Is this time of rising rates any different?

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investorjon
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Is this time of rising rates any different?

Post by investorjon »

After searching for articles on bond prices during rising interest rates, I came across this article: https://www.betterment.com/resources/bo ... est-rates/

It mentions 5 distinct periods of rising interest rates (1987 – 1988, 1994 – 1995, 1999 – 2000, 2004 – 2006, 2015 – 2017). After reading, rising rates don't seam that horrible.

Can someone explain if this period is any different and why I hear so many saying to get out of bonds or increase your stock allocation?

Thanks,
Jon
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Scott S
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Re: Is this time of rising rates any different?

Post by Scott S »

People will sell fear at any opportunity.
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thenextguy
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Re: Is this time of rising rates any different?

Post by thenextguy »

bEcAUsE hYpErInFlAtIoN.
Scooter57
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Re: Is this time of rising rates any different?

Post by Scooter57 »

Those periods of rising rates you cited occurred when rates were far higher than today in the middle of a long period during which rates very slowly achieved a decline from the double digits to today's < 1%.

The story is very different when you look at a period where the long-term trend is rising rates with brief periods of lowering. That would cover the period from the end of WWII in 1946 to 1983.

The concern is another 30 year period of consistently rising rates ending up with us in the double digits again. It is when rates rise year after year that bond funds will lose you money.

Us oldsters remember when bank Christmas Clubs were paying a laughably low 5% on savings.That rate was so low as to be considered a ripoff. Bond holders would do poorly for a long time were rates to return to the levels of the 1990s, to say nothing of the 80s.

And you must remember that bond rates went up the way they did in response to continual, significant inflation.So even if your nominal returns looked not too bad, your buying power suffered a big loss.
hi_there
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Re: Is this time of rising rates any different?

Post by hi_there »

In recent markets, interest rates have been rising for about 1y. During this time, SPX has had a 46% total return vs -0.25% for the AGG index. YTD, SPX is up 12% vs. -2.7% for AGG. In other words, stocks have trounced bonds over this recent period of rising interest rates (so far). Investors do not just care about price stability of bond funds in periods like this, but whether another asset might offer vastly better performance potential over the same period.
Robot Monster
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Re: Is this time of rising rates any different?

Post by Robot Monster »

investorjon wrote: Sun May 02, 2021 4:57 pm Can someone explain if this period is any different and why I hear so many saying to get out of bonds or increase your stock allocation?
Jeremy Siegel and Jeremy Schwartz have issued the following stern warning in a Wall Street Journal article entitled "The Great American Bond Bubble".

"Those who are now crowding into bonds and bond funds are courting disaster."

The thing is, the article was published over a decade ago, Aug. 18, 2010. I created a topic celebrating the article's ten year anniversary, and Nisiprius took the opportunity to point something out that you might find extremely interesting. See here.
"I think we may see a return to full employment next year." -- Janet Yellen, March 23rd 2021
Normchad
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Re: Is this time of rising rates any different?

Post by Normchad »

Robot Monster wrote: Sun May 02, 2021 6:15 pm
investorjon wrote: Sun May 02, 2021 4:57 pm Can someone explain if this period is any different and why I hear so many saying to get out of bonds or increase your stock allocation?
Jeremy Siegel and Jeremy Schwartz have issued the following stern warning in a Wall Street Journal article entitled "The Great American Bond Bubble".

"Those who are now crowding into bonds and bond funds are courting disaster."

The thing is, the article was published over a decade ago, Aug. 18, 2010. I created a topic celebrating the article's ten year anniversary, and Nisiprius took the opportunity to point something out that you might find extremely interesting. See here.
Wow. That is a “Hall of Fame” quality post from Nisiprius. Full of true facts, beautiful charts, clear explanations, and logic.

I have been buying bonds for the last ten years. And I hear all the naysayers. And honestly, I do sometimes doubt what I’m doing; especially with VTSAX just killing it. But I’m sticking to my plan. And that post from Nisi helps ease whatever doubt I have.....
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Taylor Larimore
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Re: Is this time of rising rates any different?

Post by Taylor Larimore »

investorjon wrote: Sun May 02, 2021 4:57 pm After searching for articles on bond prices during rising interest rates, I came across this article: https://www.betterment.com/resources/bo ... est-rates/

It mentions 5 distinct periods of rising interest rates (1987 – 1988, 1994 – 1995, 1999 – 2000, 2004 – 2006, 2015 – 2017). After reading, rising rates don't seam that horrible.

Can someone explain if this period is any different and why I hear so many saying to get out of bonds or increase your stock allocation?

Thanks,
Jon
Jon:

One of the best ways to understand how bonds act during inflation and periods of rising and falling rates is to look at the actual risk and return of the Total U.S. Bond Index which goes back further than any total bond fund.

I prepared the following table showing the total returns of the Total U.S. Bond Index and how it interacts with the other funds in The Three-Fund Portfolio:

Historical Statistics for Inflation, Bonds and U.S. stocks

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "The Lehman Bond Index (total bond market), in substance, is an appropriate choice for investors with an intermediate-term time horizon and seeking top quality."
"Simplicity is the master key to financial success." -- Jack Bogle
secondopinion
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Re: Is this time of rising rates any different?

Post by secondopinion »

investorjon wrote: Sun May 02, 2021 4:57 pm After searching for articles on bond prices during rising interest rates, I came across this article: https://www.betterment.com/resources/bo ... est-rates/

It mentions 5 distinct periods of rising interest rates (1987 – 1988, 1994 – 1995, 1999 – 2000, 2004 – 2006, 2015 – 2017). After reading, rising rates don't seam that horrible.

Can someone explain if this period is any different and why I hear so many saying to get out of bonds or increase your stock allocation?

Thanks,
Jon
It is not different this time. If you are hearing it that often, you are reading too many articles.

Most people, who have 10+ years of investment timeframe, should toss out the discussion out the window. Despite the critics are saying, investors want the rates to go up. Hard thing with 2020? The rates dropped sharply. It is not because it has "no where but up", but because returns are now so iffy. I much rather lose in the short term and win more in the long term with rate increases. By not holding bonds, we miss the point of them; a good security of a future principal. That is bonds in a nutshell. Being too short of duration in bonds in respect to the timeframe will not fix the problem but make it worse.
It is better to be half-wrong than have a 50% chance of being all-wrong. With the former, you will learn and have money to try again. Otherwise, you will never learn and will have nothing eventually.
JC Denton
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Re: Is this time of rising rates any different?

Post by JC Denton »

The difference is they cannot raise rates anymore because our federal debt is high. If they do, they will be raising their own bills on interest.

But if they don’t raise rates they take our money.
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