Was the great bond bull market just plain bull?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
Topic Author
unknownfuture
Posts: 27
Joined: Fri Feb 15, 2019 3:30 pm

Was the great bond bull market just plain bull?

Post by unknownfuture » Sat Jul 06, 2019 9:50 pm

Hi all,

I'm trying to better understand the expected long-term returns on long-term treasury bond funds such as VUSTX (Vanguard's LTT fund), TLT and TMF.

I found these blog posts interesting in that respect:
https://www.blackrockblog.com/2019/01/1 ... ll-market/
https://www.blackrockblog.com/2019/01/2 ... investors/
https://www.blackrockblog.com/2019/02/1 ... d-returns/

Basically, he poses that rising rates are actually _good_ for long-term bond fund holders, since dividends/payouts etc. of money within such funds is then reinvested at better and better yields. In the long run this results in larger total returns.

Can anyone with more knowledge about bonds confirm that this reasoning is correct? And that is applies to funds like VUSTX, TLT and TMF? Would they need to be held to more or less the average maturity in the fund, for this reasoning to hold?

Regards

User avatar
arcticpineapplecorp.
Posts: 4200
Joined: Tue Mar 06, 2012 9:22 pm

Re: Was the great bond bull market just plain bull?

Post by arcticpineapplecorp. » Sat Jul 06, 2019 10:14 pm

he says:
Most bond investors fall into the long-term camp. They are using bonds as part of a retirement plan or balanced fund allocation within a portfolio.
source: https://www.blackrockblog.com/2019/02/1 ... d-returns/
Um, no? I think if most own a total bond market or lehman aggregate bond index (like is in my 457b plan) then "most" bond investors fall into the intermediate-term camp.

That aside, just a couple other thoughts:
1. it's true that rising rates make up for losses in a funds value, if you hold long enough. But he's talking about the effects of reinvestment which would not only make up for losses due to interest rate rise but then start helping provide appreciation. He may be talking about the point of indifference:
https://www.google.com/search?client=fi ... ence+bonds

2. long term bonds are generally not recommended because the reward is not enough to make up for the extra risk. Case in point:
total bond market (intermediate) has a yield of 2.54% and average duration of 6 years.
long term bond market has a yield of 3.32% and an average duration of 15.1 years.

The duration tells you the risk (interest rate sensitivity). The long term bond fund is 2.5X as sensitive to interest rate changes. If interest rates were to rise by 1% in a year (or less) you could see your total bond (intermediate) value fall by 6% but the long term bond fund fall by 15%. Is that worth it to earn an extra 0.78%?

So you have more than twice the risk with a long term bond fund but far less than twice return (basically only a 30% greater return with two and a half times the risk).
"May you live as long as you want and never want as long as you live" -- Irish Blessing | "Invest we must" -- Jack Bogle

cheezit
Posts: 216
Joined: Sat Jul 14, 2018 7:28 pm

Re: Was the great bond bull market just plain bull?

Post by cheezit » Sat Jul 06, 2019 10:20 pm

unknownfuture wrote:
Sat Jul 06, 2019 9:50 pm
long-term treasury bond funds such as VUSTX (Vanguard's LTT fund), TLT and TMF.
Just a quick note, VGLT/VLGSX is a more attractive Vanguard LTT fund than VUSTX/VUSUX. Similar duration, lower expenses due to to being passively managed rather than active (not that VUSTX's expenses are high). VUSTX is useful if you're trying to look at past performance over a longer period, though, given its inception date is much earlier.

Topic Author
unknownfuture
Posts: 27
Joined: Fri Feb 15, 2019 3:30 pm

Re: Was the great bond bull market just plain bull?

Post by unknownfuture » Sat Jul 06, 2019 10:23 pm

Awesome, thanks! That was very helpful.

cheezit
Posts: 216
Joined: Sat Jul 14, 2018 7:28 pm

Re: Was the great bond bull market just plain bull?

Post by cheezit » Sat Jul 06, 2019 10:27 pm

Another thing to note: in an environment where interest rates rise once (the rates vs time curve is a step function), the break-even point for a fund after a rate increase will be approximately equal to the average duration of the fund. In an environment where interest rates rise continuously (the rates vs time curve is a ramp function), the break-even point for a fund after a rate increase will be approximately twice the average duration of the fund.

Of course, real-life rate changes don't usually look like step or ramp functions, and the existence of the yield curve means that even if they did you can't simply say that a fund with an average duration of ten years takes twice as long to break even as a fund with an average duration of five years because five- and ten-year bonds probably won't have equal changes in yield when the overnight rate gets raised by a given amount.

Thesaints
Posts: 2827
Joined: Tue Jun 20, 2017 12:25 am

Re: Was the great bond bull market just plain bull?

Post by Thesaints » Sat Jul 06, 2019 10:39 pm

unknownfuture wrote:
Sat Jul 06, 2019 9:50 pm
Hi all,

I'm trying to better understand the expected long-term returns on long-term treasury bond funds such as VUSTX (Vanguard's LTT fund), TLT and TMF.

I found these blog posts interesting in that respect:
https://www.blackrockblog.com/2019/01/1 ... ll-market/
https://www.blackrockblog.com/2019/01/2 ... investors/
https://www.blackrockblog.com/2019/02/1 ... d-returns/

Basically, he poses that rising rates are actually _good_ for long-term bond fund holders, since dividends/payouts etc. of money within such funds is then reinvested at better and better yields. In the long run this results in larger total returns.

Can anyone with more knowledge about bonds confirm that this reasoning is correct? And that is applies to funds like VUSTX, TLT and TMF? Would they need to be held to more or less the average maturity in the fund, for this reasoning to hold?

Regards
if you own a bond fund and average rate stays fixed to 2% you'll make 2%. If rates climb to 5% and then stay fixed, at first you may see a drop in your shares value, but eventually you'll make 5%.

sf_tech_saver
Posts: 183
Joined: Sat Sep 08, 2018 9:03 pm

Re: Was the great bond bull market just plain bull?

Post by sf_tech_saver » Sun Jul 07, 2019 12:00 am

Bond allocation is a fascinating topic.

In an 80/20 (stocks/bonds) portfolio, it's pretty easy to say that you just hold intermediate bonds and they are there for rebalancing.

In a 50/50 long term portfolio short/intermediate term only bonds make less sense to me. The common narrative of 'hold the duration you plan to invest for' seems at odds with only using intermediate-term bonds once you exceed a typical rebalance buffer.

While long term bonds do have more 'volatility' knowing they recover as rates rise should greatly cushion the emotions of the immediate on-paper 'loss'. As long as the credit quality is high the volatility is fleeting.

This isn't true for stocks as the market could decide tomorrow that the S&P 500 is only worth a P/E of 8 or 9 so the emotions around stock losses are different and necessarily less rational.

These articles are important to keep in mind when people dismiss long term bonds because of their volatility.
VTI is a modern marvel

User avatar
mrspock
Posts: 402
Joined: Tue Feb 13, 2018 2:49 am
Location: Vulcan

Re: Was the great bond bull market just plain bull?

Post by mrspock » Sun Jul 07, 2019 12:37 am

arcticpineapplecorp. wrote:
Sat Jul 06, 2019 10:14 pm
...

2. long term bonds are generally not recommended because the reward is not enough to make up for the extra risk. Case in point:
total bond market (intermediate) has a yield of 2.54% and average duration of 6 years.
long term bond market has a yield of 3.32% and an average duration of 15.1 years.
...
My ponderings on this topic:

1. Bogleheads are heavily biased to believe interest rates will go back up. There’s 0 evidence anything of the sort is going to happen. If they stay low to negative for 20 years, the 50/50 crowd is going to be destroyed.

2. LTT are compensated for increased rates, as they will reap the rewards through the coupon rate as well as the increased value of the bond on the downward slope. The 0.78% isn’t chump change... it’s a 30% premium, you are paid for the risk, and benefit handsomely if rates fall.

3. 0 value given to the risk parity properties of long term bonds. It’s a real thing... it works, you more likely than not will end up with more money over the long run.

4. So far exactly the opposite has happened vs. what intermediate bond holders have worried about. Rates are set to decline again, it will take years for intermediate bond holders to make up the lost ground vs their LTT counterparts. Now, you can’t “lose” what you never had, but the math works out the same.

5. Being too conservative with your investing is a risk in of itself (not just 100k’s of bonds... but the most conservative ones money can buy). You will likely have less capital in the future, making its own potential problems should the market fall. A 80/20 LTT bond portfolio falling 40% from a much higher number is safer than the 50/50 falling 25% from a much lower number ... because you still have more money! It might not feel that way on the way down, but your accountant will beg to differ.

... I worry what will happen to many 60/40 or 50/50 Bogleheads if rates stay low for 10-20 years. The math on which those lovely Vanguard tables are based showing historical rates of returns vs AA were during a 40 year bond bull run.

Ask yourself... as we hand over the political reins a new generation saddled with trillions of student & mortgage debt. Do you really think 5% or 6% —never-mind the borderline absurd predictions of 70s style 15% people like to warn folks about — is in the cards? Good luck with that.

Rant over....
Last edited by mrspock on Sun Jul 07, 2019 11:50 am, edited 1 time in total.

Dude2
Posts: 817
Joined: Fri Jun 08, 2007 3:40 pm

Re: Was the great bond bull market just plain bull?

Post by Dude2 » Sun Jul 07, 2019 3:45 am

mrspock wrote:
Sun Jul 07, 2019 12:37 am
1. Bogleheads are heavily biased to believe interest rates will go back up. There’s 0 evidence anything of the sort is going to happen. If they stay low to negative for 20 years, the 50/50 crowd is going to be destroyed.

5. Being too conservative with your investing is a risk in of itself (not just 100k’s of bonds... but the most conservative ones money can buy). You will likely have less capital in the future, making its own potential problems should the market fall. A 80/20 LTT bond portfolio falling 40% from a much higher number is safer than the 50/50 falling 25% from a much lower number ... because you still have more money! It might not feel that way on the way down, but your accountant beg to differ.
Number 1 is vague. Not sure how you figure the 50/50 crowd is going to be destroyed.

Number 5 fails to acknowledge that when the risks show up, taking risk was not a good thing, and the idea that taking more risk is going to save you is unwise.

A person's human capital is their greatest asset. I would focus on making additional monies versus taking on more risk. Taking on more risk is not your job, your job is your job. Nobody gets something for nothing in other words. Taking on more risk is not a perpetual motion machine.

magneto
Posts: 1007
Joined: Sun Dec 19, 2010 10:57 am
Location: On Chesil Beach

Re: Was the great bond bull market just plain bull?

Post by magneto » Sun Jul 07, 2019 4:52 am

US Bond Investors - rejoice.
You may not have seen anything yet - Bond yields across the pond it will be noted are far more dismal.
Some investors here in the UK are turning away from domestic to US Bonds, currency hedged or unhedged, to eke out a +ve real yield.
This investor not knowing any better is holding 50/50 Conventional/Inflation as per Swensen's suggestion. Whether inflation and interest rates rise or fall, effect hopefully neutral.

Bonds increasingly seem the high risk Asset Class in the portfolio.
A return of a secular bear linked to rising inflation and rising interest rates all as per pre 1982, would see Stocks and Bonds falling together.
The emphasis therefore turns to other Asset Classes for insurance.
'There is a tide in the affairs of men ...', Brutus (Market Timer)

Seasonal
Posts: 326
Joined: Sun May 21, 2017 1:49 pm

Re: Was the great bond bull market just plain bull?

Post by Seasonal » Sun Jul 07, 2019 6:07 am

mrspock wrote:
Sun Jul 07, 2019 12:37 am
arcticpineapplecorp. wrote:
Sat Jul 06, 2019 10:14 pm
...

2. long term bonds are generally not recommended because the reward is not enough to make up for the extra risk. Case in point:
total bond market (intermediate) has a yield of 2.54% and average duration of 6 years.
long term bond market has a yield of 3.32% and an average duration of 15.1 years.
...
My ponderings on this topic:

1. Bogleheads are heavily biased to believe interest rates will go back up. There’s 0 evidence anything of the sort is going to happen. If they stay low to negative for 20 years, the 50/50 crowd is going to be destroyed.

2. LTT are compensated for increased rates, as they will reap the rewards through the coupon rate as well as the increased value of the bond on the downward slope. The 0.78% isn’t chump change... it’s a 30% premium, you are paid for the risk, and benefit handsomely if rates fall.

3. 0 value given to the risk parity properties of long term bonds. It’s a real thing... it works, you more likely than not will end up with more money over the long run.

4. So far exactly the opposite has happened vs. what intermediate bond holders have worried about. Rates are set to decline again, it will take years for intermediate bond holders to make up the lost ground vs their LTT counterparts. Now, you can’t “lose” what you never had, but the math works out the same.

5. Being too conservative with your investing is a risk in of itself (not just 100k’s of bonds... but the most conservative ones money can buy). You will likely have less capital in the future, making its own potential problems should the market fall. A 80/20 LTT bond portfolio falling 40% from a much higher number is safer than the 50/50 falling 25% from a much lower number ... because you still have more money! It might not feel that way on the way down, but your accountant beg to differ.

... I worry what will happen to many 60/40 or 50/50 Bogleheads if rates stay low for 10-20 years. The math on which those lovely Vanguard tables are based showing historical rates of returns vs AA were during a 40 year bond bull run.

Ask yourself... as we hand over the political reins a new generation saddled with trillions of student & mortgage debt. Do you really think 5% or 6% —never-mind the borderline absurd predictions of 70s style 15% people like earn folks about — is in the cards? Good luck with that.

Rant over....
1. Agreed. Investors have been incorrectly predicting an imminent rise in interest rates for decades. Which isn't to day it won't happen at some point.

2. A common counter-argument is that buyers of LTT are insurance companies and other players who have different interests from most individual investors, distorting the market for the individual investors.

3. Probably

4. "Rates are set to decline" - if so, why hasn't this already been taken into account in prices and rates?

5. Yep. There's no good reason to believe history (typically 1925 or so to date) is a great guide to the future. There is not enough data, especially if relevant conditions have changed. All courses have their own risks. One problem with taking on more risk in the hope of higher returns is that the risk will manifest. More risk is riskier.

6. Remember that the next generation will both have trillions in debt and trillions in bonds. They will both have to make payments and will receive those payments. There are, of course, distributional issues.

Two common suggestions are to match maturity or duration to your investment horizon and to match the market average maturity or duration. That seems more sensible to me than going short in the implicit belief that you are better than the market at determining the future of interest rates or the relative risk of bonds.

User avatar
Sandtrap
Posts: 7587
Joined: Sat Nov 26, 2016 6:32 pm
Location: Hawaii No Ka Oi , N. Arizona

Re: Was the great bond bull market just plain bull?

Post by Sandtrap » Sun Jul 07, 2019 9:04 am

mrspock wrote:
Sun Jul 07, 2019 12:37 am
arcticpineapplecorp. wrote:
Sat Jul 06, 2019 10:14 pm
...

2. long term bonds are generally not recommended because the reward is not enough to make up for the extra risk. Case in point:
total bond market (intermediate) has a yield of 2.54% and average duration of 6 years.
long term bond market has a yield of 3.32% and an average duration of 15.1 years.
...
My ponderings on this topic:

1. Bogleheads are heavily biased to believe interest rates will go back up. There’s 0 evidence anything of the sort is going to happen. If they stay low to negative for 20 years, the 50/50 crowd is going to be destroyed.

2. LTT are compensated for increased rates, as they will reap the rewards through the coupon rate as well as the increased value of the bond on the downward slope. The 0.78% isn’t chump change... it’s a 30% premium, you are paid for the risk, and benefit handsomely if rates fall.

3. 0 value given to the risk parity properties of long term bonds. It’s a real thing... it works, you more likely than not will end up with more money over the long run.

4. So far exactly the opposite has happened vs. what intermediate bond holders have worried about. Rates are set to decline again, it will take years for intermediate bond holders to make up the lost ground vs their LTT counterparts. Now, you can’t “lose” what you never had, but the math works out the same.

5. Being too conservative with your investing is a risk in of itself (not just 100k’s of bonds... but the most conservative ones money can buy). You will likely have less capital in the future, making its own potential problems should the market fall. A 80/20 LTT bond portfolio falling 40% from a much higher number is safer than the 50/50 falling 25% from a much lower number ... because you still have more money! It might not feel that way on the way down, but your accountant beg to differ.

... I worry what will happen to many 60/40 or 50/50 Bogleheads if rates stay low for 10-20 years. The math on which those lovely Vanguard tables are based showing historical rates of returns vs AA were during a 40 year bond bull run.

Ask yourself... as we hand over the political reins a new generation saddled with trillions of student & mortgage debt. Do you really think 5% or 6% —never-mind the borderline absurd predictions of 70s style 15% people like earn folks about — is in the cards? Good luck with that.

Rant over....
+1
Might be very well true going forward.
So. . . . . .given the above. . .

What are the actionable alternatives?

1. Shift existing Total Bond while values are high to another "fixed" alternative? What???????

2. For retirees, Annuitize via SPIA's a portion of one's "fixed" allocation????

3. Do nothing?????

You have my attention.
Very interested in your input here.
j :happy
Wiki Bogleheads Wiki: Everything You Need to Know

MotoTrojan
Posts: 5009
Joined: Wed Feb 01, 2017 8:39 pm

Re: Was the great bond bull market just plain bull?

Post by MotoTrojan » Sun Jul 07, 2019 9:10 am

cheezit wrote:
Sat Jul 06, 2019 10:27 pm
Another thing to note: in an environment where interest rates rise once (the rates vs time curve is a step function), the break-even point for a fund after a rate increase will be approximately equal to the average duration of the fund. In an environment where interest rates rise continuously (the rates vs time curve is a ramp function), the break-even point for a fund after a rate increase will be approximately twice the average duration of the fund.

Of course, real-life rate changes don't usually look like step or ramp functions, and the existence of the yield curve means that even if they did you can't simply say that a fund with an average duration of ten years takes twice as long to break even as a fund with an average duration of five years because five- and ten-year bonds probably won't have equal changes in yield when the overnight rate gets raised by a given amount.
OP: This is a good summary for a standard unleveraged fund. TMF is an entirely different beast and would take far longer to break even since the change in NAV is 3x but the interest increase is offset by the cost of leverage.

1955-1982 vs. 1982-present for long bonds is quite different; it’ll be hard to justify calling the bull, bull.

HEDGEFUNDIE
Posts: 2791
Joined: Sun Oct 22, 2017 2:06 pm

Re: Was the great bond bull market just plain bull?

Post by HEDGEFUNDIE » Sun Jul 07, 2019 9:22 am

Dude2 wrote:
Sun Jul 07, 2019 3:45 am
mrspock wrote:
Sun Jul 07, 2019 12:37 am
1. Bogleheads are heavily biased to believe interest rates will go back up. There’s 0 evidence anything of the sort is going to happen. If they stay low to negative for 20 years, the 50/50 crowd is going to be destroyed.

5. Being too conservative with your investing is a risk in of itself (not just 100k’s of bonds... but the most conservative ones money can buy). You will likely have less capital in the future, making its own potential problems should the market fall. A 80/20 LTT bond portfolio falling 40% from a much higher number is safer than the 50/50 falling 25% from a much lower number ... because you still have more money! It might not feel that way on the way down, but your accountant beg to differ.
Number 1 is vague. Not sure how you figure the 50/50 crowd is going to be destroyed.

Number 5 fails to acknowledge that when the risks show up, taking risk was not a good thing, and the idea that taking more risk is going to save you is unwise.

A person's human capital is their greatest asset. I would focus on making additional monies versus taking on more risk. Taking on more risk is not your job, your job is your job. Nobody gets something for nothing in other words. Taking on more risk is not a perpetual motion machine.
Most people’s human capital starts to stagnate, then decline, in their 50s. So right around the time that you need your investments to step up over the remaining ~30 year time horizon, you are also being rotated heavily into bonds by the standard glide path.

A 50/50 investor avoiding long term bonds is therefore taking on more risk than her counterpart with a bond allocation that properly reflects her full time horizon.

User avatar
Sandtrap
Posts: 7587
Joined: Sat Nov 26, 2016 6:32 pm
Location: Hawaii No Ka Oi , N. Arizona

Re: Was the great bond bull market just plain bull?

Post by Sandtrap » Sun Jul 07, 2019 11:19 am

HEDGEFUNDIE wrote:
Sun Jul 07, 2019 9:22 am
Dude2 wrote:
Sun Jul 07, 2019 3:45 am
mrspock wrote:
Sun Jul 07, 2019 12:37 am
1. Bogleheads are heavily biased to believe interest rates will go back up. There’s 0 evidence anything of the sort is going to happen. If they stay low to negative for 20 years, the 50/50 crowd is going to be destroyed.

5. Being too conservative with your investing is a risk in of itself (not just 100k’s of bonds... but the most conservative ones money can buy). You will likely have less capital in the future, making its own potential problems should the market fall. A 80/20 LTT bond portfolio falling 40% from a much higher number is safer than the 50/50 falling 25% from a much lower number ... because you still have more money! It might not feel that way on the way down, but your accountant beg to differ.
Number 1 is vague. Not sure how you figure the 50/50 crowd is going to be destroyed.

Number 5 fails to acknowledge that when the risks show up, taking risk was not a good thing, and the idea that taking more risk is going to save you is unwise.

A person's human capital is their greatest asset. I would focus on making additional monies versus taking on more risk. Taking on more risk is not your job, your job is your job. Nobody gets something for nothing in other words. Taking on more risk is not a perpetual motion machine.
Most people’s human capital starts to stagnate, then decline, in their 50s. So right around the time that you need your investments to step up over the remaining ~30 year time horizon, you are also being rotated heavily into bonds by the standard glide path.

A 50/50 investor avoiding long term bonds is therefore taking on more risk than her counterpart with a bond allocation that properly reflects her full time horizon.
+1
Agreed.
Next . . . (as I had queried "mrspock" as well). . .

What are the alternatives for a retiree besides Total Bond?

j
Wiki Bogleheads Wiki: Everything You Need to Know

HEDGEFUNDIE
Posts: 2791
Joined: Sun Oct 22, 2017 2:06 pm

Re: Was the great bond bull market just plain bull?

Post by HEDGEFUNDIE » Sun Jul 07, 2019 11:27 am

Sandtrap wrote:
Sun Jul 07, 2019 11:19 am
HEDGEFUNDIE wrote:
Sun Jul 07, 2019 9:22 am
Dude2 wrote:
Sun Jul 07, 2019 3:45 am
mrspock wrote:
Sun Jul 07, 2019 12:37 am
1. Bogleheads are heavily biased to believe interest rates will go back up. There’s 0 evidence anything of the sort is going to happen. If they stay low to negative for 20 years, the 50/50 crowd is going to be destroyed.

5. Being too conservative with your investing is a risk in of itself (not just 100k’s of bonds... but the most conservative ones money can buy). You will likely have less capital in the future, making its own potential problems should the market fall. A 80/20 LTT bond portfolio falling 40% from a much higher number is safer than the 50/50 falling 25% from a much lower number ... because you still have more money! It might not feel that way on the way down, but your accountant beg to differ.
Number 1 is vague. Not sure how you figure the 50/50 crowd is going to be destroyed.

Number 5 fails to acknowledge that when the risks show up, taking risk was not a good thing, and the idea that taking more risk is going to save you is unwise.

A person's human capital is their greatest asset. I would focus on making additional monies versus taking on more risk. Taking on more risk is not your job, your job is your job. Nobody gets something for nothing in other words. Taking on more risk is not a perpetual motion machine.
Most people’s human capital starts to stagnate, then decline, in their 50s. So right around the time that you need your investments to step up over the remaining ~30 year time horizon, you are also being rotated heavily into bonds by the standard glide path.

A 50/50 investor avoiding long term bonds is therefore taking on more risk than her counterpart with a bond allocation that properly reflects her full time horizon.
+1
Agreed.
Next . . . (as I had queried "mrspock" as well). . .

What are the alternatives for a retiree besides Total Bond?

j
50% long term treasuries
50% long term TIPS

And a dash of Emerging Market bonds as well, for those with the stomach for it.

User avatar
Sandtrap
Posts: 7587
Joined: Sat Nov 26, 2016 6:32 pm
Location: Hawaii No Ka Oi , N. Arizona

Re: Was the great bond bull market just plain bull?

Post by Sandtrap » Sun Jul 07, 2019 11:40 am

HEDGEFUNDIE wrote:
Sun Jul 07, 2019 11:27 am
Sandtrap wrote:
Sun Jul 07, 2019 11:19 am
HEDGEFUNDIE wrote:
Sun Jul 07, 2019 9:22 am
Dude2 wrote:
Sun Jul 07, 2019 3:45 am
mrspock wrote:
Sun Jul 07, 2019 12:37 am
1. Bogleheads are heavily biased to believe interest rates will go back up. There’s 0 evidence anything of the sort is going to happen. If they stay low to negative for 20 years, the 50/50 crowd is going to be destroyed.

5. Being too conservative with your investing is a risk in of itself (not just 100k’s of bonds... but the most conservative ones money can buy). You will likely have less capital in the future, making its own potential problems should the market fall. A 80/20 LTT bond portfolio falling 40% from a much higher number is safer than the 50/50 falling 25% from a much lower number ... because you still have more money! It might not feel that way on the way down, but your accountant beg to differ.
Number 1 is vague. Not sure how you figure the 50/50 crowd is going to be destroyed.

Number 5 fails to acknowledge that when the risks show up, taking risk was not a good thing, and the idea that taking more risk is going to save you is unwise.

A person's human capital is their greatest asset. I would focus on making additional monies versus taking on more risk. Taking on more risk is not your job, your job is your job. Nobody gets something for nothing in other words. Taking on more risk is not a perpetual motion machine.
Most people’s human capital starts to stagnate, then decline, in their 50s. So right around the time that you need your investments to step up over the remaining ~30 year time horizon, you are also being rotated heavily into bonds by the standard glide path.

A 50/50 investor avoiding long term bonds is therefore taking on more risk than her counterpart with a bond allocation that properly reflects her full time horizon.
+1
Agreed.
Next . . . (as I had queried "mrspock" as well). . .

What are the alternatives for a retiree besides Total Bond?

j
50% long term treasuries
50% long term TIPS

And a dash of Emerging Market bonds as well, for those with the stomach for it.
And. . . if one is not a fan of TIPS ?????
What else?????

j
Wiki Bogleheads Wiki: Everything You Need to Know

HEDGEFUNDIE
Posts: 2791
Joined: Sun Oct 22, 2017 2:06 pm

Re: Was the great bond bull market just plain bull?

Post by HEDGEFUNDIE » Sun Jul 07, 2019 11:42 am

Sandtrap wrote:
Sun Jul 07, 2019 11:40 am
HEDGEFUNDIE wrote:
Sun Jul 07, 2019 11:27 am
Sandtrap wrote:
Sun Jul 07, 2019 11:19 am
HEDGEFUNDIE wrote:
Sun Jul 07, 2019 9:22 am
Dude2 wrote:
Sun Jul 07, 2019 3:45 am


Number 1 is vague. Not sure how you figure the 50/50 crowd is going to be destroyed.

Number 5 fails to acknowledge that when the risks show up, taking risk was not a good thing, and the idea that taking more risk is going to save you is unwise.

A person's human capital is their greatest asset. I would focus on making additional monies versus taking on more risk. Taking on more risk is not your job, your job is your job. Nobody gets something for nothing in other words. Taking on more risk is not a perpetual motion machine.
Most people’s human capital starts to stagnate, then decline, in their 50s. So right around the time that you need your investments to step up over the remaining ~30 year time horizon, you are also being rotated heavily into bonds by the standard glide path.

A 50/50 investor avoiding long term bonds is therefore taking on more risk than her counterpart with a bond allocation that properly reflects her full time horizon.
+1
Agreed.
Next . . . (as I had queried "mrspock" as well). . .

What are the alternatives for a retiree besides Total Bond?

j
50% long term treasuries
50% long term TIPS

And a dash of Emerging Market bonds as well, for those with the stomach for it.
And. . . if one is not a fan of TIPS ?????
What else?????

j
The TIPS are for inflation protection. You can decide either to do without that protection or buy a commodities fund to serve the same purpose.

sf_tech_saver
Posts: 183
Joined: Sat Sep 08, 2018 9:03 pm

Re: Was the great bond bull market just plain bull?

Post by sf_tech_saver » Sun Jul 07, 2019 11:44 am

I'll just leave this right here as something I'm pondering after reading these blogs...

2 portfolios:https://www.portfoliovisualizer.com/bac ... total3=100

2 portfolios since 2002 starting with $1M, rebalance annually and contribute $2k a month.

VTI (total market): 9.97% CAGR, max drawdown 50.84%
50/50 VTI/VBLTX (VG longterm bonds): 9.75% CAGR, max drawdown -26.36%

You can say we won't see the same conditions of the last 20 years again soon but....

Now blend in VTMFX in a traditional 50/50 intermediate portfolio:

Including intermediate 50/50: https://www.portfoliovisualizer.com/bac ... total3=100

Max drawdown remains around 25%, but CAGR falls to ~8%.
VTI is a modern marvel

User avatar
arcticpineapplecorp.
Posts: 4200
Joined: Tue Mar 06, 2012 9:22 pm

Re: Was the great bond bull market just plain bull?

Post by arcticpineapplecorp. » Sun Jul 07, 2019 12:03 pm

mrspock wrote:
Sun Jul 07, 2019 12:37 am
5. Being too conservative with your investing is a risk in of itself (not just 100k’s of bonds... but the most conservative ones money can buy). You will likely have less capital in the future, making its own potential problems should the market fall.
others have commented on your other points. I'll only say bonds are not for making money (that's what stocks are for). Bonds are for reducing risk.

LT bonds have made more money, but carried more risk:
https://www.portfoliovisualizer.com/bac ... 0&total3=0

back to 1972 std deviation was 9.68% for LT and 3.81% for intermediates. Returns were higher for LT but so were drawdowns.
"May you live as long as you want and never want as long as you live" -- Irish Blessing | "Invest we must" -- Jack Bogle

User avatar
mrspock
Posts: 402
Joined: Tue Feb 13, 2018 2:49 am
Location: Vulcan

Re: Was the great bond bull market just plain bull?

Post by mrspock » Sun Jul 07, 2019 12:10 pm

Sandtrap wrote:
Sun Jul 07, 2019 9:04 am
mrspock wrote:
Sun Jul 07, 2019 12:37 am
My ponderings on this topic:

1. Bogleheads are heavily biased to believe interest rates will go back up. There’s 0 evidence anything of the sort is going to happen. If they stay low to negative for 20 years, the 50/50 crowd is going to be destroyed.

2. LTT are compensated for increased rates, as they will reap the rewards through the coupon rate as well as the increased value of the bond on the downward slope. The 0.78% isn’t chump change... it’s a 30% premium, you are paid for the risk, and benefit handsomely if rates fall.

3. 0 value given to the risk parity properties of long term bonds. It’s a real thing... it works, you more likely than not will end up with more money over the long run.

4. So far exactly the opposite has happened vs. what intermediate bond holders have worried about. Rates are set to decline again, it will take years for intermediate bond holders to make up the lost ground vs their LTT counterparts. Now, you can’t “lose” what you never had, but the math works out the same.

5. Being too conservative with your investing is a risk in of itself (not just 100k’s of bonds... but the most conservative ones money can buy). You will likely have less capital in the future, making its own potential problems should the market fall. A 80/20 LTT bond portfolio falling 40% from a much higher number is safer than the 50/50 falling 25% from a much lower number ... because you still have more money! It might not feel that way on the way down, but your accountant beg to differ.

... I worry what will happen to many 60/40 or 50/50 Bogleheads if rates stay low for 10-20 years. The math on which those lovely Vanguard tables are based showing historical rates of returns vs AA were during a 40 year bond bull run.

Ask yourself... as we hand over the political reins a new generation saddled with trillions of student & mortgage debt. Do you really think 5% or 6% —never-mind the borderline absurd predictions of 70s style 15% people like earn folks about — is in the cards? Good luck with that.

Rant over....
+1
Might be very well true going forward.
So. . . . . .given the above. . .

What are the actionable alternatives?

1. Shift existing Total Bond while values are high to another "fixed" alternative? What???????

2. For retirees, Annuitize via SPIA's a portion of one's "fixed" allocation????

3. Do nothing?????

You have my attention.
Very interested in your input here.
j :happy
I would just reiterate HEDGEFUDIE's suggestions of 50% LTT + 50% TIPS LTT . Why?

- Risk Partity - When recessions hit and interest rates decline, potentially hitting your equities hard, your LTT bonds will cushion the blow far better than BND would. Your bonds will be there for you exactly at the moment you need and want them to be, your equities will do the heavy lifting in an economic recovery as your bonds let some air out as the fed increases rates during this period.
- The TIPS bonds protect you from an (unlikely) hyper inflation scenario circa the 1970s.... albeit super unlikely for reasons I've already stated, in the unlikely even it happened you'd be sitting on at least asset which would benefit.
- Treasuries, need I say more?
- Duration - 20 years is a far more likely bond (investment) horizon for most investors, especially those who are going to leave large sums to heirs with investment horizons which stretch out beyond their own lifetime. As such, it's prudent to capture the 30% (yield) premium on the LTTs.

HEDGEFUNDIE
Posts: 2791
Joined: Sun Oct 22, 2017 2:06 pm

Re: Was the great bond bull market just plain bull?

Post by HEDGEFUNDIE » Sun Jul 07, 2019 12:32 pm

arcticpineapplecorp. wrote:
Sun Jul 07, 2019 12:03 pm
mrspock wrote:
Sun Jul 07, 2019 12:37 am
5. Being too conservative with your investing is a risk in of itself (not just 100k’s of bonds... but the most conservative ones money can buy). You will likely have less capital in the future, making its own potential problems should the market fall.
others have commented on your other points. I'll only say bonds are not for making money (that's what stocks are for). Bonds are for reducing risk.
Two scenarios:

1. Stocks crash 50%. Total bond stays flat. A 50/50 investor loses 25%.
2. Stocks crash 50%. Long term treasuries rise 20%. The investor loses 15%.

Which bond fund reduced more risk?

Thesaints
Posts: 2827
Joined: Tue Jun 20, 2017 12:25 am

Re: Was the great bond bull market just plain bull?

Post by Thesaints » Sun Jul 07, 2019 12:35 pm

Facts:

-There is not much downside in interest rates.

- I’m convinced that interests rates will stay low (historically) for the foreseeable future. The risk is that they won’t and a spike upward would affect negatively stocks AND bond prices, maximally long-term bonds.

- It might be true that long-term bond provide a “30% premium” (not sure about how it was calculated). However it is 30% of a small number and in the end only actual dollars count. The LT premium in an investor portfolio consists of very few dollars.

- If one believes that rates will stay low and central banks are ready to prop up the economy every which way, HY bonds might be superior to LT.

User avatar
JoMoney
Posts: 7142
Joined: Tue Jul 23, 2013 5:31 am

Re: Was the great bond bull market just plain bull?

Post by JoMoney » Sun Jul 07, 2019 12:40 pm

HEDGEFUNDIE wrote:
Sun Jul 07, 2019 12:32 pm
arcticpineapplecorp. wrote:
Sun Jul 07, 2019 12:03 pm
mrspock wrote:
Sun Jul 07, 2019 12:37 am
5. Being too conservative with your investing is a risk in of itself (not just 100k’s of bonds... but the most conservative ones money can buy). You will likely have less capital in the future, making its own potential problems should the market fall.
others have commented on your other points. I'll only say bonds are not for making money (that's what stocks are for). Bonds are for reducing risk.
Two scenarios:

1. Stocks crash 50%. Total bond stays flat. A 50/50 investor loses 25%.
2. Stocks crash 50%. Long term treasuries rise 20%. The investor loses 15%.

Which bond fund reduced more risk?
The one where the duration of the bond portfolio was closer aligned to their individual need of the money.
There is no guarantees that the market for long-term treasuries will respond in any particular way to stock movements, or that interest rates won't rise during a period of poor stock market performance. The only guarantee is that the bonds will return it's principal and interest at maturity, for someone unable to hold the bond to maturity there is significantly more risk in a longer term bond portfolio than a shorter term one.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

User avatar
mrspock
Posts: 402
Joined: Tue Feb 13, 2018 2:49 am
Location: Vulcan

Re: Was the great bond bull market just plain bull?

Post by mrspock » Sun Jul 07, 2019 12:46 pm

arcticpineapplecorp. wrote:
Sun Jul 07, 2019 12:03 pm
mrspock wrote:
Sun Jul 07, 2019 12:37 am
5. Being too conservative with your investing is a risk in of itself (not just 100k’s of bonds... but the most conservative ones money can buy). You will likely have less capital in the future, making its own potential problems should the market fall.
others have commented on your other points. I'll only say bonds are not for making money (that's what stocks are for). Bonds are for reducing risk.

LT bonds have made more money, but carried more risk:
https://www.portfoliovisualizer.com/bac ... 0&total3=0

back to 1972 std deviation was 9.68% for LT and 3.81% for intermediates. Returns were higher for LT but so were drawdowns.
I would suggest you look at risk slightly more holistically (per HEDGEFUNDIE's advice). First, having less capital is more risky than having more, this should be pretty self evident, but is often lost in the noise of risk discussions.

Second, std deviation (i.e. volatility) is traditionally how folks look risk & investing. However it's the overall portfolio risk (volatility) you need to care about, not just each component which comprise it. I promise you, on average: a portfolio with shorter duration bonds is more risky than one with 50/50 LTTs/TIPS. In other words, what you want is a portfolio with *a lot* of capital (so your draw down is from a higher number), and as little volatility as you can get.

And lastly, the drawdowns matter.... a lot. This is a form of portfolio risk I don't think which isn't reflected by volatility alone.

Here's a backtest, this unfortunately doesn't include TIPs as the product wasn't around backing the 70s, otherwise the results would probably be (far?) better -> https://www.portfoliovisualizer.com/bac ... total3=100

What do you notice?

1. First, our LTT friends are within a hair of their BND buddies for *portfolio* risk. In reality they probably would have bested them if TIPs were supported with backtests to the 70s. Backtest with 50% TIPS for bond AA going back to the early 2000s to see what I mean.
2. Second, right now our LTT friend is sitting on an extra $1M vs his BND buddy -- some 26% more capital....who do you think really has more risk in the next draw down? Run two scenarios: 70s inflation & the far more common run of the mill recession where the fed drops rates to stimulate a recovery, and inflation actually declines. My money is on Mr. LTT in both cases.

Mr. LTT has some $2.88M in equities vs. $2.66M (i.e. 60% of AA). Say equities draw down some 40% Mr. LTT will have $1.728M, vs $1.596M, so not only does he have $1.9M in LTTs (which probably went up) ....he's got an extra $120k on his equity side. Even our crazy 100% equity friend sitting on some $6M will only draw down to $3.6M in this situation ... a mere $200k from where Mr. 60/40 BND began (who's now down to $2.7M by the way). So ask yourself, In a 40% stock decline scenario, who is really taking more risk: the investor left with $3.6M or the one who is left with $2.7M?

bhsince87
Posts: 2384
Joined: Thu Oct 03, 2013 1:08 pm

Re: Was the great bond bull market just plain bull?

Post by bhsince87 » Sun Jul 07, 2019 2:37 pm

I think it's a good series of articles.

Falling rates are often good for bond TRADERS. That is, people who actively buy and sell bonds and seek capital gains.

For buy and hold investors, it's a different story.

And the author does a good job spelling out the pluses and minuses for different cases for various holding periods.

But one thing I still struggle with is where different bond funds fall along the "buy and hold" spectrum.
"If ye love wealth better than liberty, the tranquility of servitude better than the animating contest of freedom, go home from us in peace." Samuel Adams

User avatar
Phineas J. Whoopee
Posts: 8406
Joined: Sun Dec 18, 2011 6:18 pm

Re: Was the great bond bull market just plain bull?

Post by Phineas J. Whoopee » Sun Jul 07, 2019 3:02 pm

It has never been clear to me how there can be a forty year bull market in securities that mature within thirty years.
PJW

User avatar
vineviz
Posts: 4431
Joined: Tue May 15, 2018 1:55 pm

Re: Was the great bond bull market just plain bull?

Post by vineviz » Sun Jul 07, 2019 5:03 pm

Sandtrap wrote:
Sun Jul 07, 2019 11:40 am
And. . . if one is not a fan of TIPS ?????
What else?????
If you’re in retirement and have a large bond allocation, you should probably spend some time learning about TIPS until you can see their value.

Otherwise, I guess it’s just nominal Treasuries.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

User avatar
mrspock
Posts: 402
Joined: Tue Feb 13, 2018 2:49 am
Location: Vulcan

Re: Was the great bond bull market just plain bull?

Post by mrspock » Sun Jul 07, 2019 5:12 pm

Phineas J. Whoopee wrote:
Sun Jul 07, 2019 3:02 pm
It has never been clear to me how there can be a forty year bull market in securities that mature within thirty years.
PJW
The rate at which the average yield of long term treasuries is declining is independent of the bond duration, which might run counter to many instincts & intuitions. For example, I might start out with a bunch of bonds in the late 70s/early 80s (~40 years ago), and they have taken the traditional "random" walk, based on the various factors which impact bond prices (e.g. speculation on future rate changes, economic cycles etc). In theory a bond bull run could be a 50 or 60 years if the general trend towards lower rates progressed at a slow/bumpy rate, but overall trending down.

Forbes has a great article with a really nice chart showing this visually: https://www.forbes.com/sites/investor/2 ... 9da3282b7a

User avatar
mrspock
Posts: 402
Joined: Tue Feb 13, 2018 2:49 am
Location: Vulcan

Re: Was the great bond bull market just plain bull?

Post by mrspock » Sun Jul 07, 2019 5:26 pm

Dude2 wrote:
Sun Jul 07, 2019 3:45 am
mrspock wrote:
Sun Jul 07, 2019 12:37 am
1. Bogleheads are heavily biased to believe interest rates will go back up. There’s 0 evidence anything of the sort is going to happen. If they stay low to negative for 20 years, the 50/50 crowd is going to be destroyed.
...
Number 1 is vague. Not sure how you figure the 50/50 crowd is going to be destroyed.
Just to close the loop on this, I was referring to retired Bogleheads, or those planning on such AAs in retirement. The various SWR studies which show 60/40 and 50/50 AAs working with high confidence had a giant bond bull market in the middle of them, if you dropped the yields, and had a bond bear market, I'm worried folks might get themselves into a pretty bad spot. For this reason folks like Buffet heavily favour taking your volatility lumps and bias to a bit more equities than you otherwise might be comfortable with, same goes with bond duration.

I 100% agree on your point about saving, and it's what I'm doing....I had my number, hit it...then tacked on another $1M on to it....and I'll probably tack on another $500k on to that number just for good measure. My goal is to be in a place where I can run a bit heavier on equities (say 75/25 or 70/30) through retirement, and because the 30% bond allocation (50/50 LTT/TIPS) is so large, say ~10 years expenses (or 15-20 of bear necessities), I can stomach the equity volatility.

Needless to say, the next 10 or 20 years of investing will be just as interesting to experience as the last 10 or 20!

User avatar
Sandtrap
Posts: 7587
Joined: Sat Nov 26, 2016 6:32 pm
Location: Hawaii No Ka Oi , N. Arizona

Re: Was the great bond bull market just plain bull?

Post by Sandtrap » Sun Jul 07, 2019 6:40 pm

mrspock wrote:
Sun Jul 07, 2019 5:12 pm
Phineas J. Whoopee wrote:
Sun Jul 07, 2019 3:02 pm
It has never been clear to me how there can be a forty year bull market in securities that mature within thirty years.
PJW
The rate at which the average yield of long term treasuries is declining is independent of the bond duration, which might run counter to many instincts & intuitions. For example, I might start out with a bunch of bonds in the late 70s/early 80s (~40 years ago), and they have taken the traditional "random" walk, based on the various factors which impact bond prices (e.g. speculation on future rate changes, economic cycles etc). In theory a bond bull run could be a 50 or 60 years if the general trend towards lower rates progressed at a slow/bumpy rate, but overall trending down.

Forbes has a great article with a really nice chart showing this visually: https://www.forbes.com/sites/investor/2 ... 9da3282b7a
Outstanding article!
Thanks for posting it.
j :happy
Wiki Bogleheads Wiki: Everything You Need to Know

User avatar
Phineas J. Whoopee
Posts: 8406
Joined: Sun Dec 18, 2011 6:18 pm

Re: Was the great bond bull market just plain bull?

Post by Phineas J. Whoopee » Sun Jul 07, 2019 6:48 pm

mrspock wrote:
Sun Jul 07, 2019 5:12 pm
Phineas J. Whoopee wrote:
Sun Jul 07, 2019 3:02 pm
It has never been clear to me how there can be a forty year bull market in securities that mature within thirty years.
PJW
The rate at which the average yield of long term treasuries is declining is independent of the bond duration, which might run counter to many instincts & intuitions. For example, I might start out with a bunch of bonds in the late 70s/early 80s (~40 years ago), and they have taken the traditional "random" walk, based on the various factors which impact bond prices (e.g. speculation on future rate changes, economic cycles etc). In theory a bond bull run could be a 50 or 60 years if the general trend towards lower rates progressed at a slow/bumpy rate, but overall trending down.

Forbes has a great article with a really nice chart showing this visually: https://www.forbes.com/sites/investor/2 ... 9da3282b7a
Oh, I fully understand how successful market timing can result in riches. All one has to do, in fixed income, is accurately predict the long-term bonds that will have the highest total return over the next twelve months, do it again selling the past year's top performers and using the proceeds to buy the upcoming year's best performers, then consistently do it more and more for four decades. That's a path to fabulous wealth.

It is not a bull market.

PJW

samstar
Posts: 52
Joined: Wed Jul 25, 2018 12:34 am

Re: Was the great bond bull market just plain bull?

Post by samstar » Mon Jul 08, 2019 12:02 am

.......
Last edited by samstar on Thu Jul 11, 2019 2:08 am, edited 1 time in total.

SovereignInvestor
Posts: 351
Joined: Mon Aug 20, 2018 4:41 pm

Re: Was the great bond bull market just plain bull?

Post by SovereignInvestor » Mon Jul 08, 2019 7:18 am

Long term treasurys have more interest rate risk than intermediate. But no one is suggesting a 100% Long treasury allocation. So the risk should be judged based on marginal risk for entire portfolio.

If someone has 60% stocks and other 40% bonds, with the 40% heavily in long treasurys versus heavily in intermediate treasurys, it will see the long treasurys have less overall portfolio risk. Except for 1970s, long bonds have been negatively correlated with stocks, with the longer duration ones having stronger negative correlation.

Thesaints
Posts: 2827
Joined: Tue Jun 20, 2017 12:25 am

Re: Was the great bond bull market just plain bull?

Post by Thesaints » Mon Jul 08, 2019 10:01 am

SovereignInvestor wrote:
Mon Jul 08, 2019 7:18 am
Long term treasurys have more interest rate risk than intermediate. But no one is suggesting a 100% Long treasury allocation. So the risk should be judged based on marginal risk for entire portfolio.

If someone has 60% stocks and other 40% bonds, with the 40% heavily in long treasurys versus heavily in intermediate treasurys, it will see the long treasurys have less overall portfolio risk. Except for 1970s, long bonds have been negatively correlated with stocks, with the longer duration ones having stronger negative correlation.
There is no time as today better suited for seeing a revival of that 70’s correlation: Central banks monetary policies are the major driver of bond and stock market.

3funder
Posts: 1007
Joined: Sun Oct 15, 2017 9:35 pm

Re: Was the great bond bull market just plain bull?

Post by 3funder » Mon Jul 08, 2019 11:38 am

arcticpineapplecorp. wrote:
Sat Jul 06, 2019 10:14 pm
he says:
Most bond investors fall into the long-term camp. They are using bonds as part of a retirement plan or balanced fund allocation within a portfolio.
source: https://www.blackrockblog.com/2019/02/1 ... d-returns/
Um, no? I think if most own a total bond market or lehman aggregate bond index (like is in my 457b plan) then "most" bond investors fall into the intermediate-term camp.

That aside, just a couple other thoughts:
1. it's true that rising rates make up for losses in a funds value, if you hold long enough. But he's talking about the effects of reinvestment which would not only make up for losses due to interest rate rise but then start helping provide appreciation. He may be talking about the point of indifference:
https://www.google.com/search?client=fi ... ence+bonds

2. long term bonds are generally not recommended because the reward is not enough to make up for the extra risk. Case in point:
total bond market (intermediate) has a yield of 2.54% and average duration of 6 years.
long term bond market has a yield of 3.32% and an average duration of 15.1 years.

The duration tells you the risk (interest rate sensitivity). The long term bond fund is 2.5X as sensitive to interest rate changes. If interest rates were to rise by 1% in a year (or less) you could see your total bond (intermediate) value fall by 6% but the long term bond fund fall by 15%. Is that worth it to earn an extra 0.78%?

So you have more than twice the risk with a long term bond fund but far less than twice return (basically only a 30% greater return with two and a half times the risk).
+1

User avatar
vineviz
Posts: 4431
Joined: Tue May 15, 2018 1:55 pm

Re: Was the great bond bull market just plain bull?

Post by vineviz » Mon Jul 08, 2019 11:44 am

SovereignInvestor wrote:
Mon Jul 08, 2019 7:18 am
Long term treasurys have more interest rate risk than intermediate.
Not for long-term investors, they don't.

Interest rate risk is not a function of the bond's duration but rather of the mismatch between the bond's duration and the investment horizon of the investor.

For a retirement cash flow which is thirty years away, a 30-year zero coupon bond would have zero interest rate risk.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

azanon
Posts: 2465
Joined: Mon Nov 07, 2011 10:34 am
Location: Little Rock, AR
Contact:

Re: Was the great bond bull market just plain bull?

Post by azanon » Mon Jul 08, 2019 12:44 pm

arcticpineapplecorp. wrote:
Sat Jul 06, 2019 10:14 pm
2. long term bonds are generally not recommended because the reward is not enough to make up for the extra risk. Case in point:
total bond market (intermediate) has a yield of 2.54% and average duration of 6 years.
long term bond market has a yield of 3.32% and an average duration of 15.1 years.

The duration tells you the risk (interest rate sensitivity). The long term bond fund is 2.5X as sensitive to interest rate changes. If interest rates were to rise by 1% in a year (or less) you could see your total bond (intermediate) value fall by 6% but the long term bond fund fall by 15%. Is that worth it to earn an extra 0.78%?

So you have more than twice the risk with a long term bond fund but far less than twice return (basically only a 30% greater return with two and a half times the risk).
I wanted to use this point to first just directly respond and then make a counterpoint.

> Respond: If you think (as many do) that Intermediates are the sweet spot on risk vs. reward, then why use "total bond market" at all since 2/3rds of the bonds that comprises it are not intermediate term. "Intermediate-Term Bond Index" fund from Vanguard would be the more sensible choice becaus eit's not only ave duration in the sweet spot, but 100% of the bonds are also in the sweet spot.

> Counterpoint: I think people make the same general mistake evaluating bonds for a portfolio that they do some alternatives such as general commodities or Gold, which is they evaluate the asset in isolation and then make a decision based upon an isolated analysis. If you evaluate bonds in isolation, you do end up picking intermediates as the sweet spot for risk/reward (and in the case of commodities, you exclude them entirely). But if you evaluate them from the perspective of the PORTFOLIO - how they'll interact with the other asset classes - you'll have many cases where the long-term bonds actually provide the best risk-adjusted returns in the portfolio.

I think it's more strategic and sensible to evaluate asset classes from the portfolio perspective, unless all you're going to buy is bonds (100%) then, yeah, go with the intermediates.

User avatar
Sandtrap
Posts: 7587
Joined: Sat Nov 26, 2016 6:32 pm
Location: Hawaii No Ka Oi , N. Arizona

Re: Was the great bond bull market just plain bull?

Post by Sandtrap » Mon Jul 08, 2019 3:46 pm

azanon wrote:
Mon Jul 08, 2019 12:44 pm
arcticpineapplecorp. wrote:
Sat Jul 06, 2019 10:14 pm
2. long term bonds are generally not recommended because the reward is not enough to make up for the extra risk. Case in point:
total bond market (intermediate) has a yield of 2.54% and average duration of 6 years.
long term bond market has a yield of 3.32% and an average duration of 15.1 years.

The duration tells you the risk (interest rate sensitivity). The long term bond fund is 2.5X as sensitive to interest rate changes. If interest rates were to rise by 1% in a year (or less) you could see your total bond (intermediate) value fall by 6% but the long term bond fund fall by 15%. Is that worth it to earn an extra 0.78%?

So you have more than twice the risk with a long term bond fund but far less than twice return (basically only a 30% greater return with two and a half times the risk).
I wanted to use this point to first just directly respond and then make a counterpoint.

> Respond: If you think (as many do) that Intermediates are the sweet spot on risk vs. reward, then why use "total bond market" at all since 2/3rds of the bonds that comprises it are not intermediate term. "Intermediate-Term Bond Index" fund from Vanguard would be the more sensible choice becaus eit's not only ave duration in the sweet spot, but 100% of the bonds are also in the sweet spot.

> Counterpoint: I think people make the same general mistake evaluating bonds for a portfolio that they do some alternatives such as general commodities or Gold, which is they evaluate the asset in isolation and then make a decision based upon an isolated analysis. If you evaluate bonds in isolation, you do end up picking intermediates as the sweet spot for risk/reward (and in the case of commodities, you exclude them entirely). But if you evaluate them from the perspective of the PORTFOLIO - how they'll interact with the other asset classes - you'll have many cases where the long-term bonds actually provide the best risk-adjusted returns in the portfolio.

I think it's more strategic and sensible to evaluate asset classes from the portfolio perspective, unless all you're going to buy is bonds (100%) then, yeah, go with the intermediates.
Good point.
Well said!
j
Wiki Bogleheads Wiki: Everything You Need to Know

Thesaints
Posts: 2827
Joined: Tue Jun 20, 2017 12:25 am

Re: Was the great bond bull market just plain bull?

Post by Thesaints » Mon Jul 08, 2019 5:36 pm

vineviz wrote:
Mon Jul 08, 2019 11:44 am
SovereignInvestor wrote:
Mon Jul 08, 2019 7:18 am
Long term treasurys have more interest rate risk than intermediate.
Not for long-term investors, they don't.

Interest rate risk is not a function of the bond's duration but rather of the mismatch between the bond's duration and the investment horizon of the investor.

For a retirement cash flow which is thirty years away, a 30-year zero coupon bond would have zero interest rate risk.
Yes, but not if held in a fund. A bond fund doesn't know the time horizon of its shareholders; it has its own.

In your example, an individual investor with a 30-year ZC would not be forced to mark-to-market and, as you say, would not experience any interest rate driven volatility (assuming he/she carries to maturity).
A fund holding the same ZC would have to mark to market, therefore shares value would change in response of interest rates changes and could even trade that ZC, thus incurring into actual losses.

User avatar
vineviz
Posts: 4431
Joined: Tue May 15, 2018 1:55 pm

Re: Was the great bond bull market just plain bull?

Post by vineviz » Mon Jul 08, 2019 5:41 pm

Thesaints wrote:
Mon Jul 08, 2019 5:36 pm
Yes, but not if held in a fund. A bond fund doesn't know the time horizon of its shareholders; it has its own.
Well, a bond doesn't "know" the time horizon of its owners either. It's up to the investor to mange their bond portfolio success that their bond duration matches their investment horizon: whether they do the with individual bonds or with bond funds is ultimately immaterial.

The difference is one of mechanics and logistics, not of fundamental priorities.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

epilnk
Posts: 2649
Joined: Wed Apr 18, 2007 7:05 pm

Re: Was the great bond bull market just plain bull?

Post by epilnk » Tue Jul 09, 2019 8:23 pm

15ish years ago after reading both David Swenson and Annette Thau I reconfigured our portfolio to include a hefty portion of long bonds. At the time everybody here (well almost everbody) knew interest rates had nowhere to go but up. Most of the bond debates here were whether to continue to hold intermediate or go short. Short had quite a few vocal proponents. But I had chosen an asset allocation that made sense to me, and that plan called for long bonds. So rate predictions be damned, long bonds it was.

No regrets - this portfolio has served us well. I assume at some point those predictions will inevitably be correct, but so far we have 15 years of growth behind us. Of course we are 15 years older than we were then, and 15 years closer to retirement. I no longer buy long bonds, just hold them and buy intermediate; our overall duration is coming down.

If your IPS calls for long bonds, buy long bonds. If it doesn't, don't. Is this not the boglehead way?

User avatar
vineviz
Posts: 4431
Joined: Tue May 15, 2018 1:55 pm

Re: Was the great bond bull market just plain bull?

Post by vineviz » Wed Jul 10, 2019 5:04 pm

epilnk wrote:
Tue Jul 09, 2019 8:23 pm
15ish years ago after reading both David Swenson and Annette Thau I reconfigured our portfolio to include a hefty portion of long bonds. At the time everybody here (well almost everbody) knew interest rates had nowhere to go but up. Most of the bond debates here were whether to continue to hold intermediate or go short. Short had quite a few vocal proponents. But I had chosen an asset allocation that made sense to me, and that plan called for long bonds. So rate predictions be damned, long bonds it was.

No regrets - this portfolio has served us well. I assume at some point those predictions will inevitably be correct, but so far we have 15 years of growth behind us. Of course we are 15 years older than we were then, and 15 years closer to retirement. I no longer buy long bonds, just hold them and buy intermediate; our overall duration is coming down.

If your IPS calls for long bonds, buy long bonds. If it doesn't, don't. Is this not the boglehead way?
Well said!

This is a great reminder that not only can people be wrong when they predict that "rates had nowhere to go but up" but also that is a mistake to assume that rising rates must mean that long-term bonds are poor investment.

We've had, by my count, four periods of rising rates since the mid-1980s. Here's a graph showing the relative performance of long-term bonds over short-term bonds during each of those four periods.

Image
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

SovereignInvestor
Posts: 351
Joined: Mon Aug 20, 2018 4:41 pm

Re: Was the great bond bull market just plain bull?

Post by SovereignInvestor » Thu Jul 11, 2019 7:40 am

Thesaints wrote:
Mon Jul 08, 2019 10:01 am
SovereignInvestor wrote:
Mon Jul 08, 2019 7:18 am
Long term treasurys have more interest rate risk than intermediate. But no one is suggesting a 100% Long treasury allocation. So the risk should be judged based on marginal risk for entire portfolio.

If someone has 60% stocks and other 40% bonds, with the 40% heavily in long treasurys versus heavily in intermediate treasurys, it will see the long treasurys have less overall portfolio risk. Except for 1970s, long bonds have been negatively correlated with stocks, with the longer duration ones having stronger negative correlation.
There is no time as today better suited for seeing a revival of that 70’s correlation: Central banks monetary policies are the major driver of bond and stock market.
Demographics say absolutely not. The developed world like EU and Japan...then China will all see hugely deflationary demographics of declining workforce. US will barely have minimal growth.

Not nearly the same as 1970s when US had 2-3% annual labor force growth and it was commodity intensive economy with massive labor union power.

SovereignInvestor
Posts: 351
Joined: Mon Aug 20, 2018 4:41 pm

Re: Was the great bond bull market just plain bull?

Post by SovereignInvestor » Thu Jul 11, 2019 7:50 am

vineviz wrote:
Mon Jul 08, 2019 11:44 am
SovereignInvestor wrote:
Mon Jul 08, 2019 7:18 am
Long term treasurys have more interest rate risk than intermediate.
Not for long-term investors, they don't.

Interest rate risk is not a function of the bond's duration but rather of the mismatch between the bond's duration and the investment horizon of the investor.

For a retirement cash flow which is thirty years away, a 30-year zero coupon bond would have zero interest rate risk.
True. But long term.investors holding 30Yr bond like you describe then have inflation risk.

BotTom line is sum of total risk of long term bond is generally greater than intermediate. The market agrees when it generally have positive sloping yield curve.

Risks being mostly interest rate risk to shorter term investors (duration mismatch) holding long term bonds..and for long term investors with long term bonds...there's not interest rate risk as you describe bevause duration is matched..but there is inflation risk..where short term bonds have much less inflation risk.

User avatar
vineviz
Posts: 4431
Joined: Tue May 15, 2018 1:55 pm

Re: Was the great bond bull market just plain bull?

Post by vineviz » Thu Jul 11, 2019 8:12 am

SovereignInvestor wrote:
Thu Jul 11, 2019 7:50 am
vineviz wrote:
Mon Jul 08, 2019 11:44 am
SovereignInvestor wrote:
Mon Jul 08, 2019 7:18 am
Long term treasurys have more interest rate risk than intermediate.
Not for long-term investors, they don't.

Interest rate risk is not a function of the bond's duration but rather of the mismatch between the bond's duration and the investment horizon of the investor.

For a retirement cash flow which is thirty years away, a 30-year zero coupon bond would have zero interest rate risk.
True. But long term.investors holding 30Yr bond like you describe then have inflation risk.
Maybe, but it's a matter of degree and varies from investor to investor.

A 36 year-old investor, with 29 years of future earnings ahead of them and a portfolio that is 85-90% in stocks has no real inflation risk to speak of even if all their bonds are long-term nominal Treasuries.

A 60 year-old investor with just 60% in stocks and contemplating retirement in five years might find themselves much more exposed to the risk of unexpectedly high inflation. Such an investor might prudently favor long-term TIPS instead of (or in addition to) long-term zero-coupon bonds.

It's just a matter of figuring out risks you face and deciding on a approach that avoids the risks you don't want to take and ensures you are compensated for the risks you DO take.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

Hector
Posts: 945
Joined: Fri Dec 24, 2010 2:21 pm
Contact:

Re: Was the great bond bull market just plain bull?

Post by Hector » Thu Jul 11, 2019 9:59 am

vineviz wrote:
Wed Jul 10, 2019 5:04 pm
epilnk wrote:
Tue Jul 09, 2019 8:23 pm
15ish years ago after reading both David Swenson and Annette Thau I reconfigured our portfolio to include a hefty portion of long bonds. At the time everybody here (well almost everbody) knew interest rates had nowhere to go but up. Most of the bond debates here were whether to continue to hold intermediate or go short. Short had quite a few vocal proponents. But I had chosen an asset allocation that made sense to me, and that plan called for long bonds. So rate predictions be damned, long bonds it was.

No regrets - this portfolio has served us well. I assume at some point those predictions will inevitably be correct, but so far we have 15 years of growth behind us. Of course we are 15 years older than we were then, and 15 years closer to retirement. I no longer buy long bonds, just hold them and buy intermediate; our overall duration is coming down.

If your IPS calls for long bonds, buy long bonds. If it doesn't, don't. Is this not the boglehead way?
Well said!

This is a great reminder that not only can people be wrong when they predict that "rates had nowhere to go but up" but also that is a mistake to assume that rising rates must mean that long-term bonds are poor investment.

We've had, by my count, four periods of rising rates since the mid-1980s. Here's a graph showing the relative performance of long-term bonds over short-term bonds during each of those four periods.

Image
How about adding data for 3-4 more decades before 80s to this graph? Long term bond did pretty bad during that phase.

User avatar
vineviz
Posts: 4431
Joined: Tue May 15, 2018 1:55 pm

Re: Was the great bond bull market just plain bull?

Post by vineviz » Thu Jul 11, 2019 11:54 am

Hector wrote:
Thu Jul 11, 2019 9:59 am
How about adding data for 3-4 more decades before 80s to this graph? Long term bond did pretty bad during that phase.
Data from that era is not comparable to the current the era for two reasons:

1) Significant direct interference with long-term returns in the pre-Volcker/Greenspan era: see here.

2) Treasury bonds were issued with call options (and sometimes put options) from 1960 to 1980, options which directly affect the payoff structure of bonds: see here and here.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

Post Reply