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Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
mary1492
Posts: 60
Joined: Thu Oct 17, 2019 3:02 am

Re: Long Term Bonds getting killed today

Post by mary1492 » Sun Nov 10, 2019 6:04 pm

.....
Last edited by mary1492 on Wed Dec 04, 2019 10:28 pm, edited 1 time in total.

Lee_WSP
Posts: 2128
Joined: Fri Apr 19, 2019 5:15 pm
Location: Arizona

Re: Long Term Bonds getting killed today

Post by Lee_WSP » Sun Nov 10, 2019 6:33 pm

Unless for some reason you're dead set on rolling the bonds when it matures, I don't see the reinvestment risk realized as opportunity cost.

HEDGEFUNDIE
Posts: 4231
Joined: Sun Oct 22, 2017 2:06 pm

Re: Long Term Bonds getting killed today

Post by HEDGEFUNDIE » Sun Nov 10, 2019 6:52 pm

mary1492 wrote:
Sun Nov 10, 2019 6:04 pm
HEDGEFUNDIE wrote:
Sun Nov 10, 2019 5:42 pm
mary1492 wrote:
Sun Nov 10, 2019 5:34 pm
RAchip wrote:
Sun Nov 10, 2019 4:31 pm
It is certainly true that if you buy individual bonds (I do) intending to hold to maturity you know exactly what you will get (ignoring the minimal default risk) — the designated interest payments plus return of par value at maturity.

But I dont think its fair to say that you cant “loose money” doing this. If market interest rates rise you miss out on those higher rates; you are locked into your lower rate bond. You are not getting the market rate of return that you could otherwise get. In that sense, you loose money. This is why longer term bonds are risky even if you buy with the intent of holding to maturity.
There is a significant difference between "losing money" and "not making as much as you might have". "Not making as much as you might have" is what you are describing.
Actually there is no difference. This is called reinvestment risk. It is an opportunity cost, and like all other opportunity costs, it is as real as an actual out-of-pocket cost.

Any belief to the contrary is pure cognitive bias.

To use your CD example, there are such as things as “no-penalty CDs” that allow you break your CD early. Would you expect a regular CD to pay more or less interest than a no-penalty CD of the same maturity? More, of course, to compensate you for the reinvestment risk.
And so we disagree. Nothing wrong with that.

Opportunity cost is not as real as an out of pocket cost at all. I have the same amount of money in my pocket before/after. The IRS says so as well - otherwise I'd be claiming losses for having not invested in Microsoft 30 years ago.

Reinvestment risk occurs at the time of maturity (the time of reinvestment) and that your options for reinvesting the money may not be as good as if it had been at an earlier time. Reinvestment risk is not taking place while you hold the bond/CD. What is happening while you own the bond/CD is interest rate risk - that you might not be earning as much as you could if you had invested at current market rates. Reinvestment risk and interest rate risk are not the same.
Reinvestment risk, interest rate risk, term risk, are all fundamentally the same risk: the risk that comparable alternative investment options would yield more or less than the option you chose.

You IRS comment is a non-sequitor. The IRS operates on a cash basis for ease of administration and audit. Opportunity costs are not only real costs, they are fundamental to how financial securities of all kinds are priced.

The reason why behavioral biases are problematic is because they lead to suboptimal decision making. You are free to believe whatever you want, of course, but then don’t be surprised if they ultimately lead to regret.

mary1492
Posts: 60
Joined: Thu Oct 17, 2019 3:02 am

Re: Long Term Bonds getting killed today

Post by mary1492 » Sun Nov 10, 2019 6:55 pm

.....
Last edited by mary1492 on Wed Dec 04, 2019 10:28 pm, edited 1 time in total.

caklim00
Posts: 2121
Joined: Mon May 26, 2008 10:09 am

Re: Long Term Bonds getting killed today

Post by caklim00 » Sun Nov 10, 2019 8:39 pm

hdas wrote:
Thu Nov 07, 2019 12:51 pm
What a day :twisted: , as of this moment:

TMF - 3X Leverage LTT > -6.75%
Ultrabond Futures > -2.74% (Measured from settlement)
EDV (LTT Strips) > -3.52%

The CBOE 30y yield index is at 2.441%....perhaps time to "wet your beak".

Cheers :greedy
Is anyone holding Ultrabond Futures as part of a risk parity/hedgefundie like approach?

Lee_WSP
Posts: 2128
Joined: Fri Apr 19, 2019 5:15 pm
Location: Arizona

Re: Long Term Bonds getting killed today

Post by Lee_WSP » Sun Nov 10, 2019 11:19 pm

HEDGEFUNDIE wrote:
Sun Nov 10, 2019 6:52 pm

Reinvestment risk, interest rate risk, term risk, are all fundamentally the same risk: the risk that comparable alternative investment options would yield more or less than the option you chose.
Doesn't interest rate risk actually affect the bond fund since it buys & sells bonds frequently, whereas the principal gain/loss of a single bond is purely hypothetical if held to maturity?

MasCowbell
Posts: 11
Joined: Sun Sep 08, 2019 12:49 am

Re: Long Term Bonds getting killed today

Post by MasCowbell » Sun Nov 10, 2019 11:35 pm

Lee_WSP wrote:
Sun Nov 10, 2019 11:19 pm
HEDGEFUNDIE wrote:
Sun Nov 10, 2019 6:52 pm

Reinvestment risk, interest rate risk, term risk, are all fundamentally the same risk: the risk that comparable alternative investment options would yield more or less than the option you chose.
Doesn't interest rate risk actually affect the bond fund since it buys & sells bonds frequently, whereas the principal gain/loss of a single bond is purely hypothetical if held to maturity?
Inflation is not hypothetical. You get back exactly what you put in, only problem is it no longer buys what you thought it would. And that is exactly what drives the bond price.

Lee_WSP
Posts: 2128
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Location: Arizona

Re: Long Term Bonds getting killed today

Post by Lee_WSP » Sun Nov 10, 2019 11:38 pm

MasCowbell wrote:
Sun Nov 10, 2019 11:35 pm
Lee_WSP wrote:
Sun Nov 10, 2019 11:19 pm
HEDGEFUNDIE wrote:
Sun Nov 10, 2019 6:52 pm

Reinvestment risk, interest rate risk, term risk, are all fundamentally the same risk: the risk that comparable alternative investment options would yield more or less than the option you chose.
Doesn't interest rate risk actually affect the bond fund since it buys & sells bonds frequently, whereas the principal gain/loss of a single bond is purely hypothetical if held to maturity?
Inflation is not hypothetical. You get back exactly what you put in, only problem is it no longer buys what you thought it would. And that is exactly what drives the bond price.
Where did I mention inflation? I never mentioned inflation. You are making an argument that doesn't exist.

MasCowbell
Posts: 11
Joined: Sun Sep 08, 2019 12:49 am

Re: Long Term Bonds getting killed today

Post by MasCowbell » Sun Nov 10, 2019 11:49 pm

Lee_WSP wrote:
Sun Nov 10, 2019 11:38 pm
MasCowbell wrote:
Sun Nov 10, 2019 11:35 pm
Lee_WSP wrote:
Sun Nov 10, 2019 11:19 pm
HEDGEFUNDIE wrote:
Sun Nov 10, 2019 6:52 pm

Reinvestment risk, interest rate risk, term risk, are all fundamentally the same risk: the risk that comparable alternative investment options would yield more or less than the option you chose.
Doesn't interest rate risk actually affect the bond fund since it buys & sells bonds frequently, whereas the principal gain/loss of a single bond is purely hypothetical if held to maturity?
Inflation is not hypothetical. You get back exactly what you put in, only problem is it no longer buys what you thought it would. And that is exactly what drives the bond price.
Where did I mention inflation? I never mentioned inflation. You are making an argument that doesn't exist.
Bond payout is determined by inflation expectations plus default risk, period.

So to say that there is no risk in holding a bond to maturity is to completely ignore inflation risk.

Unless you want to argue that inflation is an opportunity cost that is not real?

Lee_WSP
Posts: 2128
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Location: Arizona

Re: Long Term Bonds getting killed today

Post by Lee_WSP » Mon Nov 11, 2019 12:01 am

MasCowbell wrote:
Sun Nov 10, 2019 11:49 pm
Lee_WSP wrote:
Sun Nov 10, 2019 11:38 pm
MasCowbell wrote:
Sun Nov 10, 2019 11:35 pm
Lee_WSP wrote:
Sun Nov 10, 2019 11:19 pm
HEDGEFUNDIE wrote:
Sun Nov 10, 2019 6:52 pm

Reinvestment risk, interest rate risk, term risk, are all fundamentally the same risk: the risk that comparable alternative investment options would yield more or less than the option you chose.
Doesn't interest rate risk actually affect the bond fund since it buys & sells bonds frequently, whereas the principal gain/loss of a single bond is purely hypothetical if held to maturity?
Inflation is not hypothetical. You get back exactly what you put in, only problem is it no longer buys what you thought it would. And that is exactly what drives the bond price.
Where did I mention inflation? I never mentioned inflation. You are making an argument that doesn't exist.
Bond payout is determined by inflation expectations plus default risk, period.

So to say that there is no risk in holding a bond to maturity is to completely ignore inflation risk.

Unless you want to argue that inflation is an opportunity cost that is not real?
Did I say there was no risk? You are again putting words in my text.

Scooter57
Posts: 1320
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Re: Long Term Bonds getting killed today

Post by Scooter57 » Mon Nov 11, 2019 2:06 pm

Inflation risk is conceptual, and inflation often is calculated including the prices of things we aren't going to have to buy, like housing, or new cars. You put in $1000 and get back $1000 when the bond matures.

The NAV loss on a bond fund can be real. You put in $1,000 and you get back $900 when you sell the fund or your heirs do. The interest you were paid while holding the fund is low enough now that it doesn't make up for the loss in principal. In the past, interest rates were high enough that even with a loss in NAV you still earned enough interest to put you ahead, long term.

And given that Central Banks have been desperately trying to create inflation for a decade, and failing, I think the obsession with inflation just shows people's age. Many of those of us who remember inflation in the mid teen percents have been obsessed with it as a threat ever since. If inflation got to 7%, I'd worry a lot more, but at under 2% even with compounding, I'm not going to be alive long enough to lose significant amounts of purchasing power.

And much of what has inflated is housing costs, especially rentals. Food and clothing are very stable and often cost less than they did 15 years ago. Heating oil is cheaper than it was ten years ago. Gasoline is cheaper, too.

Lee_WSP
Posts: 2128
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Location: Arizona

Re: Long Term Bonds getting killed today

Post by Lee_WSP » Mon Nov 11, 2019 6:04 pm

Okay, let's discuss inflation risk. The reason I don't care about inflation risk is that it's going to strike everything regardless of what we do. Conceptually it strikes bonds more, but really, it strikes all assets. So, I think touting it around like it only affects bonds is a red herring. All your assets are going to inflate/deflate. There's nothing you can do about it unless you want to hold gold or some other inflation hedge.

RubyTuesday
Posts: 468
Joined: Fri Oct 19, 2012 11:24 am

Re: Long Term Bonds getting killed today

Post by RubyTuesday » Mon Nov 11, 2019 10:04 pm

Lee_WSP wrote:
Sun Nov 10, 2019 11:19 pm
HEDGEFUNDIE wrote:
Sun Nov 10, 2019 6:52 pm

Reinvestment risk, interest rate risk, term risk, are all fundamentally the same risk: the risk that comparable alternative investment options would yield more or less than the option you chose.
Doesn't interest rate risk actually affect the bond fund since it buys & sells bonds frequently, whereas the principal gain/loss of a single bond is purely hypothetical if held to maturity?
Term risk is not hypothetical. If you hold a single bond and rates rise significantly, you have significant opportunity costs unless you sell the bond, which would be at a market price that reflects the increased market yields. CDs bought directly from banks (as opposed to brokered CDs) do have potentially much lower term risk (relative to similar term fixed income assets) due to the fact that they typically have small early withdrawal penalties.
“Doing nothing is better than being busy doing nothing.” – Lao Tzu

Lee_WSP
Posts: 2128
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Location: Arizona

Re: Long Term Bonds getting killed today

Post by Lee_WSP » Mon Nov 11, 2019 11:40 pm

RubyTuesday wrote:
Mon Nov 11, 2019 10:04 pm
Lee_WSP wrote:
Sun Nov 10, 2019 11:19 pm
HEDGEFUNDIE wrote:
Sun Nov 10, 2019 6:52 pm

Reinvestment risk, interest rate risk, term risk, are all fundamentally the same risk: the risk that comparable alternative investment options would yield more or less than the option you chose.
Doesn't interest rate risk actually affect the bond fund since it buys & sells bonds frequently, whereas the principal gain/loss of a single bond is purely hypothetical if held to maturity?
Term risk is not hypothetical. If you hold a single bond and rates rise significantly, you have significant opportunity costs unless you sell the bond, which would be at a market price that reflects the increased market yields. CDs bought directly from banks (as opposed to brokered CDs) do have potentially much lower term risk (relative to similar term fixed income assets) due to the fact that they typically have small early withdrawal penalties.
Sure sounds like you're just making up risks.

2) you haven't presented a viable alternative.

RubyTuesday
Posts: 468
Joined: Fri Oct 19, 2012 11:24 am

Re: Long Term Bonds getting killed today

Post by RubyTuesday » Tue Nov 12, 2019 12:07 am

Lee_WSP wrote:
Mon Nov 11, 2019 11:40 pm
RubyTuesday wrote:
Mon Nov 11, 2019 10:04 pm
Lee_WSP wrote:
Sun Nov 10, 2019 11:19 pm
HEDGEFUNDIE wrote:
Sun Nov 10, 2019 6:52 pm

Reinvestment risk, interest rate risk, term risk, are all fundamentally the same risk: the risk that comparable alternative investment options would yield more or less than the option you chose.
Doesn't interest rate risk actually affect the bond fund since it buys & sells bonds frequently, whereas the principal gain/loss of a single bond is purely hypothetical if held to maturity?
Term risk is not hypothetical. If you hold a single bond and rates rise significantly, you have significant opportunity costs unless you sell the bond, which would be at a market price that reflects the increased market yields. CDs bought directly from banks (as opposed to brokered CDs) do have potentially much lower term risk (relative to similar term fixed income assets) due to the fact that they typically have small early withdrawal penalties.
Sure sounds like you're just making up risks.

2) you haven't presented a viable alternative.
Which risk did I make up?

2) viable alternative to what? FWIW I did mention that CDs can offer a better risk adjusted return for some. My point is simply that single bonds have real, not hypothetical, term risks.
“Doing nothing is better than being busy doing nothing.” – Lao Tzu

Lee_WSP
Posts: 2128
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Location: Arizona

Re: Long Term Bonds getting killed today

Post by Lee_WSP » Tue Nov 12, 2019 12:32 am

RubyTuesday wrote:
Tue Nov 12, 2019 12:07 am
Lee_WSP wrote:
Mon Nov 11, 2019 11:40 pm
RubyTuesday wrote:
Mon Nov 11, 2019 10:04 pm
Lee_WSP wrote:
Sun Nov 10, 2019 11:19 pm
HEDGEFUNDIE wrote:
Sun Nov 10, 2019 6:52 pm

Reinvestment risk, interest rate risk, term risk, are all fundamentally the same risk: the risk that comparable alternative investment options would yield more or less than the option you chose.
Doesn't interest rate risk actually affect the bond fund since it buys & sells bonds frequently, whereas the principal gain/loss of a single bond is purely hypothetical if held to maturity?
Term risk is not hypothetical. If you hold a single bond and rates rise significantly, you have significant opportunity costs unless you sell the bond, which would be at a market price that reflects the increased market yields. CDs bought directly from banks (as opposed to brokered CDs) do have potentially much lower term risk (relative to similar term fixed income assets) due to the fact that they typically have small early withdrawal penalties.
Sure sounds like you're just making up risks.

2) you haven't presented a viable alternative.
Which risk did I make up?

2) viable alternative to what? FWIW I did mention that CDs can offer a better risk adjusted return for some. My point is simply that single bonds have real, not hypothetical, term risks.
Please explain how opportunity cost is real if someone isn't actually going to do the alternative thing? Opportunity cost does not apply when a decision has already been made. It is only real before a decision is made.

Sure, you can be presented with "hold the bond or sell the bond" and then there would be opportunity costs to both sides; but that's stretching the argument.

Topic Author
hdas
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[Deleted]

Post by hdas » Tue Nov 12, 2019 9:16 am

[Deleted]
Last edited by hdas on Wed Jan 29, 2020 9:40 pm, edited 1 time in total.
....

RubyTuesday
Posts: 468
Joined: Fri Oct 19, 2012 11:24 am

Re: Long Term Bonds getting killed today

Post by RubyTuesday » Tue Nov 12, 2019 11:21 am

Lee_WSP wrote:
Tue Nov 12, 2019 12:32 am
RubyTuesday wrote:
Tue Nov 12, 2019 12:07 am
Lee_WSP wrote:
Mon Nov 11, 2019 11:40 pm
RubyTuesday wrote:
Mon Nov 11, 2019 10:04 pm
Lee_WSP wrote:
Sun Nov 10, 2019 11:19 pm


Doesn't interest rate risk actually affect the bond fund since it buys & sells bonds frequently, whereas the principal gain/loss of a single bond is purely hypothetical if held to maturity?
Term risk is not hypothetical. If you hold a single bond and rates rise significantly, you have significant opportunity costs unless you sell the bond, which would be at a market price that reflects the increased market yields. CDs bought directly from banks (as opposed to brokered CDs) do have potentially much lower term risk (relative to similar term fixed income assets) due to the fact that they typically have small early withdrawal penalties.
Sure sounds like you're just making up risks.

2) you haven't presented a viable alternative.
Which risk did I make up?

2) viable alternative to what? FWIW I did mention that CDs can offer a better risk adjusted return for some. My point is simply that single bonds have real, not hypothetical, term risks.
Please explain how opportunity cost is real if someone isn't actually going to do the alternative thing? Opportunity cost does not apply when a decision has already been made. It is only real before a decision is made.

Sure, you can be presented with "hold the bond or sell the bond" and then there would be opportunity costs to both sides; but that's stretching the argument.
This section of the wiki article comparing bond funds to bond ladders I think best captures what I am trying (ineffectively) to describe:

Why Thinking of a Rolling Ladder's Return as "Safe" is Misleading

And from Zero-Coupon Example
For example: Fred buys a bond fund while Larry buys bond ladder, each with equal duration. Interest rates skyrocket just afterward. At that moment, Fred and Larry have an equal loss. Fred can log into Vanguard and see that his fund balance is, say, 70% of what he invested. Larry can log into Vanguard Brokerage Services and see that the total value of all of the bonds in his ladder are 70% of what he invested. Whether either decides to realize the loss or not, the loss has in fact occurred.

Now, the only difference between Fred and Larry is that Larry has two options for getting his money back and Fred has one. Fred can sell his bond fund and buy a zero coupon bond with a maturity value equal to his initial capital investment. Larry can likewise sell his bond ladder and buy a zero coupon bond. Larry's additional option is to hold all of his bonds until maturity. However, this second option is unambiguously worse for Larry. He would need to hold his longest bonds twice as long as the zero coupon bond to get his money back. Due to the opportunity cost of having his money unnecessarily locked up, this means he would actually be losing money versus the zero coupon option. In addition, for taxable accounts, selling their holdings to buy zero coupon bonds would let Larry and Fred take advantage of tax loss harvesting
.

My emphasis added
“Doing nothing is better than being busy doing nothing.” – Lao Tzu

Lee_WSP
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Location: Arizona

Re: Long Term Bonds getting killed today

Post by Lee_WSP » Tue Nov 12, 2019 11:32 am

I agree that a bond ladder has very similar risks to a bond fund, but we're talking about holding a single bond or group of bonds until maturity. By itself, the bond will yield the face value and once it matures you can deal with the current environment at that time and either roll it or not.

That said, I don't think it's the best idea in the first place.

pascalwager
Posts: 1704
Joined: Mon Oct 31, 2011 8:36 pm

Re: Long Term Bonds getting killed today

Post by pascalwager » Wed Nov 13, 2019 5:47 pm

Lee_WSP wrote:
Tue Nov 12, 2019 12:32 am
RubyTuesday wrote:
Tue Nov 12, 2019 12:07 am
Lee_WSP wrote:
Mon Nov 11, 2019 11:40 pm
RubyTuesday wrote:
Mon Nov 11, 2019 10:04 pm
Lee_WSP wrote:
Sun Nov 10, 2019 11:19 pm


Doesn't interest rate risk actually affect the bond fund since it buys & sells bonds frequently, whereas the principal gain/loss of a single bond is purely hypothetical if held to maturity?
Term risk is not hypothetical. If you hold a single bond and rates rise significantly, you have significant opportunity costs unless you sell the bond, which would be at a market price that reflects the increased market yields. CDs bought directly from banks (as opposed to brokered CDs) do have potentially much lower term risk (relative to similar term fixed income assets) due to the fact that they typically have small early withdrawal penalties.
Sure sounds like you're just making up risks.

2) you haven't presented a viable alternative.
Which risk did I make up?

2) viable alternative to what? FWIW I did mention that CDs can offer a better risk adjusted return for some. My point is simply that single bonds have real, not hypothetical, term risks.
Please explain how opportunity cost is real if someone isn't actually going to do the alternative thing? Opportunity cost does not apply when a decision has already been made. It is only real before a decision is made.

Sure, you can be presented with "hold the bond or sell the bond" and then there would be opportunity costs to both sides; but that's stretching the argument.
That's the risk: You may not be able to do the alternative thing without taking a loss on the present thing. For example, you can't buy a higher rate bond without first suffering a principal reduction on the sale of the presently-owned bond.

In other words, the reason you're not going to do the alternative thing is because it won't necessarily be better than just continuing with the lower-performing present thing and that's an inherent risk of bonds.
Retired, pension, no SS | 55/45 | <1% cash | 20% rebalancing band

Lee_WSP
Posts: 2128
Joined: Fri Apr 19, 2019 5:15 pm
Location: Arizona

Re: Long Term Bonds getting killed today

Post by Lee_WSP » Wed Nov 13, 2019 6:30 pm

pascalwager wrote:
Wed Nov 13, 2019 5:47 pm
Lee_WSP wrote:
Tue Nov 12, 2019 12:32 am
RubyTuesday wrote:
Tue Nov 12, 2019 12:07 am
Lee_WSP wrote:
Mon Nov 11, 2019 11:40 pm
RubyTuesday wrote:
Mon Nov 11, 2019 10:04 pm


Term risk is not hypothetical. If you hold a single bond and rates rise significantly, you have significant opportunity costs unless you sell the bond, which would be at a market price that reflects the increased market yields. CDs bought directly from banks (as opposed to brokered CDs) do have potentially much lower term risk (relative to similar term fixed income assets) due to the fact that they typically have small early withdrawal penalties.
Sure sounds like you're just making up risks.

2) you haven't presented a viable alternative.
Which risk did I make up?

2) viable alternative to what? FWIW I did mention that CDs can offer a better risk adjusted return for some. My point is simply that single bonds have real, not hypothetical, term risks.
Please explain how opportunity cost is real if someone isn't actually going to do the alternative thing? Opportunity cost does not apply when a decision has already been made. It is only real before a decision is made.

Sure, you can be presented with "hold the bond or sell the bond" and then there would be opportunity costs to both sides; but that's stretching the argument.
That's the risk: You may not be able to do the alternative thing without taking a loss on the present thing. For example, you can't buy a higher rate bond without first suffering a principal reduction on the sale of the presently-owned bond.

In other words, the reason you're not going to do the alternative thing is because it won't necessarily be better than just continuing with the lower-performing present thing and that's an inherent risk of bonds.
How is opportunity cost while holding the individual bond a risk? That's an actual cost. It may not be realized, but it's real enough.

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nisiprius
Advisory Board
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Re: Long Term Bonds getting killed today

Post by nisiprius » Wed Nov 13, 2019 8:08 pm

Not drawing any conclusions, just watching what's happening.

Image

Longer perspective:

Image
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

caklim00
Posts: 2121
Joined: Mon May 26, 2008 10:09 am

Re: Long Term Bonds getting killed today

Post by caklim00 » Wed Nov 13, 2019 8:49 pm

hdas wrote:
Tue Nov 12, 2019 9:16 am
caklim00 wrote:
Sun Nov 10, 2019 8:39 pm
hdas wrote:
Thu Nov 07, 2019 12:51 pm
What a day :twisted: , as of this moment:

TMF - 3X Leverage LTT > -6.75%
Ultrabond Futures > -2.74% (Measured from settlement)
EDV (LTT Strips) > -3.52%

The CBOE 30y yield index is at 2.441%....perhaps time to "wet your beak".

Cheers :greedy
Is anyone holding Ultrabond Futures as part of a risk parity/hedgefundie like approach?
While I don't hold them, just trade them...I believe that this is the most efficient way to do HF approach. The trade off is that you need multiples of 180K to split the exposure, so it's tricky for the rebalancing. Cheers :greedy
Maintenance is likely around 5K on an Ultrabond. Could play it like 40/60 UPRO/Ultrabond. $125K in, $120K UPRO / $180K Ultrabond exposure (via 5k maintenance). Maybe buy/sell some EDV and or UPRO quarterly to maintain 40/60 split. Not for me but its interesting. I have to guess that while not perfect you could estimate 10 Year note future with IEF, 30 year tbond future with TLT, and Ultrabond with EDV.

pascalwager
Posts: 1704
Joined: Mon Oct 31, 2011 8:36 pm

Re: Long Term Bonds getting killed today

Post by pascalwager » Thu Nov 14, 2019 1:05 am

Lee_WSP wrote:
Wed Nov 13, 2019 6:30 pm
pascalwager wrote:
Wed Nov 13, 2019 5:47 pm
Lee_WSP wrote:
Tue Nov 12, 2019 12:32 am
RubyTuesday wrote:
Tue Nov 12, 2019 12:07 am
Lee_WSP wrote:
Mon Nov 11, 2019 11:40 pm


Sure sounds like you're just making up risks.

2) you haven't presented a viable alternative.
Which risk did I make up?

2) viable alternative to what? FWIW I did mention that CDs can offer a better risk adjusted return for some. My point is simply that single bonds have real, not hypothetical, term risks.
Please explain how opportunity cost is real if someone isn't actually going to do the alternative thing? Opportunity cost does not apply when a decision has already been made. It is only real before a decision is made.

Sure, you can be presented with "hold the bond or sell the bond" and then there would be opportunity costs to both sides; but that's stretching the argument.
That's the risk: You may not be able to do the alternative thing without taking a loss on the present thing. For example, you can't buy a higher rate bond without first suffering a principal reduction on the sale of the presently-owned bond.

In other words, the reason you're not going to do the alternative thing is because it won't necessarily be better than just continuing with the lower-performing present thing and that's an inherent risk of bonds.
How is opportunity cost while holding the individual bond a risk? That's an actual cost. It may not be realized, but it's real enough.
The risk is that you may incur the opportunity cost--and you may not. But it's a risk.
Retired, pension, no SS | 55/45 | <1% cash | 20% rebalancing band

Lee_WSP
Posts: 2128
Joined: Fri Apr 19, 2019 5:15 pm
Location: Arizona

Re: Long Term Bonds getting killed today

Post by Lee_WSP » Thu Nov 14, 2019 11:48 am

pascalwager wrote:
Thu Nov 14, 2019 1:05 am
Lee_WSP wrote:
Wed Nov 13, 2019 6:30 pm
pascalwager wrote:
Wed Nov 13, 2019 5:47 pm
Lee_WSP wrote:
Tue Nov 12, 2019 12:32 am
RubyTuesday wrote:
Tue Nov 12, 2019 12:07 am


Which risk did I make up?

2) viable alternative to what? FWIW I did mention that CDs can offer a better risk adjusted return for some. My point is simply that single bonds have real, not hypothetical, term risks.
Please explain how opportunity cost is real if someone isn't actually going to do the alternative thing? Opportunity cost does not apply when a decision has already been made. It is only real before a decision is made.

Sure, you can be presented with "hold the bond or sell the bond" and then there would be opportunity costs to both sides; but that's stretching the argument.
That's the risk: You may not be able to do the alternative thing without taking a loss on the present thing. For example, you can't buy a higher rate bond without first suffering a principal reduction on the sale of the presently-owned bond.

In other words, the reason you're not going to do the alternative thing is because it won't necessarily be better than just continuing with the lower-performing present thing and that's an inherent risk of bonds.
How is opportunity cost while holding the individual bond a risk? That's an actual cost. It may not be realized, but it's real enough.
The risk is that you may incur the opportunity cost--and you may not. But it's a risk.
That makes no practical sense. At maturity, there is no new opportunity cost. Just choices to be made. Ie, what to do with the proceeds.

pascalwager
Posts: 1704
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Re: Long Term Bonds getting killed today

Post by pascalwager » Thu Nov 14, 2019 4:04 pm

Lee_WSP wrote:
Thu Nov 14, 2019 11:48 am
pascalwager wrote:
Thu Nov 14, 2019 1:05 am
Lee_WSP wrote:
Wed Nov 13, 2019 6:30 pm
pascalwager wrote:
Wed Nov 13, 2019 5:47 pm
Lee_WSP wrote:
Tue Nov 12, 2019 12:32 am


Please explain how opportunity cost is real if someone isn't actually going to do the alternative thing? Opportunity cost does not apply when a decision has already been made. It is only real before a decision is made.

Sure, you can be presented with "hold the bond or sell the bond" and then there would be opportunity costs to both sides; but that's stretching the argument.
That's the risk: You may not be able to do the alternative thing without taking a loss on the present thing. For example, you can't buy a higher rate bond without first suffering a principal reduction on the sale of the presently-owned bond.

In other words, the reason you're not going to do the alternative thing is because it won't necessarily be better than just continuing with the lower-performing present thing and that's an inherent risk of bonds.
How is opportunity cost while holding the individual bond a risk? That's an actual cost. It may not be realized, but it's real enough.
The risk is that you may incur the opportunity cost--and you may not. But it's a risk.
That makes no practical sense. At maturity, there is no new opportunity cost. Just choices to be made. Ie, what to do with the proceeds.
You don't avoid the risk by holding to maturity. The risk (possible rising rates) is alive the entire time that you're holding the bond. If rates rise two years before your bond matures, then you're under-performing the bond market for two years while waiting for maturity.
Retired, pension, no SS | 55/45 | <1% cash | 20% rebalancing band

Lee_WSP
Posts: 2128
Joined: Fri Apr 19, 2019 5:15 pm
Location: Arizona

Re: Long Term Bonds getting killed today

Post by Lee_WSP » Thu Nov 14, 2019 4:30 pm

pascalwager wrote:
Thu Nov 14, 2019 4:04 pm
Lee_WSP wrote:
Thu Nov 14, 2019 11:48 am
pascalwager wrote:
Thu Nov 14, 2019 1:05 am
Lee_WSP wrote:
Wed Nov 13, 2019 6:30 pm
pascalwager wrote:
Wed Nov 13, 2019 5:47 pm


That's the risk: You may not be able to do the alternative thing without taking a loss on the present thing. For example, you can't buy a higher rate bond without first suffering a principal reduction on the sale of the presently-owned bond.

In other words, the reason you're not going to do the alternative thing is because it won't necessarily be better than just continuing with the lower-performing present thing and that's an inherent risk of bonds.
How is opportunity cost while holding the individual bond a risk? That's an actual cost. It may not be realized, but it's real enough.
The risk is that you may incur the opportunity cost--and you may not. But it's a risk.
That makes no practical sense. At maturity, there is no new opportunity cost. Just choices to be made. Ie, what to do with the proceeds.
You don't avoid the risk by holding to maturity. The risk (possible rising rates) is alive the entire time that you're holding the bond. If rates rise two years before your bond matures, then you're under-performing the bond market for two years while waiting for maturity.
That's not a risk. That's a cost. It's realized by holding the bond and tying up the funds.

pascalwager
Posts: 1704
Joined: Mon Oct 31, 2011 8:36 pm

Re: Long Term Bonds getting killed today

Post by pascalwager » Thu Nov 14, 2019 6:18 pm

Lee_WSP wrote:
Thu Nov 14, 2019 4:30 pm
pascalwager wrote:
Thu Nov 14, 2019 4:04 pm
Lee_WSP wrote:
Thu Nov 14, 2019 11:48 am
pascalwager wrote:
Thu Nov 14, 2019 1:05 am
Lee_WSP wrote:
Wed Nov 13, 2019 6:30 pm


How is opportunity cost while holding the individual bond a risk? That's an actual cost. It may not be realized, but it's real enough.
The risk is that you may incur the opportunity cost--and you may not. But it's a risk.
That makes no practical sense. At maturity, there is no new opportunity cost. Just choices to be made. Ie, what to do with the proceeds.
You don't avoid the risk by holding to maturity. The risk (possible rising rates) is alive the entire time that you're holding the bond. If rates rise two years before your bond matures, then you're under-performing the bond market for two years while waiting for maturity.
That's not a risk. That's a cost. It's realized by holding the bond and tying up the funds.
The cost is a materialized risk.
Retired, pension, no SS | 55/45 | <1% cash | 20% rebalancing band

HEDGEFUNDIE
Posts: 4231
Joined: Sun Oct 22, 2017 2:06 pm

Re: Long Term Bonds getting killed today

Post by HEDGEFUNDIE » Thu Nov 14, 2019 6:23 pm

HEDGEFUNDIE wrote:
Sat Nov 09, 2019 11:17 am
hdas wrote:
Sat Nov 09, 2019 10:44 am
nisiprius wrote:
Sat Nov 09, 2019 6:34 am

So the question is: who should care about "long term bonds getting killed today," and why?
The LETF crowd. A chunk of this years gains was gone this week. Cheers :greedy
I went from +54% to +48%.

Yawn.
Back up to +53% today.

Lee_WSP
Posts: 2128
Joined: Fri Apr 19, 2019 5:15 pm
Location: Arizona

Re: Long Term Bonds getting killed today

Post by Lee_WSP » Thu Nov 14, 2019 9:08 pm

pascalwager wrote:
Thu Nov 14, 2019 6:18 pm

The cost is a materialized risk.
Okay... I suppose you are correct if you take the view that everything we do has an opportunity cost risk. So, sure.

pascalwager
Posts: 1704
Joined: Mon Oct 31, 2011 8:36 pm

Re: Long Term Bonds getting killed today

Post by pascalwager » Fri Nov 15, 2019 5:00 pm

Lee_WSP wrote:
Thu Nov 14, 2019 9:08 pm
pascalwager wrote:
Thu Nov 14, 2019 6:18 pm

The cost is a materialized risk.
Okay... I suppose you are correct if you take the view that everything we do has an opportunity cost risk. So, sure.
No, I'm just discussing bonds, with principal and interest.
Retired, pension, no SS | 55/45 | <1% cash | 20% rebalancing band

Lee_WSP
Posts: 2128
Joined: Fri Apr 19, 2019 5:15 pm
Location: Arizona

Re: Long Term Bonds getting killed today

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

pascalwager wrote:
Fri Nov 15, 2019 5:00 pm
Lee_WSP wrote:
Thu Nov 14, 2019 9:08 pm
pascalwager wrote:
Thu Nov 14, 2019 6:18 pm

The cost is a materialized risk.
Okay... I suppose you are correct if you take the view that everything we do has an opportunity cost risk. So, sure.
No, I'm just discussing bonds, with principal and interest.
You are free to come up with your own risks and risk metrics. But that's no guarantee other people agree with you.

Topic Author
hdas
Posts: 1298
Joined: Thu Jun 11, 2015 8:24 am

[Deleted]

Post by hdas » Sat Nov 16, 2019 9:01 am

[Deleted]
Last edited by hdas on Wed Jan 29, 2020 9:41 pm, edited 1 time in total.
....

pascalwager
Posts: 1704
Joined: Mon Oct 31, 2011 8:36 pm

Re: Long Term Bonds getting killed today

Post by pascalwager » Sat Nov 16, 2019 11:08 pm

Lee_WSP wrote:
Fri Nov 15, 2019 5:25 pm
pascalwager wrote:
Fri Nov 15, 2019 5:00 pm
Lee_WSP wrote:
Thu Nov 14, 2019 9:08 pm
pascalwager wrote:
Thu Nov 14, 2019 6:18 pm

The cost is a materialized risk.
Okay... I suppose you are correct if you take the view that everything we do has an opportunity cost risk. So, sure.
No, I'm just discussing bonds, with principal and interest.
You are free to come up with your own risks and risk metrics. But that's no guarantee other people agree with you.
The following quotation is from a basic bond book recommended by Taylor Larimore. I think this is worth pursuing so that BH newbies won't be misled. And I certainly don't want to make the mistake of adding additional bogus risks to already risky investments.

"Think now. Which of these two facts is true?

●   All bonds are subject to interest rate risk—unless held to maturity.
●   Bonds prices vary with interest rates but do not grow like stock prices do.

Did you choose “unless held to maturity”? This is false. Interest rate risk (also known as price risk) refers to the risk that the price of a bond will fall due to an increase in interest rates. There are no exceptions. When interest rates rise, and you have your money locked-up in a bond, you are missing out on investing that money at the new higher rate. The bond you own is instantly worth less from the amount of your lost opportunity. It’s a lost opportunity even if you hold it to maturity and get each and every payment as promised, on time. Did you choose “all bonds prices vary with interest rates”? This is true. The market prices for bonds do not grow the way stock prices do, but their prices do fluctuate with interest rate changes."

Van Ness, Rick. Why Bother With Bonds: A Guide To Build All-Weather Portfolio Including CDs, Bonds, and Bond Funds--Even During Low Interest Rates (How To Achieve Financial Independence) (Kindle Locations 559-568). GrowthConnection LLC. Kindle Edition.
Retired, pension, no SS | 55/45 | <1% cash | 20% rebalancing band

Paul K
Posts: 33
Joined: Sat Apr 02, 2016 11:59 am

Re: Long Term Bonds getting killed today

Post by Paul K » Sat Nov 16, 2019 11:49 pm

Scooter57 wrote:
Fri Nov 08, 2019 1:16 pm
Because of the hunger for yield, a ton of very poor quality corporate debt has been issued over the last few years, with very weak protections for bondholders (covenants.) This is something that knowledgeable people have been flagging as a serious risk that is being overlooked by investors.
Isn't that baked in the rating? Curious to read sources on this if you have them.

Lee_WSP
Posts: 2128
Joined: Fri Apr 19, 2019 5:15 pm
Location: Arizona

Re: Long Term Bonds getting killed today

Post by Lee_WSP » Sun Nov 17, 2019 12:12 am

pascalwager wrote:
Sat Nov 16, 2019 11:08 pm
Lee_WSP wrote:
Fri Nov 15, 2019 5:25 pm
pascalwager wrote:
Fri Nov 15, 2019 5:00 pm
Lee_WSP wrote:
Thu Nov 14, 2019 9:08 pm
pascalwager wrote:
Thu Nov 14, 2019 6:18 pm

The cost is a materialized risk.
Okay... I suppose you are correct if you take the view that everything we do has an opportunity cost risk. So, sure.
No, I'm just discussing bonds, with principal and interest.
You are free to come up with your own risks and risk metrics. But that's no guarantee other people agree with you.
The following quotation is from a basic bond book recommended by Taylor Larimore. I think this is worth pursuing so that BH newbies won't be misled. And I certainly don't want to make the mistake of adding additional bogus risks to already risky investments.

"Think now. Which of these two facts is true?

●   All bonds are subject to interest rate risk—unless held to maturity.
●   Bonds prices vary with interest rates but do not grow like stock prices do.

Did you choose “unless held to maturity”? This is false. Interest rate risk (also known as price risk) refers to the risk that the price of a bond will fall due to an increase in interest rates. There are no exceptions. When interest rates rise, and you have your money locked-up in a bond, you are missing out on investing that money at the new higher rate. The bond you own is instantly worth less from the amount of your lost opportunity. It’s a lost opportunity even if you hold it to maturity and get each and every payment as promised, on time. Did you choose “all bonds prices vary with interest rates”? This is true. The market prices for bonds do not grow the way stock prices do, but their prices do fluctuate with interest rate changes."

Van Ness, Rick. Why Bother With Bonds: A Guide To Build All-Weather Portfolio Including CDs, Bonds, and Bond Funds--Even During Low Interest Rates (How To Achieve Financial Independence) (Kindle Locations 559-568). GrowthConnection LLC. Kindle Edition.
There is a difference between the market value of the bond you hold falling in value and whether or not the investor cares. Also as previously stated, the opportunity cost is realized or not realized and is the cost associated with the risk, but not the risk itself.

The risk is that the market value of the bond you hold will go down in value, incurring an opportunity cost. (Although I disagree about opportunity cost, but I'll go along with it). The risk is not the opportunity cost.

Scooter57
Posts: 1320
Joined: Thu Jan 24, 2013 9:20 am

Re: Long Term Bonds getting killed today

Post by Scooter57 » Sun Nov 17, 2019 2:02 pm

Paul K wrote:
Sat Nov 16, 2019 11:49 pm
Scooter57 wrote:
Fri Nov 08, 2019 1:16 pm
Because of the hunger for yield, a ton of very poor quality corporate debt has been issued over the last few years, with very weak protections for bondholders (covenants.) This is something that knowledgeable people have been flagging as a serious risk that is being overlooked by investors.
Isn't that baked in the rating? Curious to read sources on this if you have them.
Here is a good summary what is has been going on with Corporate (and other types of) bonds, from the Dallas Fed https://www.dallasfed.org/research/econ ... /0305.aspx

The financial press has been writing for the past two years about the poor quality of covenants and the growing percentage of corporate bonds that are rated at the lowest tier of investment (as opposed to Junk Bond) status. The point I keep seeing made is that such is the hunger for yield that investors (and by this we mean not just retailers like us, but institutions) are snapping up iffy stuff, like bonds from JC Penney or Ford. More to the point, as the Fed research points out, the money borrowed with these corporate bonds is being used much of the time not to fund new products or investment that will grow sales profits but in buybacks, dividends and mergers. All three prop up the current share price, which allows today's executives to cash out big with their options, but does nothing to grow the future profitability of the company--which is what needs to grow if these loans are to be paid back.

When investors aren't picky about what they buy and only concentrate on yield, risk is NOT baked into price.

tibbitts
Posts: 9732
Joined: Tue Feb 27, 2007 6:50 pm

Re: Long Term Bonds getting killed today

Post by tibbitts » Sun Nov 17, 2019 4:25 pm

Scooter57 wrote:
Sun Nov 17, 2019 2:02 pm
When investors aren't picky about what they buy and only concentrate on yield, risk is NOT baked into price.
Possibly the same argument can be made about any common investment today - quality down, risk up.

Lee_WSP
Posts: 2128
Joined: Fri Apr 19, 2019 5:15 pm
Location: Arizona

Re: Long Term Bonds getting killed today

Post by Lee_WSP » Sun Nov 17, 2019 4:32 pm

tibbitts wrote:
Sun Nov 17, 2019 4:25 pm
Scooter57 wrote:
Sun Nov 17, 2019 2:02 pm
When investors aren't picky about what they buy and only concentrate on yield, risk is NOT baked into price.
Possibly the same argument can be made about any common investment today - quality down, risk up.
Yup. There is no alternative. :beer

Lee_WSP
Posts: 2128
Joined: Fri Apr 19, 2019 5:15 pm
Location: Arizona

Re: Long Term Bonds getting killed today

Post by Lee_WSP » Sun Nov 17, 2019 9:07 pm

Lee_WSP wrote:
Sun Nov 17, 2019 12:12 am
pascalwager wrote:
Sat Nov 16, 2019 11:08 pm
Lee_WSP wrote:
Fri Nov 15, 2019 5:25 pm
pascalwager wrote:
Fri Nov 15, 2019 5:00 pm
Lee_WSP wrote:
Thu Nov 14, 2019 9:08 pm


Okay... I suppose you are correct if you take the view that everything we do has an opportunity cost risk. So, sure.
No, I'm just discussing bonds, with principal and interest.
You are free to come up with your own risks and risk metrics. But that's no guarantee other people agree with you.
The following quotation is from a basic bond book recommended by Taylor Larimore. I think this is worth pursuing so that BH newbies won't be misled. And I certainly don't want to make the mistake of adding additional bogus risks to already risky investments.

"Think now. Which of these two facts is true?

●   All bonds are subject to interest rate risk—unless held to maturity.
●   Bonds prices vary with interest rates but do not grow like stock prices do.

Did you choose “unless held to maturity”? This is false. Interest rate risk (also known as price risk) refers to the risk that the price of a bond will fall due to an increase in interest rates. There are no exceptions. When interest rates rise, and you have your money locked-up in a bond, you are missing out on investing that money at the new higher rate. The bond you own is instantly worth less from the amount of your lost opportunity. It’s a lost opportunity even if you hold it to maturity and get each and every payment as promised, on time. Did you choose “all bonds prices vary with interest rates”? This is true. The market prices for bonds do not grow the way stock prices do, but their prices do fluctuate with interest rate changes."

Van Ness, Rick. Why Bother With Bonds: A Guide To Build All-Weather Portfolio Including CDs, Bonds, and Bond Funds--Even During Low Interest Rates (How To Achieve Financial Independence) (Kindle Locations 559-568). GrowthConnection LLC. Kindle Edition.
There is a difference between the market value of the bond you hold falling in value and whether or not the investor cares. Also as previously stated, the opportunity cost is realized or not realized and is the cost associated with the risk, but not the risk itself.

The risk is that the market value of the bond you hold will go down in value, incurring an opportunity cost. (Although I disagree about opportunity cost, but I'll go along with it). The risk is not the opportunity cost.
Expanding on this. The opportunity cost is actually realized if the value of the bond goes up. So it’s quite a perverse “risk”

mary1492
Posts: 60
Joined: Thu Oct 17, 2019 3:02 am

Re: Long Term Bonds getting killed today

Post by mary1492 » Mon Nov 18, 2019 12:12 am

Lee_WSP wrote:
Sun Nov 17, 2019 12:12 am
pascalwager wrote:
Sat Nov 16, 2019 11:08 pm
Lee_WSP wrote:
Fri Nov 15, 2019 5:25 pm
pascalwager wrote:
Fri Nov 15, 2019 5:00 pm
Lee_WSP wrote:
Thu Nov 14, 2019 9:08 pm


Okay... I suppose you are correct if you take the view that everything we do has an opportunity cost risk. So, sure.
No, I'm just discussing bonds, with principal and interest.
You are free to come up with your own risks and risk metrics. But that's no guarantee other people agree with you.
The following quotation is from a basic bond book recommended by Taylor Larimore. I think this is worth pursuing so that BH newbies won't be misled. And I certainly don't want to make the mistake of adding additional bogus risks to already risky investments.

"Think now. Which of these two facts is true?

●   All bonds are subject to interest rate risk—unless held to maturity.
●   Bonds prices vary with interest rates but do not grow like stock prices do.

Did you choose “unless held to maturity”? This is false. Interest rate risk (also known as price risk) refers to the risk that the price of a bond will fall due to an increase in interest rates. There are no exceptions. When interest rates rise, and you have your money locked-up in a bond, you are missing out on investing that money at the new higher rate. The bond you own is instantly worth less from the amount of your lost opportunity. It’s a lost opportunity even if you hold it to maturity and get each and every payment as promised, on time. Did you choose “all bonds prices vary with interest rates”? This is true. The market prices for bonds do not grow the way stock prices do, but their prices do fluctuate with interest rate changes."

Van Ness, Rick. Why Bother With Bonds: A Guide To Build All-Weather Portfolio Including CDs, Bonds, and Bond Funds--Even During Low Interest Rates (How To Achieve Financial Independence) (Kindle Locations 559-568). GrowthConnection LLC. Kindle Edition.
There is a difference between the market value of the bond you hold falling in value and whether or not the investor cares. Also as previously stated, the opportunity cost is realized or not realized and is the cost associated with the risk, but not the risk itself.

The risk is that the market value of the bond you hold will go down in value, incurring an opportunity cost. (Although I disagree about opportunity cost, but I'll go along with it). The risk is not the opportunity cost.
My highlighted text in your quote is key. At the time I purchase a bond, I am getting everything I am looking for ... I do not care what happens to the price going forward - I know on the maturity date, the price will be 100. I have no opportunity cost, because at the time I purchased the bond, all other alternatives were deemed less attractive. The next day, it's an entirely different set of parameters. I hold my bond to maturity, issuer meets their obligation, I receive exactly what I desired the day I purchased. What happens the next day, the day after, or at any time prior to maturity is absolutely meaningless for me. I have suffered no loss, no opportunity cost. Might I have potentially made more by better *timing* things - of course. Over the course of up to 20+ years until the maturity date, will I have purchased on the single day, at the best price of the day, resulting in the best "return"? Very likely not. Nearly all investors will not. However, as with all securities (or funds) which provide an income component, while you are on the sidelines waiting for the most opportune moment to purchase (which you may or may not get), you are sacrificing income. That is a real "opportunity cost" for the guy waiting for that absolute best moment to purchase. Bottom line - nobody is going to be in the best yielding investment at every moment. Trying to time the market to be getting that absolute best yield is foolish - as foolish as Bogleheads would claim trying to time stock purchases are.

I see this play out all the time on another message board where I participate and there is a healthy amount of discussion with regard to fixed income. Some (novice) investors there refuse to pay above par value (100), as opposed to considering yield and returns. They are unable to accept that they should be agnostic to price if getting the return they are looking for. If there is a 7% bond with 10 years to maturity, trading today at say 120 or 125, it's of reasonable quality, with call protection, I'm a buyer today. I don't care what the price is, I care what my return is and what the comparable alternatives offer *today*.

Paul K
Posts: 33
Joined: Sat Apr 02, 2016 11:59 am

Re: Long Term Bonds getting killed today

Post by Paul K » Mon Nov 18, 2019 9:55 pm

Scooter57 wrote:
Sun Nov 17, 2019 2:02 pm
Here is a good summary what is has been going on with Corporate (and other types of) bonds, from the Dallas Fed https://www.dallasfed.org/research/econ ... /0305.aspx

The financial press has been writing for the past two years about the poor quality of covenants and the growing percentage of corporate bonds that are rated at the lowest tier of investment (as opposed to Junk Bond) status. The point I keep seeing made is that such is the hunger for yield that investors (and by this we mean not just retailers like us, but institutions) are snapping up iffy stuff, like bonds from JC Penney or Ford. More to the point, as the Fed research points out, the money borrowed with these corporate bonds is being used much of the time not to fund new products or investment that will grow sales profits but in buybacks, dividends and mergers. All three prop up the current share price, which allows today's executives to cash out big with their options, but does nothing to grow the future profitability of the company--which is what needs to grow if these loans are to be paid back.

When investors aren't picky about what they buy and only concentrate on yield, risk is NOT baked into price.
Thanks for the link – I liked it so much that I subscribed to the Dallas Fed's RSS feed!

I understand that investors misprice individual bonds all the time, but I was pointing out the risk being priced into the rating, not the price.

Surely the ratings agency look at covenents before issuing their ratings? Say you have two companies A and B, who both sell lumber, both looking to raise some cash, bot with a similar risk profile. One issues their bonds with the usual legalese, but the other does it with weaker terms. I'd expect the rating agency to look at this and say "Lumber Corp A is BBB but Lumber Corp B is only BB". As a result the portfolio manager behind BND includes A but not B.

Or are you arguing that the problem is so widespread that the agencies have lost track of what should be necessary to get a BBB rating?

Scooter57
Posts: 1320
Joined: Thu Jan 24, 2013 9:20 am

Re: Long Term Bonds getting killed today

Post by Scooter57 » Tue Nov 19, 2019 9:27 am

BND is an index is an index fund, so portfolio managers don't select its bonds for quality. They buy the bonds in the index.

A BB bond would not be included in an index of investment grade bonds because it is a junk bond. But a BBB bond with weak covenants would be.

But bond agencies have a poor record for rating bonds accurately. That was a major issue in the Financial Crisis of 2008. And even when they are rated well at the time of issue, many bonds don't get their ratings reviewed later when the issuers circumstances have changed.

There was a fascinating report in Bloomberg about how bonds are now bring traded in batches using automated techniques along the lines of ETFs far more often than they were just a few years ago. When these batches are traded the underlying bonds can be ignored, and you get into the same speculative fever divorced from fundamentals ETFs have caused stocks.

mary1492
Posts: 60
Joined: Thu Oct 17, 2019 3:02 am

Re: Long Term Bonds getting killed today

Post by mary1492 » Tue Nov 19, 2019 10:09 am

.....
Last edited by mary1492 on Wed Dec 04, 2019 10:28 pm, edited 1 time in total.

Scooter57
Posts: 1320
Joined: Thu Jan 24, 2013 9:20 am

Re: Long Term Bonds getting killed today

Post by Scooter57 » Tue Nov 19, 2019 10:39 am

mary1492 wrote:
Tue Nov 19, 2019 10:09 am

I see a common theme here and folks should take note. There's a reason why these Wall St. firms do this - and it's not for the benefit of the investor.

Take some dog poo, package it up with lots of other stuff, claim that it's well-diversified and thus lower risk, CONvince as many folks as you can, make money by pricing the dog poo in the bundle well in excess of what it's really worth.
Exactly. This may have a lot to do with why 18% of Vanguard's Total Bond Market Index Fund--which mirrors the actual total US bond market is rated at the very lowest investment grade--and why 51% of Vanguard Total Corporate Bond ETF (VTC) is rated Baa (which is the equivalent of BBB). It's a lot easier to sell crap when it is bundled up with other things.

I see so many investors on this forum buying funds without, as far as I can see, spending any time looking at the actual holdings of the funds they buy, just because the fund's name and category is one that academic research has backtested and found to perform well--in the past.

But there were no computer-driven ETFs heartbeat trades going on at the time most of the academic research was done that today's investors still base their investing decisions on. And as the Bloomberg article made clear, until just a few years ago, bonds were still traded individually by people not in batches by software.

I know that it is not possible to predict anything about markets (except that they will do whatever benefits the corporate top executives and billionaires running the show far more than they do us.) But I am not alone in thinking that what is going on with debt world wide will not end well.

And I saw the housing crisis that led to the 2008 crisis coming before a lot of the pundits, because I knew too many people who were getting mortgages that took every cent they earned to pay and saw oil prices going up in ways that meant they could pay for their winter heating oil or their mortgages but not both.

Topic Author
hdas
Posts: 1298
Joined: Thu Jun 11, 2015 8:24 am

[Deleted]

Post by hdas » Thu Dec 12, 2019 11:23 am

[Deleted]
Last edited by hdas on Wed Jan 29, 2020 9:41 pm, edited 1 time in total.
....

Vanguard Fan 1367
Posts: 1334
Joined: Wed Feb 08, 2017 3:09 pm

Re: Long Term Bonds getting killed today

Post by Vanguard Fan 1367 » Thu Dec 12, 2019 6:47 pm

VCLT, Vanguard's long term corporate bond fund is down .63%

bugleheadd
Posts: 165
Joined: Fri Nov 29, 2019 11:25 am

Re: Long Term Bonds getting killed today

Post by bugleheadd » Thu Dec 12, 2019 6:52 pm

hdas wrote:
Thu Dec 12, 2019 11:23 am
VGLT -1.83%
Ultrabond Futures -2.17%
TMF -5.88%


Hopefully, folks got out when bonds were melting up some days ago. Cheers :greedy
Bad idea to be in bonds now? i am in BND

guyinlaw
Posts: 504
Joined: Wed Jul 03, 2019 9:54 am

Re: Long Term Bonds getting killed today

Post by guyinlaw » Thu Dec 12, 2019 11:15 pm

Vanguard Fan 1367 wrote:
Thu Dec 12, 2019 6:47 pm
VCLT, Vanguard's long term corporate bond fund is down .63%
VTI and VCLT have a correlation of 0.02.

VTI and EDV have a correlation of -0.52.

VCLT is not diversifying your stock holdings.

guyinlaw
Posts: 504
Joined: Wed Jul 03, 2019 9:54 am

Re: Long Term Bonds getting killed today

Post by guyinlaw » Thu Dec 12, 2019 11:17 pm

hdas wrote:
Thu Dec 12, 2019 11:23 am
VGLT -1.83%
Ultrabond Futures -2.17%
TMF -5.88%


Hopefully, folks got out when bonds were melting up some days ago. Cheers :greedy
Your timing was good. :beer

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