Rebalancing into bond funds with record low interest rates

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RetireBy55
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Rebalancing into bond funds with record low interest rates

Post by RetireBy55 » Fri Nov 15, 2019 5:25 pm

Hi, everyone.

Looking at my AA today, the 2019 run-up in equities means that I need to move a pretty decent chunk ($300 - 500K) out of stocks (and funds containing stocks) to get back to a comfortable level of risk.

Normally, I'd re balance into bond funds and add to our holdings in PIMIX, DODIX, PIGIX, VWEHX, PFORX, FNMIX or DBLEX. BUT - with rates being where they are, there's almost nowhere for interest rates to go but UP - which would obviously hit bond funds.

$3-500K is a good chunk of $$ and I'm hesitant to move that much out of equities for 2020 and into bond funds - both due to the 2019 run-up in bond fund returns (even VBTLX is >8.4% YTD which is way out of the norm) and the likelihood of rate increases in 2020 or near-term beyond that, which will obviously hit bond funds hard. Cash is unfortunately even worse, with rates on all of my liquid investments dropping through the floor recently.

So..given that both bonds and CDs are not a great place to be at the moment, what would you all do if you had $3-500K of $$ to rebalance? I'm not very comfortable "letting it ride" in equities or funds that hold equities, as we're in a position where we do not need to take risk with those $$ - but I also don't want to lose money to inflation or (worse) interest rates hitting bond funds.

Appreciate and all help!

Thx..

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Re: Rebalancing into bond funds with record low interest rates

Post by Grt2bOutdoors » Fri Nov 15, 2019 5:31 pm

RetireBy55 wrote:
Fri Nov 15, 2019 5:25 pm
Hi, everyone.

Looking at my AA today, the 2019 run-up in equities means that I need to move a pretty decent chunk ($300 - 500K) out of stocks (and funds containing stocks) to get back to a comfortable level of risk.

Normally, I'd re balance into bond funds and add to our holdings in PIMIX, DODIX, PIGIX, VWEHX, PFORX, FNMIX or DBLEX. BUT - with rates being where they are, there's almost nowhere for interest rates to go but UP - which would obviously hit bond funds.

$3-500K is a good chunk of $$ and I'm hesitant to move that much out of equities for 2020 and into bond funds - both due to the 2019 run-up in bond fund returns (even VBTLX is >8.4% YTD which is way out of the norm) and the likelihood of rate increases in 2020 or near-term beyond that, which will obviously hit bond funds hard. Cash is unfortunately even worse, with rates on all of my liquid investments dropping through the floor recently.

So..given that both bonds and CDs are not a great place to be at the moment, what would you all do if you had $3-500K of $$ to rebalance? I'm not very comfortable "letting it ride" in equities or funds that hold equities, as we're in a position where we do not need to take risk with those $$ - but I also don't want to lose money to inflation or (worse) interest rates hitting bond funds.

Appreciate and all help!

Thx..
I would move it into bonds and not give it a second thought! Let me be blunt: you can lose $30,000 to $50,000 IF rates go up initially, but if you reinvest for the duration of the bond funds, you will make that up and more as the price of bonds is the inverse of the yield, price of bonds falls, yields rise. Now, the obvious choice is to move it now, especially since you don't want to leave it in equities. You can not have your cake and eat it. If rates move up 2%, another big IF, what are the funds going to go down by 10%? Well, if you can't accept a $30K-$50K loss, why are you holding any equities?

What did you do back in July when the market went south? What about last December?
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Re: Rebalancing into bond funds with record low interest rates

Post by nisiprius » Fri Nov 15, 2019 5:41 pm

RetireBy55 wrote:
Fri Nov 15, 2019 5:25 pm
...with rates being where they are, there's almost nowhere for interest rates to go but UP - which would obviously hit bond funds...
First... the 10-year rate. Since it is at 1.82%, obviously it can go down at least 1.82%. And although I'm just looking at the last few weeks, it's higher than it was.

Years ago people would say "of course interest rates can't go lower than zero," but now we know even that is untrue.

Image

Second, the Fed funds rate, although the relevance to intermediate bond funds isn't clear:

Image

The Fed funds rate is higher than it has been in, roughly by eyeball, ten or eleven years out of the last twenty.

As for "--which would obviously hit bond funds," please see this recent posting of mine on that very topic.

I think it is best to assume that interest rates can go any darn way they please. And that you can't predict which way they will go. In 2014 Bloomberg asked 68 economists for their forecasts for what the 10-year rate would do over the next six months. 68 out of 68--all of them, unanimous, not one demurral--said it would go up. It went down.
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Re: Rebalancing into bond funds with record low interest rates

Post by Dwebb2110 » Fri Nov 15, 2019 5:54 pm

Stay short duration, my latest bond fund purchase has been the vanguard gnma fund. Effective duration of 2.7 and yield of 2.5%. The Barclays aggregate is around 6.4 years at 2.6% which to me doesn’t appear getting paid to take the duration risk.

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Re: Rebalancing into bond funds with record low interest rates

Post by RetireBy55 » Fri Nov 15, 2019 6:23 pm

Grt2bOutdoors wrote:
Fri Nov 15, 2019 5:31 pm

What did you do back in July when the market went south? What about last December?
I held strong last December and made zero portfolio changes. That said, as an early retiree (at 55, DW is 61 and also retired) it stressed the livng bajeebus out of me and I was seriously hating life at the time watching the big swings in net worth.

I'm very much an advocate of the Bernstein (and Swedroe..and Ferri)..school of "if you've won the game, quit playing".

Watching my portfolio swing $1-200K at a time in early retirement is NOT where I want to be.

I don't "need" to increase the net worth at this point and would be comfortable with 20% or fewer equities. If I can generate 2%/yr on my portfolio, it gets me where I want and need to be. (I have no desire to leave a legacy or significant $$ to others..I earned what I earned..they can earn what they earn. I know that's..cold..but I'm an old school capitalist, and believe you make your own way. So if I leave $0 to others but have enough to pay the bills through the time they bury me 6 feet deep..that's fine by me).

I do, however, want to PRESERVE the net worth and generate enough income to pay the core bills - which I can do at a 2% return.

Hope that helps net things out in terms of where we are at..
Last edited by RetireBy55 on Fri Nov 15, 2019 6:27 pm, edited 2 times in total.

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Re: Rebalancing into bond funds with record low interest rates

Post by dbr » Fri Nov 15, 2019 6:26 pm

RetireBy55 wrote:
Fri Nov 15, 2019 5:25 pm
Hi, everyone.

Looking at my AA today, the 2019 run-up in equities means that I need to move a pretty decent chunk ($300 - 500K) out of stocks (and funds containing stocks) to get back to a comfortable level of risk.

Apparently your risk in stocks exceeds your risk in bonds by enough that you still believe in your asset allocation. I would think that is all that need be said. Other comments in this thread may be helpful as well.

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Re: Rebalancing into bond funds with record low interest rates

Post by JaneyLH » Fri Nov 15, 2019 6:29 pm

Just today I rebalanced by shifting about $500K from stocks/stock funds to Vanguard Total Bond Market. I've been pretty "hands off" since retirement and have intended to lower our exposure to stocks for awhile. Spent some time looking at everything, had a chat with my husband, and with his blessing went from 70/30 to 55/45 stocks/bonds and am feeling relieved. I'm not looking at the short-term effects of this move or trying to time the market; now we are more confident about being able to maintain our ability to spend on travel, etc. as we continue our retirement journey from current age of 65. I was growing increasing uncomfortable with the prospect of a major stock market correction with no guarantee of when the next bull market might return. Would hate to have to tighten our belts during the best years of our retirement, only to have the market return when we are not able to enjoy camping, cruises, etc.

I owe a tremendous debt to the Bogleheads and thank the many members of this forum who have provided such useful guidance and insights about DIY investing. Future looks bright! :sharebeer

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Re: Rebalancing into bond funds with record low interest rates

Post by Grt2bOutdoors » Fri Nov 15, 2019 6:44 pm

RetireBy55 wrote:
Fri Nov 15, 2019 6:23 pm


I don't "need" to increase the net worth at this point and would be comfortable with 20% or fewer equities. If I can generate 2%/yr on my portfolio, it gets me where I want and need to be. (I have no desire to leave a legacy or significant $$ to others..I earned what I earned..they can earn what they earn. I know that's..cold..but I'm an old school capitalist, and believe you make your own way. So if I leave $0 to others but have enough to pay the bills through the time they bury me 6 feet deep..that's fine by me).

I do, however, want to PRESERVE the net worth and generate enough income to pay the core bills - which I can do at a 2% return.

Hope that helps net things out in terms of where we are at..
I would move it to bonds on Monday, 11/18 and not give it a second thought. If you can't earn 2% on a 20/80 portfolio, we will all have much bigger issues to worry about.
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Re: Rebalancing into bond funds with record low interest rates

Post by rkhusky » Fri Nov 15, 2019 7:26 pm

PIGIX, VWEHX, PFORX, FNMIX or DBLEX seem to have pretty good yields, at the expense of some added risk. Drop it into these.

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Re: Rebalancing into bond funds with record low interest rates

Post by SlowMovingInvestor » Fri Nov 15, 2019 8:04 pm

rkhusky wrote:
Fri Nov 15, 2019 7:26 pm
PIGIX, VWEHX, PFORX, FNMIX or DBLEX seem to have pretty good yields, at the expense of some added risk. Drop it into these.
Some ? The last 2 are essentially emerging market bond funds. They include EM non sovereign debt, and not necessarily $ denominated debt

Very risky. If you have to go EM debt in search of yield (and I don't think you should), I would go with EMB or VWOB.

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Re: Rebalancing into bond funds with record low interest rates

Post by averagedude » Fri Nov 15, 2019 8:27 pm

Grt2bOutdoors wrote:
Fri Nov 15, 2019 5:31 pm
RetireBy55 wrote:
Fri Nov 15, 2019 5:25 pm
Hi, everyone.

Looking at my AA today, the 2019 run-up in equities means that I need to move a pretty decent chunk ($300 - 500K) out of stocks (and funds containing stocks) to get back to a comfortable level of risk.

Normally, I'd re balance into bond funds and add to our holdings in PIMIX, DODIX, PIGIX, VWEHX, PFORX, FNMIX or DBLEX. BUT - with rates being where they are, there's almost nowhere for interest rates to go but UP - which would obviously hit bond funds.

$3-500K is a good chunk of $$ and I'm hesitant to move that much out of equities for 2020 and into bond funds - both due to the 2019 run-up in bond fund returns (even VBTLX is >8.4% YTD which is way out of the norm) and the likelihood of rate increases in 2020 or near-term beyond that, which will obviously hit bond funds hard. Cash is unfortunately even worse, with rates on all of my liquid investments dropping through the floor recently.

So..given that both bonds and CDs are not a great place to be at the moment, what would you all do if you had $3-500K of $$ to rebalance? I'm not very comfortable "letting it ride" in equities or funds that hold equities, as we're in a position where we do not need to take risk with those $$ - but I also don't want to lose money to inflation or (worse) interest rates hitting bond funds.

Appreciate and all help!

Thx..
I would move it into bonds and not give it a second thought! Let me be blunt: you can lose $30,000 to $50,000 IF rates go up initially, but if you reinvest for the duration of the bond funds, you will make that up and more as the price of bonds is the inverse of the yield, price of bonds falls, yields rise. Now, the obvious choice is to move it now, especially since you don't want to leave it in equities. You can not have your cake and eat it. If rates move up 2%, another big IF, what are the funds going to go down by 10%? Well, if you can't accept a $30K-$50K loss, why are you holding any equities?

What did you do back in July when the market went south? What about last December?
OP, this is wise advice. Not rebalancing by purchasing bonds due to yields is a form of market timing. In 2017, I made the mistake of purchasing CD's due to the fed increasing interest rates. All of the "experts" said that people in bond funds would take a beating due to the fed's action. I would had doubled my rate of return if I would had just bought into the total bond index.

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Re: Rebalancing into bond funds with record low interest rates

Post by aristotelian » Fri Nov 15, 2019 9:06 pm

You could always do short term bonds if duration risk is a concern.

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Re: Rebalancing into bond funds with record low interest rates

Post by Kevin M » Fri Nov 15, 2019 9:39 pm

RetireBy55 wrote:
Fri Nov 15, 2019 5:25 pm
So..given that both bonds and CDs are not a great place to be at the moment <snip>
Who says CDs aren't a great place to be at the moment? Many of us have loaded up on 2-year CDs at 3.00% and 3-year CDs at 3.25% in recent weeks (I put $300K into taxable, with an add-on feature allowing an additional $20K per month, and $227K in an IRA). That deal is no longer available unless you got your application into PSECU by last Friday, but deals like this have consistently popped up periodically in recent years (at least since I've been taking advantage of them since late 2010, although there was a dry spell for a year or so when I was buying Treasuries, brokered CDs, and individual munis).

With 2-year and 3-year Treasuries at about 1.6% recently, the CDs have yields about twice as high, so quite good.

Now, you may not want to bother joining a new credit union to get a great CD deal, but that's a personal preference, which can't be generalized to "CDs aren't a great place to be".

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Re: Rebalancing into bond funds with record low interest rates

Post by Random Musings » Fri Nov 15, 2019 9:42 pm

If rebalancing to that level is part of your investment plan, just hold your nose and do it.

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Re: Rebalancing into bond funds with record low interest rates

Post by venkman » Fri Nov 15, 2019 11:27 pm

RetireBy55 wrote:
Fri Nov 15, 2019 5:25 pm
So..given that both bonds and CDs are not a great place to be at the moment, what would you all do if you had $3-500K of $$ to rebalance? I'm not very comfortable "letting it ride" in equities or funds that hold equities, as we're in a position where we do not need to take risk with those $$ - but I also don't want to lose money to inflation or (worse) interest rates hitting bond funds.
You're uncomfortable leaving the money in stocks, and you're uncomfortable putting the money into bonds. Figure out which one feels the least uncomfortable and do that.

I would point out that, in more than 30 years of existence, Vanguard's Total Bond Market Index fund has had 4 calendar years with a negative total return. The worst of those was 1994, when it lost 2.66%.

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Re: Rebalancing into bond funds with record low interest rates

Post by longinvest » Sat Nov 16, 2019 8:13 am

RetireBy55 wrote:
Fri Nov 15, 2019 5:25 pm
I'm not very comfortable "letting it ride" in equities or funds that hold equities, as we're in a position where we do not need to take risk with those $$ - but I also don't want to lose money to inflation or (worse) interest rates hitting bond funds.

Appreciate and all help!
I would consider moving my money into a low-cost Bogleheads One-Fund Portfolio and let the fund manager take care of low-level portfolio management tasks like regular rebalancing. This would free my mind for more interesting things in my life.

Good luck!
Bogleheads investment philosophy | One-ETF global balanced index portfolio | VPW

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Re: Rebalancing into bond funds with record low interest rates

Post by BlueCable » Sat Nov 16, 2019 8:16 am

Dwebb2110 wrote:
Fri Nov 15, 2019 5:54 pm
Stay short duration, my latest bond fund purchase has been the vanguard gnma fund. Effective duration of 2.7 and yield of 2.5%. The Barclays aggregate is around 6.4 years at 2.6% which to me doesn’t appear getting paid to take the duration risk.
Or, is the short term investor not getting paid to take the reinvestment risk?

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Re: Rebalancing into bond funds with record low interest rates

Post by RetireBy55 » Sat Nov 16, 2019 8:47 am

Thanks for all the replies. Much appreciated.

@Kevin - I did get in on the PSECU deal (thanks in part to reading about it here on BH). Locked in the 3.2 and 2.96 APRs on the 3 and 2-year, respectively. We're pretty much at our max comfort level on what we will have at PSECU when I complete the add-on purchases, so additional $$ on top of what we're already moving from other maturing CDs is probably not my first choice..

The equity rebalancing is what I've been struggling with. I held VBTLX quite a few years back and finally sold out of it as I wasn't satisfied with the below category average returns that it was posting for quite a few years starting around 2008-2009'ish. That said, the past several years (especially 2019 - holy cow..) have been better and perhaps I sold out of it too soon and should consider re-establishing a position.

I'm just hesitant to move any reasonably large amount of $$s into bond funds in general right now, as bond funds (like equity funds) have had a great year across the board - and I try to not make big purchases when I perceive rightly or wrongly that prices are high. I do expect bond funds to get hit next year and prices to come down a bit - the question of course is when. But with interest rates at record lows, I'm reasonably confident this is likely to happen. So, it'd be just my luck to make a big bond fund purchase to rebalance, and then to watch the value of that purchase decrease over early to late 2020. I of course strive to take the long-term view and not focus on just a year here or there, but it's never fun to make a purchase of anything (investment related or not) and watch the value of that purchase drop right after you buy it..

@Janey - hope your VBTLX purchase works out and that my gut is wrong on FI fund prices being unusually high at the moment..current NAV, though, is < 2% below it's 2019 high back in September so hence my hesitation..

I'm not that comfortable with equities, bonds OR cash at the moment. There's really no port in the storm, as I expect both equities and bonds to get hit - perhaps hard - in 2020 and being an early retiree, would almost prefer to go more (not entirely) to the sidelines for a bit. (Yes, I know that's market timing and taboo especially here on BH - but I also want to manage SOR risk as an early retiree best I can, and right now we're too high on equities but the alternatives also have risk..just less risk than the stock portion of our portfolio). Complicating things further, I've already grabbed whatever available CD deals there's been over the past couple of years and rates right now aside from the rare exception like PSECU are pretty dismal to allocate more to cash..even VMMXX is under 2% (last I looked, around 1.87%)..

Net, I'll probably move "some" more to bond funds - perhaps even VBTLX..I just have the feeling that now is not a great time to be moving any significant new $$ into bond funds after the great 2019 FI markets have had.

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Re: Rebalancing into bond funds with record low interest rates

Post by UpperNwGuy » Sat Nov 16, 2019 9:05 am

I will be rebalancing from Total Stock into Total Bond in a few weeks, and I don't care about "record low interest rates" because I am investing for the long-haul. I'm not market timing.

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Re: Rebalancing into bond funds with record low interest rates

Post by BoggledUp » Sat Nov 16, 2019 9:16 am

Bitcoin? Reits? Real Estate? Oil futures? Fine wines?

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Re: Rebalancing into bond funds with record low interest rates

Post by Doc » Sat Nov 16, 2019 9:25 am

aristotelian wrote:
Fri Nov 15, 2019 9:06 pm
You could always do short term bonds if duration risk is a concern.
Right. You lose practically nothing in yield going short especially Treasuries.

Our FI portfolio is based on a 1-10 Gov/credit bogey. Currently a large part of the T's are in six month T-Bills.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.

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Re: Rebalancing into bond funds with record low interest rates

Post by RubyTuesday » Sat Nov 16, 2019 9:43 am

Just rebalance into short term treasury and an inflation protected fund, the latter of which is actually paying you a premium for getting unexpected inflation protection.

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Re: Rebalancing into bond funds with record low interest rates

Post by J295 » Sat Nov 16, 2019 9:52 am

Typically, the purpose of an IPS and an AA with rebalancing is to minimize the existence and/or the effects of fear and greed.

I suggest you either rebalance, or scrap your AA and time to market as you deem appropriate.

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Re: Rebalancing into bond funds with record low interest rates

Post by Scooter57 » Sat Nov 16, 2019 10:04 am

venkman wrote:
Fri Nov 15, 2019 11:27 pm

I would point out that, in more than 30 years of existence, Vanguard's Total Bond Market Index fund has had 4 calendar years with a negative total return. The worst of those was 1994, when it lost 2.66%.
I would point out that for more than 30 years bond rates have been dropping from around 18%. Short periods of rising rates within that slow decline give you no hint as to what could happen if rates ever were to return to a more typical level. For most of my life going back to the 1950s 5% rates were considered ludicrously low. How low? Well that was what landlords paid on security deposits and what bank "Christmas Clubs" paid.

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Re: Rebalancing into bond funds with record low interest rates

Post by Chicken Little » Sat Nov 16, 2019 10:12 am

Scooter57 wrote:
Sat Nov 16, 2019 10:04 am
venkman wrote:
Fri Nov 15, 2019 11:27 pm

I would point out that, in more than 30 years of existence, Vanguard's Total Bond Market Index fund has had 4 calendar years with a negative total return. The worst of those was 1994, when it lost 2.66%.
I would point out that for more than 30 years bond rates have been dropping from around 18%. Short periods of rising rates within that slow decline give you no hint as to what could happen if rates ever were to return to a more typical level. For most of my life going back to the 1950s 5% rates were considered ludicrously low. How low? Well that was what landlords paid on security deposits and what bank "Christmas Clubs" paid.
I look at this as the main story.

Instead of hiding behind intermediate term duration in the face of a spontaneous 1% increase in rates, what is the outlook for a decades-long slog upward?

Not the probability, the risk?

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Re: Rebalancing into bond funds with record low interest rates

Post by Chicken Little » Sat Nov 16, 2019 10:15 am

To put this in perspective, I haven't been concerned about rising rates until about 6 months ago. Was never a member of the "rates have to go up" team.

In fact, in my opinion, the only thing that will make rates go up is if they go down another 2% first.

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Re: Rebalancing into bond funds with record low interest rates

Post by dbr » Sat Nov 16, 2019 10:31 am

Chicken Little wrote:
Sat Nov 16, 2019 10:12 am
Scooter57 wrote:
Sat Nov 16, 2019 10:04 am
venkman wrote:
Fri Nov 15, 2019 11:27 pm

I would point out that, in more than 30 years of existence, Vanguard's Total Bond Market Index fund has had 4 calendar years with a negative total return. The worst of those was 1994, when it lost 2.66%.
I would point out that for more than 30 years bond rates have been dropping from around 18%. Short periods of rising rates within that slow decline give you no hint as to what could happen if rates ever were to return to a more typical level. For most of my life going back to the 1950s 5% rates were considered ludicrously low. How low? Well that was what landlords paid on security deposits and what bank "Christmas Clubs" paid.
I look at this as the main story.

Instead of hiding behind intermediate term duration in the face of a spontaneous 1% increase in rates, what is the outlook for a decades-long slog upward?

Not the probability, the risk?
The outcome is that end point wealth will grow to a larger value from increased interest paid and reinvested than the holding would have attained if the interest rate had not changed from a low value. There have been some posts in the past showing the outcome charts for this sort of thing. Naturally the result can depend on the rate of change. Within reasonable rates of change it is a benefit to bond investors for interest rates to rise. In an extreme case, such as hyperinflation, that would not be true. Historically we have experienced rises and falls of perhaps 15% in 15-20 years, so that would be what one could have in mind though even that experience is historically at an extreme. A slow rise in interest rates from 2% to 8% over two decades would probably be a real boon for bond investors due to increased earning. Maybe someone has the curves for that to show the result with real data. We are also taking about durations of less than a decade as well, perhaps the 5-7 years of intermediate bonds. The prospects for a 30 year duration investment would be different, if there even is such a duration.

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Re: Rebalancing into bond funds with record low interest rates

Post by Chicken Little » Sat Nov 16, 2019 10:41 am

dbr wrote:
Sat Nov 16, 2019 10:31 am
Chicken Little wrote:
Sat Nov 16, 2019 10:12 am
Scooter57 wrote:
Sat Nov 16, 2019 10:04 am
venkman wrote:
Fri Nov 15, 2019 11:27 pm

I would point out that, in more than 30 years of existence, Vanguard's Total Bond Market Index fund has had 4 calendar years with a negative total return. The worst of those was 1994, when it lost 2.66%.
I would point out that for more than 30 years bond rates have been dropping from around 18%. Short periods of rising rates within that slow decline give you no hint as to what could happen if rates ever were to return to a more typical level. For most of my life going back to the 1950s 5% rates were considered ludicrously low. How low? Well that was what landlords paid on security deposits and what bank "Christmas Clubs" paid.
I look at this as the main story.

Instead of hiding behind intermediate term duration in the face of a spontaneous 1% increase in rates, what is the outlook for a decades-long slog upward?

Not the probability, the risk?
The outcome is that end point wealth will grow to a larger value from increased interest paid and reinvested than the holding would have attained if the interest rate had not changed from a low value. There have been some posts in the past showing the outcome charts for this sort of thing. Naturally the result can depend on the rate of change. Within reasonable rates of change it is a benefit to bond investors for interest rates to rise. In an extreme case, such as hyperinflation, that would not be true. Historically we have experienced rises and falls of perhaps 15% in 15-20 years, so that would be what one could have in mind though even that experience is historically at an extreme. A slow rise in interest rates from 2% to 8% over two decades would probably be a real boon for bond investors due to increased earning. Maybe someone has the curves for that to show the result with real data. We are also taking about durations of less than a decade as well, perhaps the 5-7 years of intermediate bonds. The prospects for a 30 year duration investment would be different, if there even is such a duration.
I agree in theory, it's the practice I'm worried about.

The increase from 2% to 20% looks like a roller coaster. Not sure everyone would have the wherewithal to stand still, especially since bonds have played a different role in portfolios for the last 30 years or so.

https://www.macrotrends.net/2015/fed-fu ... ical-chart

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Re: Rebalancing into bond funds with record low interest rates

Post by dbr » Sat Nov 16, 2019 10:51 am

Chicken Little wrote:
Sat Nov 16, 2019 10:41 am


I agree in theory, it's the practice I'm worried about.

The increase from 2% to 20% looks like a roller coaster. Not sure everyone would have the wherewithal to stand still, especially since bonds have played a different role in portfolios for the last 30 years or so.

https://www.macrotrends.net/2015/fed-fu ... ical-chart
If you are truly worried that 2020-2040 us going to look like 1960-1980 then you should invest in ultra short bonds or even ultra short TIPS which will pace the increasing interest rates. Then in 2040 you should shift everything to long bonds. Of course if the next twenty years do not look like 1960-1980 then staying in short bonds will cost you a lot in return. Note that being in stocks from 1960-1980 did not have a really good outcome either. In fact in 1980 instead of buying long bonds one should have put everything in stocks and then gotten out in 2000. You can see that it is easy to find good strategies with hindsight.

The problem with preparing for any single extreme worry is that you end up with bad decisions for all other possible outcomes. That is why people take middle of the road positions such as holding both stocks and bonds and holding intermediate durations in bonds -- because no single outcome will be at its worst.

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Re: Rebalancing into bond funds with record low interest rates

Post by Chicken Little » Sat Nov 16, 2019 1:16 pm

I’m interested in ‘60-‘80. What I don’t know how to account for is total debt then compared to now.

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Re: Rebalancing into bond funds with record low interest rates

Post by Kevin M » Sat Nov 16, 2019 3:29 pm

RetireBy55 wrote:
Sat Nov 16, 2019 8:47 am
@Kevin - I did get in on the PSECU deal (thanks in part to reading about it here on BH). Locked in the 3.2 and 2.96 APRs on the 3 and 2-year, respectively. We're pretty much at our max comfort level on what we will have at PSECU when I complete the add-on purchases, so additional $$ on top of what we're already moving from other maturing CDs is probably not my first choice..
That's great. So you don't really believe that CDs aren't the place to be. :sharebeer Note that since you opened your account while the deal was in effect, you have until Nov 30 to buy more CDs at the promo rates.

My comfort level for PSECU is whatever is covered by NCUA deposit insurance.

For an IRA it's $250K, which is why I only put $227K in my 3-year IRA CD (grows to a little under $250K in three years).

For taxable, I've named three beneficiaries, so am covered to $750K; I started with $300K ($150K in each of a 2y and 3y CD), and have the add-on set to $20k/month. Assuming I stop the add-ons for the 2-year CD after 12 months, and for the 3-year CD after 24 months, I wont' get to $750K, but will be close enough that I probably wouldn't buy another CD.

If I want to earn the higher rate on a larger amount for a longer period, I could consider selling some of my CA muni bond funds to put into another 3y CD, and stop the add-ons sooner. For me, TEY on the CA intermediate-term muni fund is 2.26%, and on the long-term CA muni fund it's 2.77%, so to the extent I'm comfortable reducing term risk (reducing price risk and increasing reinvestment risk), putting money into another 3y CD could make sense. I'll have to run the numbers some more.
RetireBy55 wrote:
Sat Nov 16, 2019 8:47 am
I'm just hesitant to move any reasonably large amount of $$s into bond funds in general right now, as bond funds (like equity funds) have had a great year across the board - and I try to not make big purchases when I perceive rightly or wrongly that prices are high. I do expect bond funds to get hit next year and prices to come down a bit - the question of course is when. But with interest rates at record lows, I'm reasonably confident this is likely to happen. So, it'd be just my luck to make a big bond fund purchase to rebalance, and then to watch the value of that purchase decrease over early to late 2020. I of course strive to take the long-term view and not focus on just a year here or there, but it's never fun to make a purchase of anything (investment related or not) and watch the value of that purchase drop right after you buy it..
First, the relevant yields are not at record lows. Looking at the 5-year Treasury yield, for example, it's now at 1.65%, while the historical low since 1962 was 0.56% on 7/25/2012--only a little more than 7 years ago.

Image

So we shouldn't rule out further declines in yields, and we certainly shouldn't believe that there's nowhere to go but up.

Having said that, if you're more nervous about price risk than reinvestment risk, and if you can't find any good CD deals, then cash and very short-term bond funds are reasonable alternatives. I'd look at Treasury MM, and Ultra-Short-Term-Bond fund (duration = 0.9 years).
RetireBy55 wrote:
Sat Nov 16, 2019 8:47 am
I'm not that comfortable with equities, bonds OR cash at the moment. There's really no port in the storm, as I expect both equities and bonds to get hit - perhaps hard - in 2020 and being an early retiree, would almost prefer to go more (not entirely) to the sidelines for a bit. (Yes, I know that's market timing and taboo especially here on BH - but I also want to manage SOR risk as an early retiree best I can, and right now we're too high on equities but the alternatives also have risk..just less risk than the stock portion of our portfolio). Complicating things further, I've already grabbed whatever available CD deals there's been over the past couple of years and rates right now aside from the rare exception like PSECU are pretty dismal to allocate more to cash..even VMMXX is under 2% (last I looked, around 1.87%)..
Well, you have to pick something. Given your proclivities, I'd say Treasury MM and/or ultra-short bond are reasonable alternatives. Also, you probably can find a savings account at 2.4% or so, like this: https://www.depositaccounts.com/banks/f ... nk/offers/. Of course the rate normally isn't guaranteed for a savings account, so significant reinvestment risk.

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Re: Rebalancing into bond funds with record low interest rates

Post by RetireBy55 » Sat Nov 16, 2019 5:49 pm

Thanks, Kevin. I considered using beneficiaries to go above the $250K per person NCUA insurance also. QQ, though - if you have 3 beneficiaries, wouldn't you be insured for $1M vs. $750K? I always thought it was the account holder(s) for $250K, then each beneficiary adds another $250K.

How did you have to title your PSECU accounts? I seem to remember reading on depositaccounts.com that for the beneficiary coverage to kick in that accounts "must" be titled a very specific way - like POD to the beneficiary in the account title. But that's where it gets murky (at least to me). On all other CDS I've had (eg: Ally), I've never seen the "title" change on a POD. At Ally, for example, I DO see a beneficiary listed - but the account title is still just my and my wife's name..not, me & wife POD person X. (Hopefully that makes sense).

What did you do at PSECU to be comfortable you'll be covered for $750K in taxable?

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Re: Rebalancing into bond funds with record low interest rates

Post by RetireBy55 » Sat Nov 16, 2019 5:54 pm

PS - I wasn't trying to imply yields are at record lows - just that bond funds (eg: VBTLX) have had a great run in 2019 and the current NAVs are near 52-week highs in a lot of cases..

VBTLX, for example, is ~2% below the NAV high set in mid Sept.

So, that's what I was referring to by saying things are currently expensive..I usually DCA, but to rebalance a reasonably large sum that'd take forever and I have the opportunity cost of a lot of those $$ sitting in VMMXX, VMMFX or other liquid account with low current yields as well..

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Re: Rebalancing into bond funds with record low interest rates

Post by Kevin M » Sat Nov 16, 2019 8:43 pm

RetireBy55 wrote:
Sat Nov 16, 2019 5:49 pm
Thanks, Kevin. I considered using beneficiaries to go above the $250K per person NCUA insurance also. QQ, though - if you have 3 beneficiaries, wouldn't you be insured for $1M vs. $750K? I always thought it was the account holder(s) for $250K, then each beneficiary adds another $250K.
Nope, once you go with revocable trust account coverage, whether a formal revocable trust or in informal revocable trust (e.g., POD), it's only the beneficiaries that count. Here's an FDIC site you can use to review this: https://www.fdic.gov/deposit/covered/trust.html. You can do some web searching to verify that NCUA insurance works the same.
RetireBy55 wrote:
Sat Nov 16, 2019 5:49 pm
How did you have to title your PSECU accounts? I seem to remember reading on depositaccounts.com that for the beneficiary coverage to kick in that accounts "must" be titled a very specific way - like POD to the beneficiary in the account title. But that's where it gets murky (at least to me). On all other CDS I've had (eg: Ally), I've never seen the "title" change on a POD. At Ally, for example, I DO see a beneficiary listed - but the account title is still just my and my wife's name..not, me & wife POD person X. (Hopefully that makes sense).
The titling is in the bank records, which is referred to if you read the FDIC insurance details, and NCUA is the same.

At Ally, I asked them to change the titling of accounts so if reflected the POD, and they did, but at some point they eliminated that. The beneficiaries are clearly noted though if you look at account details, so clearly the bank records reflect the POD nature of the account.
RetireBy55 wrote:
Sat Nov 16, 2019 5:49 pm
What did you do at PSECU to be comfortable you'll be covered for $750K in taxable?
They have a form you must complete to name your beneficiaries. They refer to this as a "tentative trust account", a term which I've never heard before. "Totten trust" is a term used in the FDIC coverage wording.

When asking how to set up beneficiaries, the PSECU rep assured me that naming the beneficiaries was sufficient for the NCUA coverage to be $250K per beneficiary.

I think some folks are more paranoid than I am, but I'm comfortable that naming POD beneficiaries provides $250K per beneficiary coverage for five or fewer beneficiaries (for more than five, the coverage rules are more complex). Also, bank and CU failure rates are extremely low, and PSECU is a large, highly-rated CU.

Kevin
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Re: Rebalancing into bond funds with record low interest rates

Post by Scooter57 » Sat Nov 16, 2019 9:00 pm

dbr wrote:
Sat Nov 16, 2019 10:51 am
if the next twenty years do not look like 1960-1980 then staying in short bonds will cost you a lot in return.
How could staying in short bonds cost you a lot in returns when rates for all maturities are so ridiculously low? Right now the spread between the 5 year Treasury and the 30 year is only .66%. That is not a difference that is going to do much for your portfolio. At least with the shorter investment, you retain flexibility.

All the theory about bonds which people have internalized and repeat to each other here was formed from how thimgs werr on periods when rates were high enough that compounding could make a meaningful difference in your portfolio. Good luck compounding the current rates. Most of us in the retirement age group won't live long enough to see today's 30 yr Treasury's 2.31% double our investment, as it will take 31years. Even at 5% it only took 14.

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Re: Rebalancing into bond funds with record low interest rates

Post by dbr » Sun Nov 17, 2019 9:55 am

Scooter57 wrote:
Sat Nov 16, 2019 9:00 pm
dbr wrote:
Sat Nov 16, 2019 10:51 am
if the next twenty years do not look like 1960-1980 then staying in short bonds will cost you a lot in return.
How could staying in short bonds cost you a lot in returns when rates for all maturities are so ridiculously low? Right now the spread between the 5 year Treasury and the 30 year is only .66%. That is not a difference that is going to do much for your portfolio. At least with the shorter investment, you retain flexibility.

All the theory about bonds which people have internalized and repeat to each other here was formed from how thimgs werr on periods when rates were high enough that compounding could make a meaningful difference in your portfolio. Good luck compounding the current rates. Most of us in the retirement age group won't live long enough to see today's 30 yr Treasury's 2.31% double our investment, as it will take 31years. Even at 5% it only took 14.
Presumably because rates won't look like they look right now for the next twenty years either. But I grant you trying to predict interest rates doesn't work, which is really the point.

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Re: Rebalancing into bond funds with record low interest rates

Post by Scooter57 » Sun Nov 17, 2019 1:51 pm

dbr wrote:
Sun Nov 17, 2019 9:55 am
Scooter57 wrote:
Sat Nov 16, 2019 9:00 pm
dbr wrote:
Sat Nov 16, 2019 10:51 am
if the next twenty years do not look like 1960-1980 then staying in short bonds will cost you a lot in return.
How could staying in short bonds cost you a lot in returns when rates for all maturities are so ridiculously low? Right now the spread between the 5 year Treasury and the 30 year is only .66%. That is not a difference that is going to do much for your portfolio. At least with the shorter investment, you retain flexibility.

All the theory about bonds which people have internalized and repeat to each other here was formed from how thimgs werr on periods when rates were high enough that compounding could make a meaningful difference in your portfolio. Good luck compounding the current rates. Most of us in the retirement age group won't live long enough to see today's 30 yr Treasury's 2.31% double our investment, as it will take 31years. Even at 5% it only took 14.
Presumably because rates won't look like they look right now for the next twenty years either. But I grant you trying to predict interest rates doesn't work, which is really the point.
Staying in short bonds now would give you the flexibility to take advantage of higher rates should they arrive, while going longer would shut down that possibility. The OP seemed to think you'd be losing out if you stayed short.

Personally, I continue to stick with a five year CD ladder, though I did buy into two Vanguard muni funds when the interest they were paying was high enough to make it worth taking some long-bond risk. I'm monitoring them carefully and will sell them when I get very close to my break even price, but that would only happen if rates rose again to where I'd be able to find those 3.5% and 4% CDs.

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