Correlation between BND and raising interest rates

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realclemsongrad
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Correlation between BND and raising interest rates

Post by realclemsongrad »

Hi Folks,

I could not find a simple graph that shows a total bond market fund like BND and how it fared during raising interest rates? I see the data on Vanguard or Yahoo but this is all during the dropping of the interest rates (correct me if i am wrong https://finance.yahoo.com/quote/BND/performance?p=BND)

Is there a way to graph the bond index vs interest rate graph over a period of 20 years?

Thanks
000
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Re: Correlation between BND and raising interest rates

Post by 000 »

We haven't seen sustained rising rates for a long time in the US. You will need to go back further. I think portfolio visualizer goes back to 1972 (asset class level, not specific fund).
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Re: Correlation between BND and raising interest rates

Post by nisiprius »

1) Confusing, but important when you are trying to find historic data.
BND is the Vanguard Total Bond Market Index ETF.
On 12/11/1986, Total Bond Index Fund had inception (began), with the ticker symbol VBMFX.
On 11/12/2001, the Admiral Shares share class had inception with symbol VBTLX.
On 04/03/2007, the ETF had inception with symbol BND.
These are virtually identical except for tiny differences in performance due to different expense ratios.
For historic data, depending on where you are looking, you always need to try both VBMFX and VBTLX because you are never sure which the source might have.

2) For the performance of the Vanguard Total Bond Market Index Fund, I used portfoliovisualizer.com , selected Fund Performance Analysis, and used VBMFX as the ticker symbol.
Here's the direct link.

Image

So here you have 33 years of data.

In this chart, what I see is a general upward loft, very different from the kinds of chart you get from any stock fund. Notice how you can hardly see the global financial crisis of 2008-2009. On top of the general upward trend, there are relatively small fluctuations, the worst being the so-called "bond massacre of 1994." And there is a curvature, the curve is obviously climbing faster that the beginning and slowing down at the end. This reflects the simple fact that interest rates were higher.

3) For the Fed rate, which is almost irrelevant but often talked about, the St. Louis Fed has many useful charts. It is well worth poking around their website. One of them is:

FEDFUNDS

Here's the way they present the chart initially:

Image

Here, I turned off the recession bars, restricted the date range to start at 1987, and used an image editor to line it up by eye with the Total Bond chart.

Image

Hey, wait, you might say. I see almost no relationship between the two. Exactly. All the smart-sounding talk about what the Fed is going to do and how that is going to decimate your bond fund is noise. Tune out the noise.

Now I was cheating a bit because it's true that the noise is often about the Fed funds rate, but what matters are the interest rates for the actual bonds in the funds, which have an average maturity of 8.5 years. We'd really like the "8.5-year interest rate" but that's not easy to find. Treasury notes are issued in 7- and 10-year terms. The 10-year Treasury rate is a very frequently mentioned number and it's close enough, so we'll use it. The St. Louis Fed has it here:

10-Year Treasury Constant Maturity Rate (DGS10)

The whole chart is interesting to look at but I'll just do what I did before and use an image editor to superimpose it on Total Bond.

Image

So what we see here is that a) the Fed does not control the 10-year Treasury rate. The 10-year rate is set by the market. It's influenced by the Treasury rate, and whatever the Fed chooses to do about buying longer-term bonds, but it doesn't control it. b) The ups and downs in the 10-year rate do lines up with movements in the opposite direction in Total Bond, but, darn it all, it's not all that big a factor. Vanguard suggests that Total Bond may be appropriate for investors with a four-to-ten-year time frame so you shouldn't be obsessing over one- or two-year fluctuations. c) The overwhelming message of this chart is that, just as you'd think, overall, long-term, buy-and-hold, big picture, a bond fund owner would like to see higher interest rates.
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Re: Correlation between BND and raising interest rates

Post by nisiprius »

As we saw, the interest rate peak was around 1982. Unfortunately, it is difficult to find real-life example of bond funds before 1982, and not clear to me exactly what kinds of bonds they were investing in. Bond funds before 1980 certainly were not bond index funds!

We do get a peek at the effect of ten years of rising interest rates in the Fidelity Bond Fund, FBNDX. And during the time Total Bond has existed, the Fidelity Bond Fund and Total Bond have performed fairly similarly.

FBNDX

Image

And with the 10-year Treasury rate superimposed:

Image

From inception, when the 10-year rate was about 6%, through 9/1981, when it peaked at almost 16%, FBNDX made money, and average 4.20% but... and this is a big "but," this was a period of high inflation, and FBNDX lost -32% of its purchasing power, inflation-adjusted.

But stocks lost real value, too. Massachusetts Investors Trust, a stock mutual fund that has not been terribly different from the S&P 500, lost -26%, inflation-adjusted, during the same time period.

So even though you made money, it was not a great time to be investing in a bond fund. It was not a great time for stocks, either, just less bad. In both cases, of course, you had to pay income tax on the dollar "gains."

Source

Bonds, blue; stocks, red.

Image
Last edited by nisiprius on Fri Sep 04, 2020 5:50 pm, edited 2 times in total.
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Re: Correlation between BND and raising interest rates

Post by vineviz »

nisiprius wrote: Thu Sep 03, 2020 7:27 am The overwhelming message of this chart is that, just as you'd think, overall, long-term, buy-and-hold, big picture, a bond fund owner would like to see higher interest rates.
Thank you for taking to the time to provide a straightforward answer to the OP.
realclemsongrad wrote: Wed Sep 02, 2020 3:27 pm I could not find a simple graph that shows a total bond market fund like BND and how it fared during raising interest rates?
I'm glad nisiprius answered your question, but here's the question you didn't ask but should consider: does it matter?

My conclusion after decades of experience in investment management is that it is important to tune out any bit of information from the markets that isn't actionable. In other words, "can I make any useful decision based on the relationship between BND and the direction of interest rate changes?".

IMHO, the answer to THAT question is "no" simply because future changes in interest rates are unpredictable. The choice of which bond fund to pick is an easy one, based on a few simple criteria:

a) What is your investment horizon?
b) How much credit (or default) risk should you take?
c) How much inflation risk should you take?

These are all personal finance questions, the answers to which have nothing to do with what bond markets are doing or might do.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: Correlation between BND and raising interest rates

Post by petulant »

As another data point, I recently had occasion to look at the simba backtesting spreadsheet maintained by siamond and likewise found a very small drawdown in intermediate bonds and the total bond market surrogate during periods like 1955-1982. (This is not to say that inflation wasn't a problem, only that the nominal drawdowns were not large.) That's despite a significant run-up in interest rates over that time period.
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Re: Correlation between BND and raising interest rates

Post by Robot Monster »

nisiprius wrote: Thu Sep 03, 2020 7:53 am
Bonds, blue; stocks, red.

Image
Thank you, nisiprius! So,

From late 1971 - late 1981, BND-lookalike Fidelity Bond Fund (FBNDX) lost -32% of its purchasing power, inflation-adjusted.

Just how, then, is this actionable? Well...

Bearing in mind the concern of nominal bonds losing to inflation, my inclination is to ask, why invest so heavily into Total Bond, on the fixed income side, when TIPS are available? Why not divide fixed income between nominal bonds and TIPS, like in the "David Swensen portfolio"? Or even the "Scott Burns' Couch Potato portfolio / Andrew Tobias' Three Fund portfolio" which only has TIPS, and no nominal bond exposure.

What if inflation took off higher than it did during this 1971-1981 period? I see inflation reached about 13% in 1979 and 1980. Do we not want a portfolio resilient against a tail risk event of inflation even higher then this?

PS Can't help noticing cash had a 0.2% inflation adjusted CAGR over a similar period (Jan 1972 - Dec 1982.) Just an observation! Not implying anything actionable!
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Re: Correlation between BND and raising interest rates

Post by dbr »

Thanks to Nisi for the usual excellent perspective on these issues.

A different datum to consult about this whole topic is to look at an estimate of the risk in a holding using the conventional financial definition of risk as standard deviation of annual returns. You can get that number for some years of history in Portfolio Visualizer or you can look at Rick Ferri's 30 year forecast.

In PV VBMFX had an SD of about 3.6% back to 1993 and total stock VTSMX was 15%. If you want to use those numbers as bounds around the expected return then VBMFX would return between 1.7% and 8.9% in any given year and VTSMX would return between -5.2% and 25% in a year. Clearly there can be years outside those bounds. If you really want to do some rough and ready (very rough) estimating you can put bounds on the CAGR for a period of time by dividing those SDs by the square root of the years involved. (For statisticians, yes I know, but then this article by Norstad can be an eye-opener for people: https://web.archive.org/web/20170911171 ... -time.html ).
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Re: Correlation between BND and raising interest rates

Post by vineviz »

Robot Monster wrote: Fri Sep 04, 2020 9:45 am
What if inflation took off higher than it did during this 1971-1981 period? I see inflation reached about 13% in 1979 and 1980. Do we not want a portfolio resilient against a tail risk event of inflation even higher then this?
Maybe, but maybe not.

If the portfolio you need to "protect" you from something with a 0.1% chance of occurring is far less suitable in the other 99.9% of possible outcomes than the price of "resilience" might be too high.

Also: solving for the optimal solution to "a tail risk event of inflation" is definitely an interesting thought exercise, however being "resilient against inflation" isn't the purpose of retiring planning for most people. Instead, almost always the purpose of retiring planning is to provide for future consumption and that is NOT the same thing as protecting against inflation.

So while I think MANY investors probably should have SOME allocation to TIPS at CERTAIN points in their lifecycle, nominal bonds are almost certain to play a role for most investors too.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: Correlation between BND and raising interest rates

Post by absolute zero »

vineviz wrote: Fri Sep 04, 2020 11:07 am
Robot Monster wrote: Fri Sep 04, 2020 9:45 am
What if inflation took off higher than it did during this 1971-1981 period? I see inflation reached about 13% in 1979 and 1980. Do we not want a portfolio resilient against a tail risk event of inflation even higher then this?
Maybe, but maybe not.

If the portfolio you need to "protect" you from something with a 0.1% chance of occurring is far less suitable in the other 99.9% of possible outcomes than the price of "resilience" might be too high.
Vineviz, is there anything unsuitable about TIPS? I think I’ve seen you make the argument before that inflation risk is extremely low for accumulators. But regardless of whether a person is an accumulator or a retiree, Im unaware of any cost of holding TIPS vs nominal treasuries (assuming same duration).

Even if the benefit is small or unlikely, if the cost is only the 3 minutes it takes to swap one’s fund from nominal to TIPS then that seems like a good deal. Maybe I’m missing something?
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Re: Correlation between BND and raising interest rates

Post by Robot Monster »

vineviz wrote: Fri Sep 04, 2020 11:07 am
Robot Monster wrote: Fri Sep 04, 2020 9:45 am
What if inflation took off higher than it did during this 1971-1981 period? I see inflation reached about 13% in 1979 and 1980. Do we not want a portfolio resilient against a tail risk event of inflation even higher then this?
Maybe, but maybe not.

If the portfolio you need to "protect" you from something with a 0.1% chance of occurring is far less suitable in the other 99.9% of possible outcomes than the price of "resilience" might be too high.

Also: solving for the optimal solution to "a tail risk event of inflation" is definitely an interesting thought exercise, however being "resilient against inflation" isn't the purpose of retiring planning for most people. Instead, almost always the purpose of retiring planning is to provide for future consumption and that is NOT the same thing as protecting against inflation.

So while I think MANY investors probably should have SOME allocation to TIPS at CERTAIN points in their lifecycle, nominal bonds are almost certain to play a role for most investors too.
Good points. To use Annie Duke's book title, if we're thinking in bets, it's not ideal to model your entire portfolio around an unlikely tail-risk, in effect, treating it like the base case. Instead, maybe we can say, "Be okay in a tail-risk high-inflation event. That is, have a portfolio that will survive well enough to still meet your basic consumption needs." In other words, if we had a repeat of '71-'83 (or worse, perhaps), where both stocks and bonds performed poorly, your portfolio should be able to take the hit well enough that you don't have to start eating cat food.

Point taken about the difference between consumption and inflation, but they are somewhat linked, in the way the stock market and economy are? If inflation hits 20%, your consumption costs, to some extent, are going to be taken for that ride?
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Re: Correlation between BND and raising interest rates

Post by abuss368 »

realclemsongrad wrote: Wed Sep 02, 2020 3:27 pm Hi Folks,

I could not find a simple graph that shows a total bond market fund like BND and how it fared during raising interest rates? I see the data on Vanguard or Yahoo but this is all during the dropping of the interest rates (correct me if i am wrong https://finance.yahoo.com/quote/BND/performance?p=BND)

Is there a way to graph the bond index vs interest rate graph over a period of 20 years?

Thanks
When rates started to rise after the Great Recession I felt we were fine and a lot of bond crash fears were overblown.

There is good reason Total Bond is the biggest bond fund on the planet. Tune out the noise as it is an excellent choice to provide safety and income.
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Re: Correlation between BND and raising interest rates

Post by vineviz »

absolute zero wrote: Fri Sep 04, 2020 5:48 pm Vineviz, is there anything unsuitable about TIPS? I think I’ve seen you make the argument before that inflation risk is extremely low for accumulators. But regardless of whether a person is an accumulator or a retiree, Im unaware of any cost of holding TIPS vs nominal treasuries (assuming same duration).

Even if the benefit is small or unlikely, if the cost is only the 3 minutes it takes to swap one’s fund from nominal to TIPS then that seems like a good deal. Maybe I’m missing something?
I wouldn't say that TIPS are "unsuitable" for an accumulator who doesn't really face much inflation risk, but there are two factors that generally make them suboptimal for younger investors in my opinion.

One is the lack of low-cost long-term TIPS funds. The only widely available fund is PIMCO 15+ Year US TIPS ETF (LTPZ) with an expense ratio of 0.20% and the only open-end mutual fund is DFA LTIP Portfolio (DRXIX) at 0.15% (but most investors don't have access to DFA funds without an advisor). On the other hand there are multiple long-term Treasury ETFs and mutual funds from Fidelity, State Street, and Vanguard with expense rations of 0.06% or less. With yields as low as they are, the higher expenses of LTPZ means sacrificing 10% to 15% of the TIPS expected return to expenses: not ideal, IMHO.

The second reason is that TIPS are more correlated with stocks than nominal Treasuries which makes sense due to the fact that both TIPS and stocks have shared risk factors. But for an equity-heavy investor (as younger investors tend to be), this higher correlation makes TIPS less powerful as diversification than nominal Treasuries.

Image

So while I wouldn't say that TIPS are wholly unsuitable for an accumulator, my general view is that the typical accumulator is better served by using nominal Treasuries for the first 20% or so of their portfolio that they allocate to bonds. But there's certainly nothing unsuitable about TIPS for younger investors and some investors (e.g. the very risk averse) could definitely prefer TIPS to nominal bonds across the board.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: Correlation between BND and raising interest rates

Post by Always passive »

vineviz wrote: Thu Sep 03, 2020 7:54 am
nisiprius wrote: Thu Sep 03, 2020 7:27 am The overwhelming message of this chart is that, just as you'd think, overall, long-term, buy-and-hold, big picture, a bond fund owner would like to see higher interest rates.
Thank you for taking to the time to provide a straightforward answer to the OP.
realclemsongrad wrote: Wed Sep 02, 2020 3:27 pm I could not find a simple graph that shows a total bond market fund like BND and how it fared during raising interest rates?
I'm glad nisiprius answered your question, but here's the question you didn't ask but should consider: does it matter?

My conclusion after decades of experience in investment management is that it is important to tune out any bit of information from the markets that isn't actionable. In other words, "can I make any useful decision based on the relationship between BND and the direction of interest rate changes?".

IMHO, the answer to THAT question is "no" simply because future changes in interest rates are unpredictable. The choice of which bond fund to pick is an easy one, based on a few simple criteria:

a) What is your investment horizon?
b) How much credit (or default) risk should you take?
c) How much inflation risk should you take?

These are all personal finance questions, the answers to which have nothing to do with what bond markets are doing or might do.
Generally you are correct, but thinking at what is going on now and what the FED has been advertising, if you purchase BND today and keep it to duration, the YTM will be extremely close to the present yield, no matter what happens in between. Unfortunately no single investment grade bond/bond fund/bond ETF will give you much more. There is one case when you may do better. "If" inflation shows up and the FED forces interest rates to stay low, TIPS, and preferentially short term (VTIP) which reflect inflation changes better than intermediate term TIPS (TIP).
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Re: Correlation between BND and raising interest rates

Post by Oicuryy »

realclemsongrad wrote: Wed Sep 02, 2020 3:27 pm Is there a way to graph the bond index vs interest rate graph over a period of 20 years?
Something like this maybe?

Image

Monthly VBMFX total return data since Dec. 1986 is Yahoo's adjusted closing price. Monthly average 10-year constant maturity rate is from FRED. Excel created the trend line.

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Re: Correlation between BND and raising interest rates

Post by vineviz »

Always passive wrote: Sat Sep 05, 2020 11:57 am Generally you are correct, but thinking at what is going on now and what the FED has been advertising, if you purchase BND today and keep it to duration, the YTM will be extremely close to the present yield, no matter what happens in between. Unfortunately no single investment grade bond/bond fund/bond ETF will give you much more.
An investor with an investment horizon longer the duration of BND (roughly 6.5 years, currently) can certainly find a fund that will "give you much more". For instance, both Vanguard Long-Term Bond ETF (BLV) and iShares Core 10+ Year USD Bond ETF (ILTB) have SEC Yields that are roughly double the yield of BND. Plus, if the investor's time horizon is more than six years out then both BLV and ILTB are more likely to actually GIVE the investor something close to 2.4% than BND is to provide its 1.2%
Always passive wrote: Sat Sep 05, 2020 11:57 am There is one case when you may do better. "If" inflation shows up and the FED forces interest rates to stay low, TIPS, and preferentially short term (VTIP) which reflect inflation changes better than intermediate term TIPS (TIP).
I'll say two things about this.

One is that for every scenario that results in "doing better" there is a scenario that results in "doing worse": exposing yourself it interest rate risk ALWAYS cuts both ways, and unless the investor genuinely believes they are smarter than the market then intentionally taking on a duration gap is creating risk with no expectation of resultant return.

The second thing is that the notion that short-term TIPS "reflect inflation changes better than intermediate term TIPS" is a largely a myth, I think flowing from a methodological flaw in a Vanguard white paper that makes a similar claim. The TIPS duration that best reflects inflation over YOUR inflation risk horizon is the duration that most closely matches your investment horizon. Sure, for short-term investors this might be short-term TIPS but I'm willing to wager that most Bogleheads are not short-term investors. Moreover, because of the way that TIPS are adjusted for inflation it turns out that short-term TIPS actually aren't appreciably better at hedging for short-run inflation than nominal Treasuries are.
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Re: Correlation between BND and raising interest rates

Post by absolute zero »

vineviz wrote: Sat Sep 05, 2020 11:44 am
absolute zero wrote: Fri Sep 04, 2020 5:48 pm Vineviz, is there anything unsuitable about TIPS? I think I’ve seen you make the argument before that inflation risk is extremely low for accumulators. But regardless of whether a person is an accumulator or a retiree, Im unaware of any cost of holding TIPS vs nominal treasuries (assuming same duration).

Even if the benefit is small or unlikely, if the cost is only the 3 minutes it takes to swap one’s fund from nominal to TIPS then that seems like a good deal. Maybe I’m missing something?
I wouldn't say that TIPS are "unsuitable" for an accumulator who doesn't really face much inflation risk, but there are two factors that generally make them suboptimal for younger investors in my opinion.

One is the lack of low-cost long-term TIPS funds. The only widely available fund is PIMCO 15+ Year US TIPS ETF (LTPZ) with an expense ratio of 0.20% and the only open-end mutual fund is DFA LTIP Portfolio (DRXIX) at 0.15% (but most investors don't have access to DFA funds without an advisor). On the other hand there are multiple long-term Treasury ETFs and mutual funds from Fidelity, State Street, and Vanguard with expense rations of 0.06% or less. With yields as low as they are, the higher expenses of LTPZ means sacrificing 10% to 15% of the TIPS expected return to expenses: not ideal, IMHO.

The second reason is that TIPS are more correlated with stocks than nominal Treasuries which makes sense due to the fact that both TIPS and stocks have shared risk factors. But for an equity-heavy investor (as younger investors tend to be), this higher correlation makes TIPS less powerful as diversification than nominal Treasuries.

Image

So while I wouldn't say that TIPS are wholly unsuitable for an accumulator, my general view is that the typical accumulator is better served by using nominal Treasuries for the first 20% or so of their portfolio that they allocate to bonds. But there's certainly nothing unsuitable about TIPS for younger investors and some investors (e.g. the very risk averse) could definitely prefer TIPS to nominal bonds across the board.
Hmm I had previously read that funds like LTPZ were a bit pricier, but I've never explored the differences in correlation. Very interesting to see that nominal treasuries provide better diversification than TIPS. Thanks for sharing.
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Re: Correlation between BND and raising interest rates

Post by Robot Monster »

abuss368 wrote: Sat Sep 05, 2020 10:27 am
realclemsongrad wrote: Wed Sep 02, 2020 3:27 pm Hi Folks,

I could not find a simple graph that shows a total bond market fund like BND and how it fared during raising interest rates? I see the data on Vanguard or Yahoo but this is all during the dropping of the interest rates (correct me if i am wrong https://finance.yahoo.com/quote/BND/performance?p=BND)

Is there a way to graph the bond index vs interest rate graph over a period of 20 years?

Thanks
When rates started to rise after the Great Recession I felt we were fine and a lot of bond crash fears were overblown.

There is good reason Total Bond is the biggest bond fund on the planet. Tune out the noise as it is an excellent choice to provide safety and income.
When the Fed started raising rates in 2016, the 10yr was at a low in July at 1.50%, eventually rising to a height in October 2018 at 3.12%, before going back down again.

Between those dates (Jul 2016 - Oct 2018) Total Bond (BND) had a inflation adjusted -2.84% compound annual growth rate (CAGR). This is in contrast to the -4.06% inflation adjusted CAGR the BND-lookalike Fidelity Investment Grade Bond Fund had between Oct 1971 - Sep 1981.

I suppose the question then becomes, how the dickens is this information actionable?

Some thoughts...

I don't know if this is how others look at it, but why not test one's portfolio against a variety of possible, and even unlikely, scenarios? A possible scenario might be, "The 10yr hovers around its current 0.72% yield for five years before slowly rising to 3%, and averages that amount for the next forty years."

Sources:
https://www.portfoliovisualizer.com/bac ... ion1_1=100
https://www.thebalance.com/u-s-inflatio ... st-3306093
https://www.multpl.com/10-year-treasury ... e/by-month
Last edited by Robot Monster on Sun Sep 06, 2020 5:08 pm, edited 4 times in total.
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realclemsongrad
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Re: Correlation between BND and raising interest rates

Post by realclemsongrad »

I am the OP asked this question. I want to thank each one of you esp @000, @niriprius, @vineviz, @petulant,@dbr,@Robot Monster, @abuss368, @Always Passive, @oicuryy, @absolute zeroprofoundly for providing in-depth replies.

I read it few times, I understand most of it and I wont pretend to understand all of the nuances, I am learning :).

Seems like the conclusion is to tune out the noise on the raise of interest rates and go with the BND fund for intermediate/long term.

Once again Thank you!
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Re: Correlation between BND and raising interest rates

Post by zetsui »

so you are still reccomending, for a beginner like me, to hold BND for my 60% bond allocation? In line with boglehead philosphy?
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Re: Correlation between BND and raising interest rates

Post by Always passive »

zetsui wrote: Sat Sep 26, 2020 8:12 pm so you are still reccomending, for a beginner like me, to hold BND for my 60% bond allocation? In line with boglehead philosphy?
I do not know who are you asking, I will give you my views:
if you are content with less than 2% annual return for the next years, and possibility to lose money when the FED increases rates, whenever that happens, then go ahead. I think that if you must own bonds either because you are retired or because or low risk tolerance, then any investment grade bond fund/ETF will do the job. All will yield less than inflation.
If you are not retired, there is zero reason to hold more than 20% bonds.
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Re: Correlation between BND and raising interest rates

Post by Robot Monster »

zetsui wrote: Sat Sep 26, 2020 8:12 pm so you are still reccomending, for a beginner like me, to hold BND for my 60% bond allocation? In line with boglehead philosphy?
The recommendation of BND is indeed very much in line with Boglehead philosophy. It's an allocation in the Two-Fund Portfolio, as well as the Three-Fund Portfolio. Here's a very nice article about the Three-Fund Portfolio, which discusses how much BND to allocate.
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Re: Correlation between BND and raising interest rates

Post by dbr »

zetsui wrote: Sat Sep 26, 2020 8:12 pm so you are still reccomending, for a beginner like me, to hold BND for my 60% bond allocation? In line with boglehead philosphy?
See next post == munged posting
Last edited by dbr on Sun Sep 27, 2020 9:29 am, edited 2 times in total.
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Re: Correlation between BND and raising interest rates

Post by dbr »

Robot Monster wrote: Sun Sep 27, 2020 9:12 am
zetsui wrote: Sat Sep 26, 2020 8:12 pm so you are still reccomending, for a beginner like me, to hold BND for my 60% bond allocation? In line with boglehead philosphy?
The recommendation of BND is indeed very much in line with Boglehead philosophy. It's an allocation in the Two-Fund Portfolio, as well as the Three-Fund Portfolio. Here's a very nice article about the Three-Fund Portfolio, which discusses how much BND to allocate.
Exactly. The idea behind recommending BND specifically for a new investor is that it is a starting place which is also sufficient to be the ending place for an investor. One can then apply the recommendation that one own BND until or unless there is a well understood reason to do otherwise. "Well understood" should be a high bar to cross and does not imply that one selection of investments is for people who are still supposed to be naive and uninformed and another set of investments is for people who are more informed and more sophisticated. It might be implied by Boglehead thinking that the three fund porfolio is actually the most sophisticated choice out there.

An issue I do have with many investing books, including one's I recommend, is the possible appearance that some recommended portfolios are "more advanced" than others. It might be the more complicate portfolios are harder to understand but I don't like to see it implied that the simpler portfolios are for dummies and the other ones are for "smart" people.

Disclaimer: I am a long term three fund portfolio investor even though I admit I hold different bonds than BND. But the difference in bonds is irrelevant. For full transparency my bonds in retirement are Treasuries and TIPS but no way do I say someone should hold those and not BND. Also, my "high bar" for that choice is "because I want to and I take responsibility for the consequences."
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