shouldn't the feds position on interest rates suggest that we 'time' the bond market?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
Topic Author
spindrift103
Posts: 29
Joined: Fri Jan 10, 2020 7:28 pm

shouldn't the feds position on interest rates suggest that we 'time' the bond market?

Post by spindrift103 »

I'm 30% equities (mostly VTI) and rest is bonds/cash (bonds are mostly BND). Here's what's driving the subject line of my post:

"Federal Reserve Chair Jerome Powell and his colleagues continued to project near-zero interest rates at least through 2023 despite upgrading their U.S. economic outlook and the mounting inflation worries in financial markets "

Now granted, the above may NOT turn out to be the case, but if we would assume for a moment that it's in the ballpark of what will actually transpire, wouldn't this mean that one should unload their bond holdings sometime in 2023 (or even earlier to be on the safe side). Otherwise, one's current bonds holdings will have an increase in yield (commensurate with the interest rate increases), but their price will go down (and it will probably do down a good bit....like 5% or more....)

Getting out of bonds before rates go up, and then getting in again after they go up, seems like it could enable one to avoid that 5+% hit in their bond holdings.

Maybe it's just down to the usual problem of 'when to get out, and when to get back in'? You have to be kinda right on 2 different occasions. But getting out too early doesn't seem to 'hurt' anything....you just lose some crappy yield for a year or so (BND is yielding 1.3%)

Thoughts?
Northern Flicker
Posts: 7251
Joined: Fri Apr 10, 2015 12:29 am

Re: shouldn't the feds position on interest rates suggest that we 'time' the bond market?

Post by Northern Flicker »

Do you invest in the Fed or in bonds? The bond market sets bond yields, not the Fed.
My postings are my opinion, and never should be construed as a recommendation to buy, sell, or hold any particular investment.
User avatar
Corsair
Posts: 518
Joined: Mon Oct 21, 2019 9:57 am
Location: WA

Re: shouldn't the feds position on interest rates suggest that we 'time' the bond market?

Post by Corsair »

Northern Flicker wrote: Sun Apr 04, 2021 10:01 pm Do you invest in the Fed or in bonds? The bond market sets bond yields, not the Fed.
To be fair the Fed is applying yield curve management at this moment. We could see yield curve control if yields go high enough.
All posts are my own opinions and are not financial advice.
KlangFool
Posts: 20069
Joined: Sat Oct 11, 2008 12:35 pm

Re: shouldn't the feds position on interest rates suggest that we 'time' the bond market?

Post by KlangFool »

OP,

If you know this, so does everyone else. So, why do you think it is not priced into all the newly issued bonds? Ditto for folks that sell and buy current bonds. Unless you know something else that no one else know, why do you think you can "time" the bond market?

This is the similar problem like timing the stock market. Unless you know something that no one else know, how could you do better?

KlangFool
40% VWENX | 12.5% VFWAX/VTIAX | 11.5% VTSAX | 16% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 40% Wellington 40% 3-funds 20% Mini-Larry
User avatar
JoMoney
Posts: 11265
Joined: Tue Jul 23, 2013 5:31 am

Re: shouldn't the feds position on interest rates suggest that we 'time' the bond market?

Post by JoMoney »

Northern Flicker wrote: Sun Apr 04, 2021 10:01 pm Do you invest in the Fed or in bonds? The bond market sets bond yields, not the Fed.
If the Fed uses "Open Market Operations", buying bonds to get the market to the rates they're targeting... is there a difference?
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
User avatar
Mountain Doc
Posts: 214
Joined: Tue Aug 08, 2017 3:15 pm
Location: Life Elevated

Re: shouldn't the feds position on interest rates suggest that we 'time' the bond market?

Post by Mountain Doc »

Other market participants know just as much about the Fed's intentions as you do. Probably more. Bond prices adjust accordingly ahead of Fed moves, not merely in response to Fed moves.

Go look up the Bloomberg survey of economists in 2014 about the direction of interest rates. 100% percent of them, 67/67, were wrong.

Trying to predict the direction of bond prices is pointless.
User avatar
climber2020
Posts: 1793
Joined: Sun Mar 25, 2012 8:06 pm

Re: shouldn't the feds position on interest rates suggest that we 'time' the bond market?

Post by climber2020 »

spindrift103 wrote: Sun Apr 04, 2021 9:55 pm Now granted, the above may NOT turn out to be the case, but if we would assume for a moment that it's in the ballpark of what will actually transpire, wouldn't this mean that one should unload their bond holdings sometime in 2023 (or even earlier to be on the safe side).
In another thread, there was a recent discussion about making predictions.

Start an investing journal and write down exactly what you think will happen in the bond market and when it will happen. If you can use specific numbers, all the better. Then wait a while and see what actually transpires. This puts your predictions in writing, eliminates recall bias, and you can see how close your forecast was to reality.
Topic Author
spindrift103
Posts: 29
Joined: Fri Jan 10, 2020 7:28 pm

Re: shouldn't the feds position on interest rates suggest that we 'time' the bond market?

Post by spindrift103 »

gotcha... one would be guessing if they unloaded bonds under the assumption that they'd soon be going up....it could take years for them to go up (all the while you'd be getting no yield at all, and the cash would just be 'losing' value due to inflation) And even if you were right, when is the right time to 'go back in' and buy again? It's just like timing the stock market. You have to be right 2x. And it would just be luck...


Mountain Doc wrote: Sun Apr 04, 2021 10:14 pm Other market participants know just as much about the Fed's intentions as you do. Probably more. Bond prices adjust accordingly ahead of Fed moves, not merely in response to Fed moves.

Go look up the Bloomberg survey of economists in 2014 about the direction of interest rates. 100% percent of them, 67/67, were wrong.

Trying to predict the direction of bond prices is pointless.
dkturner
Posts: 1646
Joined: Sun Feb 25, 2007 7:58 pm

Re: shouldn't the feds position on interest rates suggest that we 'time' the bond market?

Post by dkturner »

Unlike stock returns bond returns have historically run in very long cycles.

From 1941 through 1981 (41 years!) ten year Treasuries produced annualized inflation adjusted returns of NEGATIVE 2.3%. The huge deficits accumulated during WW2 were being inflated away. By 1982 inflation was beginning to decline from its peak, and the next 39 years (1982-2020) saw ten year Treasuries produce annualized inflation adjusted returns of POSITIVE 5.1%.

I don’t know what the next 40 years is going to look like but I can’t imagine that allocating a large percentage of bonds to ones portfolio is going to result in a good outcome for the foreseeable future.
Nowizard
Posts: 3268
Joined: Tue Oct 23, 2007 5:33 pm

Re: shouldn't the feds position on interest rates suggest that we 'time' the bond market?

Post by Nowizard »

As always, personal circumstances are the key. Yes, fund prices will go down, partially because of market timing leading to redemption of fund shares by timers. For those who use bonds primarily for protection, they continue to serve their purpose, and for those who are not in a position to redeem bond funds for current expenses, the funds will recover as time moves forward and lower yielding bonds are replaced. That's our view, and we are holding stable with an exchange to a fund with shorter duration with a small portion of our total bond fund. Others are making very different decisions, many reflecting that no one knows what is going to happen.

Tim
whereskyle
Posts: 1546
Joined: Wed Jan 29, 2020 10:29 am

Re: shouldn't the feds position on interest rates suggest that we 'time' the bond market?

Post by whereskyle »

spindrift103 wrote: Sun Apr 04, 2021 9:55 pm I'm 30% equities (mostly VTI) and rest is bonds/cash (bonds are mostly BND). Here's what's driving the subject line of my post:

"Federal Reserve Chair Jerome Powell and his colleagues continued to project near-zero interest rates at least through 2023 despite upgrading their U.S. economic outlook and the mounting inflation worries in financial markets "

Now granted, the above may NOT turn out to be the case, but if we would assume for a moment that it's in the ballpark of what will actually transpire, wouldn't this mean that one should unload their bond holdings sometime in 2023 (or even earlier to be on the safe side). Otherwise, one's current bonds holdings will have an increase in yield (commensurate with the interest rate increases), but their price will go down (and it will probably do down a good bit....like 5% or more....)

Getting out of bonds before rates go up, and then getting in again after they go up, seems like it could enable one to avoid that 5+% hit in their bond holdings.

Maybe it's just down to the usual problem of 'when to get out, and when to get back in'? You have to be kinda right on 2 different occasions. But getting out too early doesn't seem to 'hurt' anything....you just lose some crappy yield for a year or so (BND is yielding 1.3%)

Thoughts?
The fed doesn't set bond yields and will exit its positions only if there are people/institutions willing to buy the bonds its holding at reasonable prices and it will exit them gradually so there are no seismic shocks to the market.

You're also timing the market in assuming that bonds at 1.3% are somehow terrible even though they're pretty great if you look at the global market and where inflation has been recently.
"I am better off than he is – for he knows nothing and thinks that he knows. I neither know nor think that I know." - Socrates. "Nobody knows nothing." - Jack Bogle
User avatar
gasman
Posts: 833
Joined: Mon Jul 30, 2007 6:13 pm

Re: shouldn't the feds position on interest rates suggest that we 'time' the bond market?

Post by gasman »

Given the lack of reward for extending maturities, I think that there is a good case to be made for "timing" the bond market. As a result, I hold most of my bond position as cash. Excluding TIPs.
z3r0c00l
Posts: 2288
Joined: Fri Jul 06, 2012 11:43 am
Location: NYC
Contact:

Re: shouldn't the feds position on interest rates suggest that we 'time' the bond market?

Post by z3r0c00l »

Widespread predictions about bonds have been wrong since 2009 and counting. I don't see why it would be any easier this time around, except by sheer luck, if one makes the right guess. Timing interest rates is imho harder than timing stocks in the sense that while stocks have consistently gone up over long spans of time, bond interest rates follow no such trend except perhaps for a very long secular decline over the last few centuries. Someone in 1945 might have said these low rates are silly and can't last long. Did they know the 10 year would go up almost 1,000%? I don't think so. They would have looked back to see 4-5% as a likely high. Follow the link below to see how unpredictable interest rates are. There is a very long trend downward but your entire investing lifetime can be dominated by anything from dramatic increases to dramatic decreases.

https://ritholtz.com/wp-content/uploads ... 68x461.png

So timing bonds is asking for disappointment. However can we shop around? I think so, and see superior options out there for my safe money right now. I bonds and EE bonds offer guarantees that regular bonds can't.
User avatar
tipswatcher
Posts: 381
Joined: Tue Jun 21, 2011 5:17 pm
Contact:

Re: shouldn't the feds position on interest rates suggest that we 'time' the bond market?

Post by tipswatcher »

spindrift103 wrote: Sun Apr 04, 2021 9:55 pm
Getting out of bonds before rates go up, and then getting in again after they go up, seems like it could enable one to avoid that 5+% hit in their bond holdings.
I think this is a legitimate question. If you knew that the federal government was openly and aggressively manipulating the stock market, would that change your view of the stock market? The Fed is openly and fairly aggressively manipulating the bond market, especially Treasurys. I say "fairly aggressively" because it is still holding back on lowering longer-term yields, which remain fairly low. But the overall effect continues the cycle of "risk on" with very strong (and sometimes crazy) moves higher in the stock market, real estate and other assets.

When longer-term yields started inching higher, all eyes turned to the Fed: "What are you going to do about it?" The Fed answered: "Nothing, for now." But we all know further action could be coming. Maybe that won't be necessary.

I think shortening your mix of duration and adding inflation protection seem like good choices right now. Maybe build up higher cash reserves, even at these pathetic interest rates. But we really don't know. I don't think BND is particularly risky, but it is down 3.3% YTD in total return. I can live with that. In other words ... I'm staying in bonds, but I have shortened my duration risk and added to VTIP for inflation protection.
TIPS: Perfect investment for imperfect times?
User avatar
nisiprius
Advisory Board
Posts: 43163
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: shouldn't the feds position on interest rates suggest that we 'time' the bond market?

Post by nisiprius »

No, for these reasons.

1) As investors in a core bond fund like Vanguard Total Bond, we are affected by intermediate-term interest rates. The Fed only sets* the overnight rate. All longer-term rates are set by the market. The overnight rate has a strong influence on shorter-term rates, but even by the time we get out to intermediate-term rates, they are only loosely coupled to the Fed rates.

That's why we need a "yield curve," why people care about it, and why it keeps changing shape. For example, consider 2004-2007. What did the Fed do? By how many percentage points did the Fed funds rate increase?

Image

Now look at the whole yield curve. What happened to the ten-year rate? By how many percentage points did the ten-year rate increase? Did the Fed action have a huge effect on the ten-year rate?

Source

Image

If you invested $10,000 into the Vanguard Total Bond Market Index Fund on 1/1/2004, when the Fed rate was 1%, how many dollars would you have had on 1/1/2007, when it was over 5%?

Source

Image

2) For reasons I only partially understand, the financial press and casual discussions are insanely fixated on the short-term effect of interest rate changes. Interest rates up, bonds down is a short-term effect. Since (most) bonds pay out their face value at maturity, the market value of the bond close to maturity must be the face value of the bond. With bonds, what goes down must come up, and it does so on schedule. It's not just some vague mean-reversion tendency. So a bond held to maturity doesn't lose market value, and meanwhile it pays interest. In a bond fund the situation is more complicated. However, for all bond portfolios, because of bond math, once interest rates stop rising, the entire portfolio begins climbing up from its depressed value, and the rate of climb is exactly equal to the current interest rate... so a rise in rates is bad in the short-term, good in the long-term.

The duration of the bond fund is an approximate neutral point. So when we read that the duration of Total Bond is 6.6 years, and we also read Vanguard saying that it "may be appropriate for investors with medium-term investment horizons (4 to 10 years)," those statements are consistent.

3) As with all investment, certainly, if you could accurately predict short-term events, you could dodge in and out short-term. If you knew for sure what the Fed was going to say hours before the announcement, and if it was very different from what the market expected, you could make a fortune. But those are two big "ifs." In fact, since Fed does its absolute best to keep the announcement secret in advance, and does its absolute best not to surprise the market, those are two very big "ifs."

Ordinary retirement savers might just as well buy and hold for the "4 to 10 year" time frame Vanguard suggests. You aren't going to make any big improvements by doing anything different.

*I think it is Phineas J. Whoopee who keeps explaining to me that it doesn't literally control even the overnight rate; even that is a "target."
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.
User avatar
watchnerd
Posts: 7339
Joined: Sat Mar 03, 2007 11:18 am
Location: Seattle, WA, USA

Re: shouldn't the feds position on interest rates suggest that we 'time' the bond market?

Post by watchnerd »

spindrift103 wrote: Sun Apr 04, 2021 9:55 pm I'm 30% equities (mostly VTI) and rest is bonds/cash (bonds are mostly BND). Here's what's driving the subject line of my post:

"Federal Reserve Chair Jerome Powell and his colleagues continued to project near-zero interest rates at least through 2023 despite upgrading their U.S. economic outlook and the mounting inflation worries in financial markets "

Now granted, the above may NOT turn out to be the case, but if we would assume for a moment that it's in the ballpark of what will actually transpire, wouldn't this mean that one should unload their bond holdings sometime in 2023 (or even earlier to be on the safe side). Otherwise, one's current bonds holdings will have an increase in yield (commensurate with the interest rate increases), but their price will go down (and it will probably do down a good bit....like 5% or more....)

Getting out of bonds before rates go up, and then getting in again after they go up, seems like it could enable one to avoid that 5+% hit in their bond holdings.

Maybe it's just down to the usual problem of 'when to get out, and when to get back in'? You have to be kinda right on 2 different occasions. But getting out too early doesn't seem to 'hurt' anything....you just lose some crappy yield for a year or so (BND is yielding 1.3%)

Thoughts?
I think if earning negative real interest on your bonds for the near term bothers you, instead of timing, you should hold less bonds.

If interest rate changes bother you, shorten your duration.

If you want to earn higher yield, take on more credit risk.

There are other options that are more effective than trying a hard-to-pull-off timing move.
60% Global Market Stocks (VT,FM) | 15% Long Treasuries 15% short TIPS 10% cash / currencies || RSU + ESPP | LMP TIPS/STRIPS
User avatar
birdog
Posts: 1382
Joined: Fri Apr 07, 2017 1:35 pm
Location: Anytown, USA

Re: shouldn't the feds position on interest rates suggest that we 'time' the bond market?

Post by birdog »

dkturner wrote: Mon Apr 05, 2021 7:08 am I don’t know what the next 40 years is going to look like but I can’t imagine that allocating a large percentage of bonds to ones portfolio is going to result in a good outcome for the foreseeable future.
If your definition of "good outcome" is based on return performance, I wouldn't disagree with you. Low interest rates have caused me to give up any hopes of a decent return from my bond fund. But I continue to hold the bond fund for the other role that it performs, and that is to be a shock absorber in an equity market downturn.
User avatar
patrick013
Posts: 3146
Joined: Mon Jul 13, 2015 7:49 pm

Re: shouldn't the feds position on interest rates suggest that we 'time' the bond market?

Post by patrick013 »

spindrift103 wrote: Sun Apr 04, 2021 9:55 pm
Getting out of bonds before rates go up, and then getting in again after they go up, seems like it could enable one to avoid that 5+% hit in their bond holdings.

If I decide to buy a TRSY10 when the rate hits 2.5% the rate
will climb to 2.25% and then drop back down to 1.75% thwarting
my chance at this market time. That's the luck I expect.

So in my bond ladder I buy the best bond available at the time
of maturity of the various bonds in there. I usually get a
very good deal if not the best deal of the year.

Having money in cash or BSV or ultra-short can make a strategy
to start. They do foresee or desire the rates to rise the
next several years. Or at least not be surprised if they do.
That would be a buyer's market with still rather low rates in
the market.
age in bonds, buy-and-hold, 10 year business cycle
User avatar
watchnerd
Posts: 7339
Joined: Sat Mar 03, 2007 11:18 am
Location: Seattle, WA, USA

Re: shouldn't the feds position on interest rates suggest that we 'time' the bond market?

Post by watchnerd »

patrick013 wrote: Mon Apr 05, 2021 11:29 am
spindrift103 wrote: Sun Apr 04, 2021 9:55 pm
Getting out of bonds before rates go up, and then getting in again after they go up, seems like it could enable one to avoid that 5+% hit in their bond holdings.

If I decide to buy a TRSY10 when the rate hits 2.5% the rate
will climb to 2.25% and then drop back down to 1.75% thwarting
my chance at this market time. That's the luck I expect.

So in my bond ladder I buy the best bond available at the time
of maturity of the various bonds in there. I usually get a
very good deal if not the best deal of the year.

Having money in cash or BSV or ultra-short can make a strategy
to start. They do foresee or desire the rates to rise the
next several years. Or at least not be surprised if they do.
That would be a buyer's market with still rather low rates in
the market.
When I buy for my LMP bond ladder, I'm usually buying at auction.

So I can't market time that, anyway.
60% Global Market Stocks (VT,FM) | 15% Long Treasuries 15% short TIPS 10% cash / currencies || RSU + ESPP | LMP TIPS/STRIPS
scout1
Posts: 125
Joined: Thu Oct 18, 2018 3:26 pm

Re: shouldn't the feds position on interest rates suggest that we 'time' the bond market?

Post by scout1 »

The bond market is timing the fed's position on interest rates for you.
User avatar
patrick013
Posts: 3146
Joined: Mon Jul 13, 2015 7:49 pm

Re: shouldn't the feds position on interest rates suggest that we 'time' the bond market?

Post by patrick013 »

watchnerd wrote: Mon Apr 05, 2021 12:12 pm When I buy for my LMP bond ladder, I'm usually buying at auction.

So I can't market time that, anyway.
Barron's used to post current auction rates pre-auction based on
expected auction rate to be accepted. I don't see where they do
that on Treasury Direct. So there's some info about the next auction
rate expected there for whatever use it can be. Better than not
knowing anything till the day after the auction. Never heard that
forecast was inaccurate. :)
age in bonds, buy-and-hold, 10 year business cycle
User avatar
watchnerd
Posts: 7339
Joined: Sat Mar 03, 2007 11:18 am
Location: Seattle, WA, USA

Re: shouldn't the feds position on interest rates suggest that we 'time' the bond market?

Post by watchnerd »

patrick013 wrote: Mon Apr 05, 2021 12:38 pm
watchnerd wrote: Mon Apr 05, 2021 12:12 pm When I buy for my LMP bond ladder, I'm usually buying at auction.

So I can't market time that, anyway.
Barron's used to post current auction rates pre-auction based on
expected auction rate to be accepted. I don't see where they do
that on Treasury Direct. So there's some info about the next auction
rate expected there for whatever use it can be. Better than not
knowing anything till the day after the auction. Never heard that
forecast was inaccurate. :)
Sure.

But the auctions only happen at set intervals, regardless.

And secondary market spreads are wider.

So one's "better timing" has to also make up for a worse spread.
60% Global Market Stocks (VT,FM) | 15% Long Treasuries 15% short TIPS 10% cash / currencies || RSU + ESPP | LMP TIPS/STRIPS
RAchip
Posts: 505
Joined: Sat May 07, 2016 7:31 pm

Re: shouldn't the feds position on interest rates suggest that we 'time' the bond market?

Post by RAchip »

Does everyone agree that it is extremely unlikely that bond yields will go materially lower (ie, bond prices aren’t going to go up materially) over the next few years? If so, what is the point of owning bonds at all at this point? To earn interest? The interest return is so low it just doesnt seem worth the risk to me.
User avatar
watchnerd
Posts: 7339
Joined: Sat Mar 03, 2007 11:18 am
Location: Seattle, WA, USA

Re: shouldn't the feds position on interest rates suggest that we 'time' the bond market?

Post by watchnerd »

RAchip wrote: Mon Apr 05, 2021 12:48 pm Does everyone agree that it is extremely unlikely that bond yields will go materially lower (ie, bond prices aren’t going to go up materially) over the next few years? If so, what is the point of owning bonds at all at this point? To earn interest? The interest return is so low it just doesnt seem worth the risk to me.
I don't think of bonds in cycles that are only a few years long.

Bond cycles are often decades long.

The long term supra-secular cycle over several hundred years of history is declining interest rates.

There might be a near term meso-cycle where rates go up again a bit, but I don't anticipate revisiting the high rates of the 1970s in my lifetime, unless there is some event that makes capital scarce again.

So, no, over the next few decades, I don't agree that it's extremely unlikely that bond yields will go lower / foregone conclusion that they go higher. I think they actually could go lower over the next 20-30 years.

Yields in Japan and Europe are already much lower the the US, so, yes, I think lower could happen.

To your specific tactical question:

I don't hold bonds to create wealth.

I hold bonds to slow the erosion of wealth, provide a financial floor that allows me to take risks with my capital, and risk parity match equities.

My long term hope is to eke out a sliver of positive real return, just above breakeven.

20 YR LTT is within about 10 bps of breakeven, but still slightly negative.

That's how I view the role of bonds in my port.

If you're trying to earn meaningful positive real returns in bonds right now, you need to take on more credit risk (junk, EM bonds).
60% Global Market Stocks (VT,FM) | 15% Long Treasuries 15% short TIPS 10% cash / currencies || RSU + ESPP | LMP TIPS/STRIPS
jimkinny
Posts: 1545
Joined: Sun Mar 14, 2010 1:51 pm

Re: shouldn't the feds position on interest rates suggest that we 'time' the bond market?

Post by jimkinny »

I don't think the Fed's position has a lot to do but the actual interest rates have a lot to do with my take on things.

I don't think there is any compelling reason to take term interest rate risk. The term risk of intermediate bonds is significant when compared to paltry reward for that risk. I would rather own a FDIC savings account paying 0.5% interests rather than a 5 year Treasury bill paying 0.9%. A total bond market fund has credit risk so it will pay a bit more. So, after subtracting 0.1% ER for a bond fund you have a humongous yield of 0.3% for 5 years of term risk.

In 6 months or a year, the situation likely will have changed so I am just being patient waiting for the pandemic to fade away (I hope) amd our economic recovery to develope more fully. Every one knows this, but I guess that 0.3% extra yield is enough for many. And, we may have another event happen next week that derails our economy.
User avatar
watchnerd
Posts: 7339
Joined: Sat Mar 03, 2007 11:18 am
Location: Seattle, WA, USA

Re: shouldn't the feds position on interest rates suggest that we 'time' the bond market?

Post by watchnerd »

jimkinny wrote: Mon Apr 05, 2021 4:16 pm I would rather own a FDIC savings account paying 0.5% interests rather than a 5 year Treasury bill paying 0.9%. A total bond market fund has credit risk so it will pay a bit more. So, after subtracting 0.1% ER for a bond fund you have a humongous yield of 0.3% for 5 years of term risk.
While I understand your reasoning, I think this ignores the role Treasuries can play in portfolio construction due to their risk parity behavior vs equities during down markets.

Cash equivalents (like CDs) have 0 correlation to stocks, which while having benefits of its own, has not improved the Sharpe ratio as much as negatively correlated Treasuries have in equity-dominant portfolios.
60% Global Market Stocks (VT,FM) | 15% Long Treasuries 15% short TIPS 10% cash / currencies || RSU + ESPP | LMP TIPS/STRIPS
jimkinny
Posts: 1545
Joined: Sun Mar 14, 2010 1:51 pm

Re: shouldn't the feds position on interest rates suggest that we 'time' the bond market?

Post by jimkinny »

watchnerd wrote: Mon Apr 05, 2021 4:27 pm
jimkinny wrote: Mon Apr 05, 2021 4:16 pm I would rather own a FDIC savings account paying 0.5% interests rather than a 5 year Treasury bill paying 0.9%. A total bond market fund has credit risk so it will pay a bit more. So, after subtracting 0.1% ER for a bond fund you have a humongous yield of 0.3% for 5 years of term risk.
While I understand your reasoning, I think this ignores the role Treasuries can play in portfolio construction due to their risk parity behavior vs equities during down markets.

Cash equivalents (like CDs) have 0 correlation to stocks, which while having benefits of its own, has not improved the Sharpe ratio as much as negatively correlated Treasuries have in equity-dominant portfolios.
For me, improving a Sharpe ratio of a portfolio doesn't matter much when one one is deciding on a CD or an equivalent term Treasury. Much more important is the interest rate. If all else is equal, then sure, Treasuries would when. It is a benefit to have Treasuries negatively corrlated to equities in a crisis but if I can get a sometimes very significant higher interest rate in a CD I will take it. In the currrent situation, unless we have the pandemic recovery go off the rails, I don't think a 0.3% yield difference between a 5 year Treasury and a savings account is worth the term risk. Maybe in 6 months, maybe in a year we might have a different situation. Larry Swedroe used to suggest here that a 0.2% increase in yield justified a 1 year increase in a bond term. 0.3% is only give one .06% per year increase in yield per year by buying Treasuries. I understand that bond spreads have narrowed a bit from when Larry Swedroe wrote about that but still, 0.06% spread per year is just too low for me.
bestoftimes
Posts: 5
Joined: Fri May 04, 2018 10:30 am
Location: NW Michigan

Re: shouldn't the feds position on interest rates suggest that we 'time' the bond market?

Post by bestoftimes »

nisiprius wrote: Mon Apr 05, 2021 8:02 am No, for these reasons.

1) As investors in a core bond fund like Vanguard Total Bond, we are affected by intermediate-term interest rates. The Fed only sets* the overnight rate. All longer-term rates are set by the market. The overnight rate has a strong influence on shorter-term rates, but even by the time we get out to intermediate-term rates, they are only loosely coupled to the Fed rates.

That's why we need a "yield curve," why people care about it, and why it keeps changing shape. For example, consider 2004-2007. What did the Fed do? By how many percentage points did the Fed funds rate increase?

Image

Now look at the whole yield curve. What happened to the ten-year rate? By how many percentage points did the ten-year rate increase? Did the Fed action have a huge effect on the ten-year rate?

Source

Image

If you invested $10,000 into the Vanguard Total Bond Market Index Fund on 1/1/2004, when the Fed rate was 1%, how many dollars would you have had on 1/1/2007, when it was over 5%?

Source

Image

2) For reasons I only partially understand, the financial press and casual discussions are insanely fixated on the short-term effect of interest rate changes. Interest rates up, bonds down is a short-term effect. Since (most) bonds pay out their face value at maturity, the market value of the bond close to maturity must be the face value of the bond. With bonds, what goes down must come up, and it does so on schedule. It's not just some vague mean-reversion tendency. So a bond held to maturity doesn't lose market value, and meanwhile it pays interest. In a bond fund the situation is more complicated. However, for all bond portfolios, because of bond math, once interest rates stop rising, the entire portfolio begins climbing up from its depressed value, and the rate of climb is exactly equal to the current interest rate... so a rise in rates is bad in the short-term, good in the long-term.

The duration of the bond fund is an approximate neutral point. So when we read that the duration of Total Bond is 6.6 years, and we also read Vanguard saying that it "may be appropriate for investors with medium-term investment horizons (4 to 10 years)," those statements are consistent.

3) As with all investment, certainly, if you could accurately predict short-term events, you could dodge in and out short-term. If you knew for sure what the Fed was going to say hours before the announcement, and if it was very different from what the market expected, you could make a fortune. But those are two big "ifs." In fact, since Fed does its absolute best to keep the announcement secret in advance, and does its absolute best not to surprise the market, those are two very big "ifs."

Ordinary retirement savers might just as well buy and hold for the "4 to 10 year" time frame Vanguard suggests. You aren't going to make any big improvements by doing anything different.

*I think it is Phineas J. Whoopee who keeps explaining to me that it doesn't literally control even the overnight rate; even that is a "target."
Thank you Nisiprius for this very comprehensible explanation.
KlangFool
Posts: 20069
Joined: Sat Oct 11, 2008 12:35 pm

Re: shouldn't the feds position on interest rates suggest that we 'time' the bond market?

Post by KlangFool »

jimkinny wrote: Tue Apr 06, 2021 7:37 am
watchnerd wrote: Mon Apr 05, 2021 4:27 pm
jimkinny wrote: Mon Apr 05, 2021 4:16 pm I would rather own a FDIC savings account paying 0.5% interests rather than a 5 year Treasury bill paying 0.9%. A total bond market fund has credit risk so it will pay a bit more. So, after subtracting 0.1% ER for a bond fund you have a humongous yield of 0.3% for 5 years of term risk.
While I understand your reasoning, I think this ignores the role Treasuries can play in portfolio construction due to their risk parity behavior vs equities during down markets.

Cash equivalents (like CDs) have 0 correlation to stocks, which while having benefits of its own, has not improved the Sharpe ratio as much as negatively correlated Treasuries have in equity-dominant portfolios.
For me, improving a Sharpe ratio of a portfolio doesn't matter much when one one is deciding on a CD or an equivalent term Treasury. Much more important is the interest rate. If all else is equal, then sure, Treasuries would when. It is a benefit to have Treasuries negatively corrlated to equities in a crisis but if I can get a sometimes very significant higher interest rate in a CD I will take it. In the currrent situation, unless we have the pandemic recovery go off the rails, I don't think a 0.3% yield difference between a 5 year Treasury and a savings account is worth the term risk. Maybe in 6 months, maybe in a year we might have a different situation. Larry Swedroe used to suggest here that a 0.2% increase in yield justified a 1 year increase in a bond term. 0.3% is only give one .06% per year increase in yield per year by buying Treasuries. I understand that bond spreads have narrowed a bit from when Larry Swedroe wrote about that but still, 0.06% spread per year is just too low for me.
jimkinny,

<<unless we have the pandemic recovery go off the rails,>>

How do you know that is not possible? I don't. I know that I cannot predict the future. Hence, I choose to be diversified. I have CASH, US Stock, International Stock, US Bond, Intermediate-Term Treasury, and Physical Gold/Silver.

KlangFool
40% VWENX | 12.5% VFWAX/VTIAX | 11.5% VTSAX | 16% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 40% Wellington 40% 3-funds 20% Mini-Larry
protagonist
Posts: 6939
Joined: Sun Dec 26, 2010 12:47 pm

Re: shouldn't the feds position on interest rates suggest that we 'time' the bond market?

Post by protagonist »

spindrift103 wrote: Sun Apr 04, 2021 9:55 pm

Thoughts?
My thought is yes, absolutely, you should time the bond market at a time when interest rates are at such an extreme. Not just because of the fed's position, but because interest rates have hardly any room to fall but the sky is the limit. And because interest rates rose to record highs in the 4 decades or so following WW2, and subsequently have fallen to record lows. The stock market is a highly complex system dependent on countless unpredictable variables whereas fed interest rates are much simpler, since they are consciously manipulated by human beings. And bond interest rates correlate highly with fed rates.

But strict "Bogleheads" will disagree with me.

Some will argue that people have been saying what I have been saying for years and yet the bond market has continued to perform well, which is true.
But that is not a valid argument, since we are just talking about probabilities here, not certainties, and luck is still a major factor. The argument is akin to saying that because you got a payoff in a slot machine three times in a row, it is a "lucky machine" and you should keep popping in your quarters, when the reality is that the odds are still against you.

The bottom line is, if you had to guess, would you say there is at least a 51% chance, or a 50.1% chance, or even at least a 50.001% chance, that interest rates will rise rather than fall during the period of time you plan to continue to leave your money in bonds? And if the answer is "yes", why would you invest in something that would more likely result in you losing than making money? It is like a casino where the house holds the advantage, but you don't get the nice hotel room and free drinks.

But if you really believe there is a better chance that interest rates will still continue to fall rather than rise, then I guess you should invest in bonds.
JackoC
Posts: 2180
Joined: Sun Aug 12, 2018 11:14 am

Re: shouldn't the feds position on interest rates suggest that we 'time' the bond market?

Post by JackoC »

watchnerd wrote: Mon Apr 05, 2021 4:27 pm
jimkinny wrote: Mon Apr 05, 2021 4:16 pm I would rather own a FDIC savings account paying 0.5% interests rather than a 5 year Treasury bill paying 0.9%. A total bond market fund has credit risk so it will pay a bit more. So, after subtracting 0.1% ER for a bond fund you have a humongous yield of 0.3% for 5 years of term risk.
While I understand your reasoning, I think this ignores the role Treasuries can play in portfolio construction due to their risk parity behavior vs equities during down markets.

Cash equivalents (like CDs) have 0 correlation to stocks, which while having benefits of its own, has not improved the Sharpe ratio as much as negatively correlated Treasuries have in equity-dominant portfolios.
The difference in 'correlation' performance between a CD ladder of given average maturity and a treasury ladder of *same average maturity* is an illusion however. Whatever you believe you gain from marking the treasury ladder to market when rates go down is offset by definition by the lower yield of the treasuries going forward. For example my CD ladder, right now, still pays average rate just over 3%: that's the other side of the coin of it not having been marked up in value to a higher price, with then a much lower yield calculated at that higher price. Which is not some magic advantage of CD's, the advantage was that the CD's I have now yielded average 1.44% higher than comparable maturity treasuries when the CD's were bought. That's a real advantage in fixed income return terms, again over *same maturity* marked to market treasury ladder. Although right now CD to treasury spread is much less favorable than that, or than usual (only ~ 0.35% spread over the 5 yr note to best 5 yr CD I see now). But market to market v non market to market at a given duration is not itself an advantage for either type of instrument.

Now, if the treasury ladder has a higher average maturity than the CD ladder, then there could be different actual correlation performance, just like there could be between a treasury ladder centered at 3 yrs and one centered at 10 or more yrs.

Although, while I'll reiterate that longer duration *could* actually create a more favorable correlation of fixed income to stocks, my own opinion is that correlations are too unstable generally to put a lot of stock in them on a forward looking basis. And in particular now I think now bond market downside would probably be stock market downside even on a day to day noise kind of basis. What's more, overdependence on low rates (by corporations, market players, governments) that we don't now fully comprehend the extent of is a leading candidate IMO for a bad 'deep risk' surprise if rates go up a lot. So I personally don't like duration now and am happy with CD ladder centered around 3 yrs as main fixed income element.

And, if I did like duration I would not throw away the yield premium of CD's over treasuries: I'd still put my safe money mainly in CD's and just put on more duration with note/bond futures in IRA. Likewise to the extent I want particular % of stocks and 'bonds', I can adjust at the margin with bond and/or equity index futures in IRA rather than move the full amounts of cash around from one asset to another. It's an at least partly self imposed constraint to tie your duration position strictly to that of the CD's you have, or to only shift between stock and fixed income positions using cash.
User avatar
Scott S
Posts: 1814
Joined: Mon Nov 24, 2008 3:28 am
Location: building my position

Re: shouldn't the feds position on interest rates suggest that we 'time' the bond market?

Post by Scott S »

Based on the time I've been a member here, the Bogleheads plan for timing the bond market seems to be to go to cash or short-term bonds and then never be able to move from there. :P
"Worry is interest paid on trouble before it becomes due." -- William R. Inge
User avatar
watchnerd
Posts: 7339
Joined: Sat Mar 03, 2007 11:18 am
Location: Seattle, WA, USA

Re: shouldn't the feds position on interest rates suggest that we 'time' the bond market?

Post by watchnerd »

Scott S wrote: Tue Apr 06, 2021 4:29 pm Based on the time I've been a member here, the Bogleheads plan for timing the bond market seems to be to go to cash or short-term bonds and then never be able to move from there. :P
I'm glad I'm not the only one that noticed that. :)

Time to start trying to 'time' the cash market.
60% Global Market Stocks (VT,FM) | 15% Long Treasuries 15% short TIPS 10% cash / currencies || RSU + ESPP | LMP TIPS/STRIPS
User avatar
dziuniek
Posts: 1156
Joined: Mon Jul 23, 2012 2:54 pm
Location: C0rrupticut

Re: shouldn't the feds position on interest rates suggest that we 'time' the bond market?

Post by dziuniek »

If that's one's idea, then why wait until 2023?
Everyone and their grandmother who thinks they can time the bond market already go out this year.

You would be late to the game.
Get rich or die tryin'
User avatar
arcticpineapplecorp.
Posts: 7820
Joined: Tue Mar 06, 2012 9:22 pm

Re: shouldn't the feds position on interest rates suggest that we 'time' the bond market?

Post by arcticpineapplecorp. »

here's what economists predicted treasuries would do over a short period (six months):

Image

now if economists can't accurately predict interest rates over a 6 month period what makes you think you can?

p.s. have you ever heard of Bill Gross? He was once called The Bond King. If you haven't heard of him, you should read on:

https://www.google.com/search?client=fi ... ond+market

If you can time the bond market, then you should be the next Bond King. Just be careful of that messy final act of timing the market. It's the last one that always gets you.
It's "Stay" the course, not Stray the Course. Buy and Hold works. You should really try it sometime. Get a plan: www.bogleheads.org/wiki/Investment_policy_statement
User avatar
nisiprius
Advisory Board
Posts: 43163
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: shouldn't the feds position on interest rates suggest that we 'time' the bond market?

Post by nisiprius »

Indeed. Expanding on arcticpineapplecorp's comments, when Bill Gross, the Bond King, left PIMCO, there was a good deal of excitement over his next move. Gross was widely believed to be a master investor in the bond market. When he left PIMCO, the PIMCO Total Return bond fund lost about ⅔ of its assets. And when he joined Janus, the prices of Janus stock went up.

At Janus (now Janus Henderson), he was allowed to operate a brand new fund, the Janus Global Unconstrained Bond Fund, a "go-anywhere" fund that would unleash his full powers: CNBC commented that
Global unconstrained bond funds are prime examples of active fund management, where managers use their expertise to find the best investable options
and quoted the fund's literature:
this opportunistic bond fund seeks to achieve positive total returns in diverse market environments over a full market cycle by focusing on managing overall portfolio duration, credit risk and volatility... an unconstrained nontraditional bond holding that opportunistically manages duration, interest-rate, sector and geographic exposure in an effort to maximize total returns.
And the results, over the period of time Gross was managing it?

Blue, Bill Gross's actively managed go-anywhere Janus Unconstrained.

Orange, boring old Vanguard Total Bond Market Index Fund, whose managers' hands are tied to slavishly tracking an index. On a $10,000 investment, it made $1,000 while Gross' fund was making $100.

Source

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.
Desx
Posts: 18
Joined: Thu Feb 11, 2021 2:44 pm

Re: shouldn't the feds position on interest rates suggest that we 'time' the bond market?

Post by Desx »

I think instead of "timing" being the word its more of should you lend your money to the government for the next 30 years at 2.34% interest. You aren't timing the market, you are deciding if the current market rates make sense to lend as opposed to spread your cash into a split stake among 500 or 3500 American companies.

Many people advocate 40% bonds, does it make sense to for an individual to right now give 40% of their networth to the government at 2.34% interest? Or does it make more sense to give say 10-20% and perhaps balance into it getting up to 40% as the debt interest becomes more attractive. This isn't timing.
User avatar
Beensabu
Posts: 625
Joined: Sun Aug 14, 2016 3:22 pm

Re: shouldn't the feds position on interest rates suggest that we 'time' the bond market?

Post by Beensabu »

They don't know what's going to happen and are just doing the best they can not to make things worse at any point in time. How do you time that?
"The only thing that makes life possible is permanent, intolerable uncertainty; not knowing what comes next."
User avatar
Scott S
Posts: 1814
Joined: Mon Nov 24, 2008 3:28 am
Location: building my position

Re: shouldn't the feds position on interest rates suggest that we 'time' the bond market?

Post by Scott S »

Desx wrote: Tue Apr 06, 2021 8:11 pmOr does it make more sense to give say 10-20% and perhaps balance into it getting up to 40% as the debt interest becomes more attractive. This isn't timing.
Waiting because you assume it will become more attractive isn't timing? :oops:
"Worry is interest paid on trouble before it becomes due." -- William R. Inge
Desx
Posts: 18
Joined: Thu Feb 11, 2021 2:44 pm

Re: shouldn't the feds position on interest rates suggest that we 'time' the bond market?

Post by Desx »

Scott S wrote: Tue Apr 06, 2021 9:52 pm
Desx wrote: Tue Apr 06, 2021 8:11 pmOr does it make more sense to give say 10-20% and perhaps balance into it getting up to 40% as the debt interest becomes more attractive. This isn't timing.
Waiting because you assume it will become more attractive isn't timing? :oops:
Not really, if the government continues to offer 2.35% interest while at the same time telling you that inflation will average 2% per year over the next decade, are you really making a good decision to just dump 40% of your hard earned money into it because you don't want to ever be considered a "market timer"? Would be different if they offered say 4-5%, might make sense to loan more of your hard earned assets risk free.

I fail to see how this is market timing, its understanding you are getting basically 0 real return for lending to the government right now and maybe should look elsewhere until they offer you better terms. Just to make you happy, I'll say I have no idea if the government will or won't. Maybe they won't!

If they never do, the investors who hold 40% Long term treasuries will get 2.35% interest for 40% of their portfolio for their entire investing career. What a deal!
User avatar
Beensabu
Posts: 625
Joined: Sun Aug 14, 2016 3:22 pm

Re: shouldn't the feds position on interest rates suggest that we 'time' the bond market?

Post by Beensabu »

Desx wrote: Tue Apr 06, 2021 10:27 pm
Scott S wrote: Tue Apr 06, 2021 9:52 pm
Desx wrote: Tue Apr 06, 2021 8:11 pmOr does it make more sense to give say 10-20% and perhaps balance into it getting up to 40% as the debt interest becomes more attractive. This isn't timing.
Waiting because you assume it will become more attractive isn't timing? :oops:
Not really, if the government continues to offer 2.35% interest while at the same time telling you that inflation will average 2% per year over the next decade, are you really making a good decision to just dump 40% of your hard earned money into it because you don't want to ever be considered a "market timer"? Would be different if they offered say 4-5%, might make sense to loan more of your hard earned assets risk free.

I fail to see how this is market timing, its understanding you are getting basically 0 real return for lending to the government right now and maybe should look elsewhere until they offer you better terms. Just to make you happy, I'll say I have no idea if the government will or won't. Maybe they won't!

If they never do, the investors who hold 40% Long term treasuries will get 2.35% interest for 40% of their portfolio for their entire investing career. What a deal!
The government is not offering the interest rate on anything besides overnight lending. The rates you're referring to are set by what the market is willing to pay for the respective yields of treasury bonds of various maturities. Just like the price of equities is set by what the market is willing to pay for future earnings. Maybe it's a good deal. Maybe it's not. Either you give them your money and you wait, or you keep your money and you wait. One of them will turn out to have been a better idea than the other.
"The only thing that makes life possible is permanent, intolerable uncertainty; not knowing what comes next."
criticalmass
Posts: 1873
Joined: Wed Feb 12, 2014 10:58 pm

Re: shouldn't the feds position on interest rates suggest that we 'time' the bond market?

Post by criticalmass »

JoMoney wrote: Sun Apr 04, 2021 10:13 pm
Northern Flicker wrote: Sun Apr 04, 2021 10:01 pm Do you invest in the Fed or in bonds? The bond market sets bond yields, not the Fed.
If the Fed uses "Open Market Operations", buying bonds to get the market to the rates they're targeting... is there a difference?
Yes, there is a significant difference. The most common fed tool in "open market operations" is simply targeting the short term federal funds rate, that banks charge each other for short/overnight loans, usually to cover reserves.

The bond market is much more complicated than short term loans.

Many years ago during a booming economy, the WSJ wrote a great column about the fed's attempts but inability to influence interest rates beyond that one target. The market sets the interest rates (actually the market sets bond prices, which relate to yield.) The fed has limited influence beyond what it actually buys and sells.
User avatar
JoMoney
Posts: 11265
Joined: Tue Jul 23, 2013 5:31 am

Re: shouldn't the feds position on interest rates suggest that we 'time' the bond market?

Post by JoMoney »

criticalmass wrote: Tue Apr 06, 2021 11:03 pm
JoMoney wrote: Sun Apr 04, 2021 10:13 pm
Northern Flicker wrote: Sun Apr 04, 2021 10:01 pm Do you invest in the Fed or in bonds? The bond market sets bond yields, not the Fed.
If the Fed uses "Open Market Operations", buying bonds to get the market to the rates they're targeting... is there a difference?
Yes, there is a significant difference. The most common fed tool in "open market operations" is simply targeting the short term federal funds rate, that banks charge each other for short/overnight loans, usually to cover reserves.

The bond market is much more complicated than short term loans.

Many years ago during a booming economy, the WSJ wrote a great column about the fed's attempts but inability to influence interest rates beyond that one target. The market sets the interest rates (actually the market sets bond prices, which relate to yield.) The fed has limited influence beyond what it actually buys and sells.
What it "actually buys and sells" has considerable influence.
https://www.federalreserve.gov/releases ... nt/h41.htm
Between April 1, 2020 and March 31, 2021 the Fed bought over $3 Trillion in treasury "notes and bonds" (maturities over 1 year), and almost $1.5 Trillion in mortgage-backed securities, which it continues to hold on its balance sheets.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
criticalmass
Posts: 1873
Joined: Wed Feb 12, 2014 10:58 pm

Re: shouldn't the feds position on interest rates suggest that we 'time' the bond market?

Post by criticalmass »

JoMoney wrote: Wed Apr 07, 2021 1:55 am
criticalmass wrote: Tue Apr 06, 2021 11:03 pm
JoMoney wrote: Sun Apr 04, 2021 10:13 pm
Northern Flicker wrote: Sun Apr 04, 2021 10:01 pm Do you invest in the Fed or in bonds? The bond market sets bond yields, not the Fed.
If the Fed uses "Open Market Operations", buying bonds to get the market to the rates they're targeting... is there a difference?
Yes, there is a significant difference. The most common fed tool in "open market operations" is simply targeting the short term federal funds rate, that banks charge each other for short/overnight loans, usually to cover reserves.

The bond market is much more complicated than short term loans.

Many years ago during a booming economy, the WSJ wrote a great column about the fed's attempts but inability to influence interest rates beyond that one target. The market sets the interest rates (actually the market sets bond prices, which relate to yield.) The fed has limited influence beyond what it actually buys and sells.
What it "actually buys and sells" has considerable influence.
https://www.federalreserve.gov/releases ... nt/h41.htm
Between April 1, 2020 and March 31, 2021 the Fed bought over $3 Trillion in treasury "notes and bonds" (maturities over 1 year), and almost $1.5 Trillion in mortgage-backed securities, which it continues to hold on its balance sheets.
Yes it did, but the total bond market sets total bond prices. The Fed has some influence, but it doesn't have a monopoly on market behavior.
Desx
Posts: 18
Joined: Thu Feb 11, 2021 2:44 pm

Re: shouldn't the feds position on interest rates suggest that we 'time' the bond market?

Post by Desx »

criticalmass wrote: Wed Apr 07, 2021 7:25 am
JoMoney wrote: Wed Apr 07, 2021 1:55 am
criticalmass wrote: Tue Apr 06, 2021 11:03 pm
JoMoney wrote: Sun Apr 04, 2021 10:13 pm
Northern Flicker wrote: Sun Apr 04, 2021 10:01 pm Do you invest in the Fed or in bonds? The bond market sets bond yields, not the Fed.
If the Fed uses "Open Market Operations", buying bonds to get the market to the rates they're targeting... is there a difference?
Yes, there is a significant difference. The most common fed tool in "open market operations" is simply targeting the short term federal funds rate, that banks charge each other for short/overnight loans, usually to cover reserves.

The bond market is much more complicated than short term loans.

Many years ago during a booming economy, the WSJ wrote a great column about the fed's attempts but inability to influence interest rates beyond that one target. The market sets the interest rates (actually the market sets bond prices, which relate to yield.) The fed has limited influence beyond what it actually buys and sells.
What it "actually buys and sells" has considerable influence.
https://www.federalreserve.gov/releases ... nt/h41.htm
Between April 1, 2020 and March 31, 2021 the Fed bought over $3 Trillion in treasury "notes and bonds" (maturities over 1 year), and almost $1.5 Trillion in mortgage-backed securities, which it continues to hold on its balance sheets.
Yes it did, but the total bond market sets total bond prices. The Fed has some influence, but it doesn't have a monopoly on market behavior.
Image

You really think the fed doesn't have a decent sized affect the t-note rate? I mean I guess they only bought about 2 TRILLION worth of it in a year.
KlangFool
Posts: 20069
Joined: Sat Oct 11, 2008 12:35 pm

Re: shouldn't the feds position on interest rates suggest that we 'time' the bond market?

Post by KlangFool »

Desx wrote: Wed Apr 07, 2021 12:48 pm
criticalmass wrote: Wed Apr 07, 2021 7:25 am
JoMoney wrote: Wed Apr 07, 2021 1:55 am
criticalmass wrote: Tue Apr 06, 2021 11:03 pm
JoMoney wrote: Sun Apr 04, 2021 10:13 pm
If the Fed uses "Open Market Operations", buying bonds to get the market to the rates they're targeting... is there a difference?
Yes, there is a significant difference. The most common fed tool in "open market operations" is simply targeting the short term federal funds rate, that banks charge each other for short/overnight loans, usually to cover reserves.

The bond market is much more complicated than short term loans.

Many years ago during a booming economy, the WSJ wrote a great column about the fed's attempts but inability to influence interest rates beyond that one target. The market sets the interest rates (actually the market sets bond prices, which relate to yield.) The fed has limited influence beyond what it actually buys and sells.
What it "actually buys and sells" has considerable influence.
https://www.federalreserve.gov/releases ... nt/h41.htm
Between April 1, 2020 and March 31, 2021 the Fed bought over $3 Trillion in treasury "notes and bonds" (maturities over 1 year), and almost $1.5 Trillion in mortgage-backed securities, which it continues to hold on its balance sheets.
Yes it did, but the total bond market sets total bond prices. The Fed has some influence, but it doesn't have a monopoly on market behavior.
Image

You really think the fed doesn't have a decent sized affect the t-note rate? I mean I guess they only bought about 2 TRILLION worth of it in a year.
Desx,

It is 2T out of 39T of total US Bond Market as per 2017 number. It should be a much smaller percentage as per 2021.

https://en.wikipedia.org/wiki/Bond_market
<<The bond market has largely been dominated by the United States, which accounts for about 39% of the market. As of 2017, the size of the worldwide bond market (total debt outstanding) is estimated at $100.13 trillion, according to Securities Industry and Financial Markets Association (SIFMA).>>

KlangFool
40% VWENX | 12.5% VFWAX/VTIAX | 11.5% VTSAX | 16% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 40% Wellington 40% 3-funds 20% Mini-Larry
criticalmass
Posts: 1873
Joined: Wed Feb 12, 2014 10:58 pm

Re: shouldn't the feds position on interest rates suggest that we 'time' the bond market?

Post by criticalmass »

Desx wrote: Wed Apr 07, 2021 12:48 pm
criticalmass wrote: Wed Apr 07, 2021 7:25 am
JoMoney wrote: Wed Apr 07, 2021 1:55 am
criticalmass wrote: Tue Apr 06, 2021 11:03 pm
JoMoney wrote: Sun Apr 04, 2021 10:13 pm
If the Fed uses "Open Market Operations", buying bonds to get the market to the rates they're targeting... is there a difference?
Yes, there is a significant difference. The most common fed tool in "open market operations" is simply targeting the short term federal funds rate, that banks charge each other for short/overnight loans, usually to cover reserves.

The bond market is much more complicated than short term loans.

Many years ago during a booming economy, the WSJ wrote a great column about the fed's attempts but inability to influence interest rates beyond that one target. The market sets the interest rates (actually the market sets bond prices, which relate to yield.) The fed has limited influence beyond what it actually buys and sells.
What it "actually buys and sells" has considerable influence.
https://www.federalreserve.gov/releases ... nt/h41.htm
Between April 1, 2020 and March 31, 2021 the Fed bought over $3 Trillion in treasury "notes and bonds" (maturities over 1 year), and almost $1.5 Trillion in mortgage-backed securities, which it continues to hold on its balance sheets.
Yes it did, but the total bond market sets total bond prices. The Fed has some influence, but it doesn't have a monopoly on market behavior.
You really think the fed doesn't have a decent sized affect the t-note rate? I mean I guess they only bought about 2 TRILLION worth of it in a year.

For some definition of "decent."

Hint: Look at all transactions, not just one party.
AnEngineer
Posts: 404
Joined: Sat Jun 27, 2020 4:05 pm

Re: shouldn't the feds position on interest rates suggest that we 'time' the bond market?

Post by AnEngineer »

nisiprius wrote: Mon Apr 05, 2021 8:02 am so a rise in rates is bad in the short-term, good in the long-term.
This is not true of bonds you already hold: in the long term performance is exactly what you knew what you bought them.

It is only true for bonds purchased after a rise in rates, because the rate is higher, the return is higher.
User avatar
nisiprius
Advisory Board
Posts: 43163
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: shouldn't the feds position on interest rates suggest that we 'time' the bond market?

Post by nisiprius »

AnEngineer wrote: Thu Apr 08, 2021 8:48 am
nisiprius wrote: Mon Apr 05, 2021 8:02 am so a rise in rates is bad in the short-term, good in the long-term.
This is not true of bonds you already hold: in the long term performance is exactly what you knew what you bought them.

It is only true for bonds purchased after a rise in rates, because the rate is higher, the return is higher.
(Shrug) If it is a 10-year bond you just bought, and you need money after 5 years, and interest rates rise, that is bad for you. If you need money at 10 years, you don't care what interest rates do, you just let it mature. If you need money after 15 years, it is good for you because when the bond matures you will be able to roll it over into a higher-interest-bearing bond.
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.
Post Reply