Investing in bonds

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1937bert
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Investing in bonds

Post by 1937bert »

Best way to invest in bonds in rising interest rate environment?
wetgear
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Re: Investing in bonds

Post by wetgear »

Same as any environment. Total bond and chill.
dbr
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Re: Investing in bonds

Post by dbr »

I agree with the "same as." Otherwise it seems the nature of bonds is that there are far more choices than there reasons to choose among them, which means identifying a "best" way probably doesn't make sense.

The general properties of bonds that determine outcomes are duration and credit quality and also the opportunity to get inflation indexing in the cases of TIPS and I bonds.
esteen
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Re: Investing in bonds

Post by esteen »

It would depend on my life stage and when I expecting to need the money I'm investing, but in general it would be split between total bond and TIPS.
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mikejuss
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Re: Investing in bonds

Post by mikejuss »

Gosh--this really is the topic of the moment on this board. It's as if no one is appreciating where the stock market is right now. I'm having no problem sticking to my asset allocation, including the bond portion of it.
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22twain
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Re: Investing in bonds

Post by 22twain »

"Rates gotta rise, bonds gotta crash! Augh!"

"Stocks are too high, they've gotta crash! Augh!"

"Inflation is high, cash gotta crash! Augh!"
It's "Roth", not "ROTH". Senator William Roth was a person, not an acronym.
Triple digit golfer
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Re: Investing in bonds

Post by Triple digit golfer »

mikejuss wrote: Wed Nov 24, 2021 12:48 pm Gosh--this really is the topic of the moment on this board. It's as if no one is appreciating where the stock market is right now. I'm having no problem sticking to my asset allocation, including the bond portion of it.
Right. Look at the portfolio as a whole and not the individual components.
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dual
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Re: Investing in bonds

Post by dual »

Keep your duration short. Either T-bills or a short term etf like SHY. For bonds you want return of capital not return on capital.
3funder
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Re: Investing in bonds

Post by 3funder »

wetgear wrote: Wed Nov 24, 2021 12:28 pm Same as any environment. Total bond and chill.
+1
Global stocks, US bonds, and time.
TominToledo
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Re: Investing in bonds

Post by TominToledo »

dual wrote: Wed Nov 24, 2021 1:18 pm Keep your duration short. Either T-bills or a short term etf like SHY. For bonds you want return of capital not return on capital.
That's what savings accounts used to be for. Return of capital. Maybe we will see decent savings interest rates in the next year or two. Or maybe if everything goes ballistic, we will see 13% 30 year treasuries again. I hope not.
Jehousto
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Re: Investing in bonds

Post by Jehousto »

You might consider TIPS ( Treasury inflation protected securities).
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grabiner
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Re: Investing in bonds

Post by grabiner »

Buy a bond fund with a duration no longer than your time horizon.

If you buy a ten-year bond and hold it for ten years, you know how much money you will get when it matures. The price might decline next year if rates rise, but the increased rate and yield will make up the loss.

Similarly, if you buy Total Bond Market Index, which has a 7-year duration, and the yields on its bonds rise 1% over some time period, you will lose 7%, but make up 1% per year over seven years to get the same return. If you have to sell in less than seven years, you may get a lower return. (If you are investing for retirement, your time horizon is more than 7 years even if you are already retired. If you are 65 and will live to 85, you will be spending money every year for 20 years, so you have a 10-year horizon.)

Bond traders already know about the probability of rising rates. This is why long-term bonds are traded at yields significantly higher than short-term bonds; the buyers of long-term bonds expect enough benefit from the higher yield to make up for the expected loss from rising rates and the higher risk. The only reason to vary your own bond strategy is your personal needs, as noted above; Total Bond Market is inappropriate if you are going to use the money to buy a house next year.
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UpperNwGuy
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Re: Investing in bonds

Post by UpperNwGuy »

Bogleheads love to obsess over bonds, yet bonds have very little impact on their total portfolio.
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gasdoc
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Re: Investing in bonds

Post by gasdoc »

I am using a bucket strategy, or call it time segmentation, whichever you prefer. I am using Vanguard's Total Bond Fund as a simple way to fund my first ten years or so of retirement (with a few years of cash reserves). I realize there is some risk to this over what I would expect using a more short term bond fund or bond ladder. Would people here consider that risk too high? Thanks.
000
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Re: Investing in bonds

Post by 000 »

1937bert wrote: Wed Nov 24, 2021 12:26 pm Best way to invest in bonds in rising interest rate environment?
Cash, floating rate bonds, TIPS are options.
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BolderBoy
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Re: Investing in bonds

Post by BolderBoy »

gasdoc wrote: Wed Nov 24, 2021 9:26 pmI am using a bucket strategy, or call it time segmentation, whichever you prefer. I am using Vanguard's Total Bond Fund as a simple way to fund my first ten years or so of retirement (with a few years of cash reserves). I realize there is some risk to this over what I would expect using a more short term bond fund or bond ladder. Would people here consider that risk too high? Thanks.
I don't think that is too risky. It is what I did for the first 10 years of my retirement as well, though I did it on the taxable side using VWIUX. Everything turned out okay and I only ended up spending down 1/2 of my bucket before SS started.
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FoundingFather
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Re: Investing in bonds

Post by FoundingFather »

1937bert wrote: Wed Nov 24, 2021 12:26 pm Best way to invest in bonds in rising interest rate environment?
There is a lot of great advice above, OP. Based on how long you have until you need this money, and the reason for investing in bonds, you might consider holding money in a high yield savings account, I bonds, TIPs, or a bond market fund (choosing a duration that matches your anticipated duration of investment).

I prefer I bonds for my needs, but any of the things I listed above would be reasonable. If you wanted to reply with how long you plan to hold these bonds, what kind of account your money is in, and what you want bonds to do for you, we could give you more specific recommendations. :)

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bikechuck
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Re: Investing in bonds

Post by bikechuck »

BolderBoy wrote: Thu Nov 25, 2021 11:02 am
gasdoc wrote: Wed Nov 24, 2021 9:26 pmI am using a bucket strategy, or call it time segmentation, whichever you prefer. I am using Vanguard's Total Bond Fund as a simple way to fund my first ten years or so of retirement (with a few years of cash reserves). I realize there is some risk to this over what I would expect using a more short term bond fund or bond ladder. Would people here consider that risk too high? Thanks.
I don't think that is too risky. It is what I did for the first 10 years of my retirement as well, though I did it on the taxable side using VWIUX. Everything turned out okay and I only ended up spending down 1/2 of my bucket before SS started.
I am curious about what you will you do as you progress through the first decade of your retirement and after the first ten years is up? Will you continue to own some bonds or do you plan to allow your allocation to bonds drop to zero? I am not criticizing I am just trying to better understand your strategy.
BitTooAggressive
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Re: Investing in bonds

Post by BitTooAggressive »

1937bert wrote: Wed Nov 24, 2021 12:26 pm Best way to invest in bonds in rising interest rate environment?
Bonds are a terrible investment in a rising rate environment.
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Re: Investing in bonds

Post by BitTooAggressive »

wetgear wrote: Wed Nov 24, 2021 12:28 pm Same as any environment. Total bond and chill.
Disagree. Total Bond will be posting losses in a rising interest rate environment. I would not call that investing. If they need to have a bond portion, I think it is a no brainer to shorten your duration.
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Re: Investing in bonds

Post by plats »

BitTooAggressive wrote: Thu Nov 25, 2021 3:06 pm
wetgear wrote: Wed Nov 24, 2021 12:28 pm Same as any environment. Total bond and chill.
Disagree. Total Bond will be posting losses in a rising interest rate environment. I would not call that investing. If they need to have a bond portion, I think it is a no brainer to shorten your duration.
I agree to disagree. Total Bond negative return so far this year confirms my theory that when bonds sell off bond holders lose.
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Re: Investing in bonds

Post by Explorer »

BitTooAggressive wrote: Thu Nov 25, 2021 3:06 pm
wetgear wrote: Wed Nov 24, 2021 12:28 pm Same as any environment. Total bond and chill.
Disagree. Total Bond will be posting losses in a rising interest rate environment. I would not call that investing. If they need to have a bond portion, I think it is a no brainer to shorten your duration.
BitTooAggressive, yes bonds would lose NAV when rates rise. What do you think stocks would not lose value in rising rate environment?
Triple digit golfer
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Re: Investing in bonds

Post by Triple digit golfer »

BitTooAggressive wrote: Thu Nov 25, 2021 3:06 pm
wetgear wrote: Wed Nov 24, 2021 12:28 pm Same as any environment. Total bond and chill.
Disagree. Total Bond will be posting losses in a rising interest rate environment. I would not call that investing. If they need to have a bond portion, I think it is a no brainer to shorten your duration.
It will post losses in a rising rate environment, but you don't know what environment we're in during the present. And if you hold bonds for the duration, you will not lose in a rising rate environment.
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Re: Investing in bonds

Post by tibbitts »

BitTooAggressive wrote: Thu Nov 25, 2021 3:06 pm
wetgear wrote: Wed Nov 24, 2021 12:28 pm Same as any environment. Total bond and chill.
Disagree. Total Bond will be posting losses in a rising interest rate environment. I would not call that investing. If they need to have a bond portion, I think it is a no brainer to shorten your duration.
Unless perhaps short rates rise and longer rates don't.
Mr.RegPark
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Re: Investing in bonds

Post by Mr.RegPark »

i opted for a bond ladder strategy for the fixed income part of my portfolio. Pros and cons a-plenty, but as my prior bonds mature, Pimco buys at the long end of my ladder (currently 12 years). Schwab fixed income seems to be pushing the ladder strategy as opportune for this environment. We shall see.
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Re: Investing in bonds

Post by 9-5 Suited »

BitTooAggressive wrote: Thu Nov 25, 2021 3:03 pm
1937bert wrote: Wed Nov 24, 2021 12:26 pm Best way to invest in bonds in rising interest rate environment?
Bonds are a terrible investment in a rising rate environment.
This is creeping up toward the top of the list of investing myths. It’s demonstrably false but widely believed. If you holds bonds that are duration-matched to your investment horizon you have neutralized interest rate risk. If rates go up, your bonds or bond fund will decline in paper value but the higher yields will bring you to break even at roughly the duration of the fund.

This is driven by inherent bond mathematics. Don’t be drawn in by the short-term impact on the asset value. Unless you have inappropriate bond duration, you’re fine.

Same goes for the people advocating staying in very short bonds. That is terribly misguided advice resulting from the same misunderstanding.
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Re: Investing in bonds

Post by ivgrivchuck »

1937bert wrote: Wed Nov 24, 2021 12:26 pm Best way to invest in bonds in rising interest rate environment?
I-bonds
40% VTI | 40% VXUS | 13% I-bonds | 7% EE-bonds
Robot Monster
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Re: Investing in bonds

Post by Robot Monster »

UpperNwGuy wrote: Wed Nov 24, 2021 9:06 pm Bogleheads love to obsess over bonds, yet bonds have very little impact on their total portfolio.
Nominal bonds were a huge drag this year because of inflation, which helped cause stock heavy Wellington fund to do much better than Wellesley fund, for example. Sad to say, we don't know if next year will be any different.

Inflation Adjusted Return from Jan 2021 - Oct 2021
Wellington Fund, 66.51% stocks, +9.04%
Wellesley Income Fund, 39.34% stocks, +1.13%
link
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Re: Investing in bonds

Post by UpperNwGuy »

Robot Monster wrote: Thu Nov 25, 2021 6:43 pm
UpperNwGuy wrote: Wed Nov 24, 2021 9:06 pm Bogleheads love to obsess over bonds, yet bonds have very little impact on their total portfolio.
Nominal bonds were a huge drag this year because of inflation, which helped cause stock heavy Wellington fund to do much better than Wellesley fund, for example. Sad to say, we don't know if next year will be any different.

Inflation Adjusted Return from Jan 2021 - Oct 2021
Wellington Fund, 66.51% stocks, +9.04%
Wellesley Income Fund, 39.34% stocks, +1.13%
link
I would expect stock-heavy Wellington to do better than bond-heavy Wellesley in most years.
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Re: Investing in bonds

Post by Robot Monster »

1937bert wrote: Wed Nov 24, 2021 12:26 pm Best way to invest in bonds in rising interest rate environment?
"Rising rates don’t negate benefits of bonds" link
"The downs are part of the long term upward trend." -- our favorite golfer
inbox788
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Re: Investing in bonds

Post by inbox788 »

22twain wrote: Wed Nov 24, 2021 12:54 pm "Rates gotta rise, bonds gotta crash! Augh!"

"Stocks are too high, they've gotta crash! Augh!"

"Inflation is high, cash gotta crash! Augh!"
Completely agree, so might as well spend it now.

But car prices are so high, so wait till they normalize. And real estate are at all time highs in many locations. And it's too late to catch the crypto craze, and if it a Ponzy scheme as many say, you'd be going in at the peak.

Nowhere to hide in this brave new world, so back to bonds it it.
mikejuss wrote: Wed Nov 24, 2021 12:48 pm Gosh--this really is the topic of the moment on this board. It's as if no one is appreciating where the stock market is right now. I'm having no problem sticking to my asset allocation, including the bond portion of it.
I appreciate the stock market has gone up and had to rebalance, hence buy bonds. Also, I kept more cash around for the pandemic, which was the wrong thing to do, but glad to have it liquid, and now don't need it in cash, so that went to bonds too. Will consider all options, just haven't been convinced of a better one yet.
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Re: Investing in bonds

Post by Robot Monster »

UpperNwGuy wrote: Thu Nov 25, 2021 6:50 pm
Robot Monster wrote: Thu Nov 25, 2021 6:43 pm
UpperNwGuy wrote: Wed Nov 24, 2021 9:06 pm Bogleheads love to obsess over bonds, yet bonds have very little impact on their total portfolio.
Nominal bonds were a huge drag this year because of inflation, which helped cause stock heavy Wellington fund to do much better than Wellesley fund, for example. Sad to say, we don't know if next year will be any different.

Inflation Adjusted Return from Jan 2021 - Oct 2021
Wellington Fund, 66.51% stocks, +9.04%
Wellesley Income Fund, 39.34% stocks, +1.13%
link
I would expect stock-heavy Wellington to do better than bond-heavy Wellesley in most years.
Yes agreed, but this year the difference was much more profound, no?

Inflation Adjusted Return from Jan 2010 - Dec 2020
Wellington -- 8.1%
Wellesley -- 6.2%

vs

Inflation Adjusted Return from Jan 2021 - Oct 2021
Wellington -- 9.04%
Wellesley -- 1.13%
"The downs are part of the long term upward trend." -- our favorite golfer
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Re: Investing in bonds

Post by ObiQuiet »

9-5 Suited wrote: Thu Nov 25, 2021 5:41 pm
BitTooAggressive wrote: Thu Nov 25, 2021 3:03 pm
1937bert wrote: Wed Nov 24, 2021 12:26 pm Best way to invest in bonds in rising interest rate environment?
Bonds are a terrible investment in a rising rate environment.
This is creeping up toward the top of the list of investing myths. It’s demonstrably false but widely believed. If you holds bonds that are duration-matched to your investment horizon you have neutralized interest rate risk. If rates go up, your bonds or bond fund will decline in paper value but the higher yields will bring you to break even at roughly the duration of the fund.

This is driven by inherent bond mathematics. Don’t be drawn in by the short-term impact on the asset value. Unless you have inappropriate bond duration, you’re fine.

Same goes for the people advocating staying in very short bonds. That is terribly misguided advice resulting from the same misunderstanding.
Isn't part of the confusion/mistake here due to equivocation re: "bonds" vs (most) "bond funds"? Those bond funds with a rotating composition keep a duration out N years in the future, which make matching them to my horizon impossible, right?
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Re: Investing in bonds

Post by ObiQuiet »

ObiQuiet wrote: Thu Nov 25, 2021 7:19 pm
9-5 Suited wrote: Thu Nov 25, 2021 5:41 pm
BitTooAggressive wrote: Thu Nov 25, 2021 3:03 pm
1937bert wrote: Wed Nov 24, 2021 12:26 pm Best way to invest in bonds in rising interest rate environment?
Bonds are a terrible investment in a rising rate environment.
This is creeping up toward the top of the list of investing myths. It’s demonstrably false but widely believed. If you holds bonds that are duration-matched to your investment horizon you have neutralized interest rate risk. If rates go up, your bonds or bond fund will decline in paper value but the higher yields will bring you to break even at roughly the duration of the fund.

This is driven by inherent bond mathematics. Don’t be drawn in by the short-term impact on the asset value. Unless you have inappropriate bond duration, you’re fine.

Same goes for the people advocating staying in very short bonds. That is terribly misguided advice resulting from the same misunderstanding.
Isn't part of the confusion/mistake here due to equivocation re: "bonds" vs (most) "bond funds"? Those bond funds with a rotating composition keep a duration out N years in the future, which make matching them to my horizon impossible... do I understand it right?
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9-5 Suited
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Re: Investing in bonds

Post by 9-5 Suited »

ObiQuiet wrote: Thu Nov 25, 2021 7:19 pm
9-5 Suited wrote: Thu Nov 25, 2021 5:41 pm
BitTooAggressive wrote: Thu Nov 25, 2021 3:03 pm
1937bert wrote: Wed Nov 24, 2021 12:26 pm Best way to invest in bonds in rising interest rate environment?
Bonds are a terrible investment in a rising rate environment.
This is creeping up toward the top of the list of investing myths. It’s demonstrably false but widely believed. If you holds bonds that are duration-matched to your investment horizon you have neutralized interest rate risk. If rates go up, your bonds or bond fund will decline in paper value but the higher yields will bring you to break even at roughly the duration of the fund.

This is driven by inherent bond mathematics. Don’t be drawn in by the short-term impact on the asset value. Unless you have inappropriate bond duration, you’re fine.

Same goes for the people advocating staying in very short bonds. That is terribly misguided advice resulting from the same misunderstanding.
Isn't part of the confusion/mistake here due to equivocation re: "bonds" vs (most) "bond funds"? Those bond funds with a rotating composition keep a duration out N years in the future, which make matching them to my horizon impossible, right?
Good question. Funds are essentially similar as they are collections of individual bonds, but yes if you only own one single fund eventually its constantly resetting duration will outstrip your own. The most common advice to mimic individual bonds with funds is to own two funds (say one long and one short) and move money between them to match your desired time horizon.
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Re: Investing in bonds

Post by BitTooAggressive »

Explorer wrote: Thu Nov 25, 2021 5:04 pm
BitTooAggressive wrote: Thu Nov 25, 2021 3:06 pm
wetgear wrote: Wed Nov 24, 2021 12:28 pm Same as any environment. Total bond and chill.
Disagree. Total Bond will be posting losses in a rising interest rate environment. I would not call that investing. If they need to have a bond portion, I think it is a no brainer to shorten your duration.
BitTooAggressive, yes bonds would lose NAV when rates rise. What do you think stocks would not lose value in rising rate environment?
That was not the original posters question. You can certainly certainly shorten the fund duration. If the rise in interest rates is accompanied or partially due to inflation tips can also mitigate the expected losses in bonds.
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Re: Investing in bonds

Post by BitTooAggressive »

9-5 Suited wrote: Thu Nov 25, 2021 5:41 pm
BitTooAggressive wrote: Thu Nov 25, 2021 3:03 pm
1937bert wrote: Wed Nov 24, 2021 12:26 pm Best way to invest in bonds in rising interest rate environment?
Bonds are a terrible investment in a rising rate environment.
This is creeping up toward the top of the list of investing myths. It’s demonstrably false but widely believed. If you holds bonds that are duration-matched to your investment horizon you have neutralized interest rate risk. If rates go up, your bonds or bond fund will decline in paper value but the higher yields will bring you to break even at roughly the duration of the fund.

This is driven by inherent bond mathematics. Don’t be drawn in by the short-term impact on the asset value. Unless you have inappropriate bond duration, you’re fine.

Same goes for the people advocating staying in very short bonds. That is terribly misguided advice resulting from the same misunderstanding.
I see nothing wrong with shortening the duration with rates rising and then lengthening the duration with stable or falling rates.

It’s funny that you refer to the loss bonds take during the rise in rates as paper value, but you are restored by the higher yields.

I assure you both the increase in yields and loss of principal are real.

If the rise in interest rates is coupled with a stock pullback and I wish to rebalance I am much better off having switched to the shorter duration. This is no myth.
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Re: Investing in bonds

Post by dbr »

It makes sense to also be aware of the yield curve. At the moment this is relatively flat which means there is less premium from extending duration, or less penalty to going shorter. This does not always have to be the case and different parts of the yield curve can have different trends.

I personally don't tend to worry about duration or interest rate trends. I think the long term investor in stocks and bonds will do fine with intermediate term bond funds. People with a short term horizon should not pick durations that are too long, though.
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Re: Investing in bonds

Post by BitTooAggressive »

dbr wrote: Fri Nov 26, 2021 9:37 am It makes sense to also be aware of the yield curve. At the moment this is relatively flat which means there is less premium from extending duration, or less penalty to going shorter. This does not always have to be the case and different parts of the yield curve can have different trends.

I personally don't tend to worry about duration or interest rate trends. I think the long term investor in stocks and bonds will do fine with intermediate term bond funds. People with a short term horizon should not pick durations that are too long, though.
I agree but I think I can get a little more return by shortening the duration during rising rates. Once rates are maybe near the top go to intermediate or long. It’s not important to get it exactly correct. When you had the high interest rates in the early 80s and a President and Fed that was committed to fighting inflation those long bonds were great money, riding them all the way down with little risk.

My personal opinion is the bond market is very distorted because of government intervention.

Just refinanced my house at 30 years for 2.85 percent. That is a lot of risk for someone to incur. All there returns could be lost with one bad run of inflation.
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Re: Investing in bonds

Post by 9-5 Suited »

BitTooAggressive wrote: Fri Nov 26, 2021 6:38 am
9-5 Suited wrote: Thu Nov 25, 2021 5:41 pm
BitTooAggressive wrote: Thu Nov 25, 2021 3:03 pm
1937bert wrote: Wed Nov 24, 2021 12:26 pm Best way to invest in bonds in rising interest rate environment?
Bonds are a terrible investment in a rising rate environment.
This is creeping up toward the top of the list of investing myths. It’s demonstrably false but widely believed. If you holds bonds that are duration-matched to your investment horizon you have neutralized interest rate risk. If rates go up, your bonds or bond fund will decline in paper value but the higher yields will bring you to break even at roughly the duration of the fund.

This is driven by inherent bond mathematics. Don’t be drawn in by the short-term impact on the asset value. Unless you have inappropriate bond duration, you’re fine.

Same goes for the people advocating staying in very short bonds. That is terribly misguided advice resulting from the same misunderstanding.
I see nothing wrong with shortening the duration with rates rising and then lengthening the duration with stable or falling rates.

It’s funny that you refer to the loss bonds take during the rise in rates as paper value, but you are restored by the higher yields.

I assure you both the increase in yields and loss of principal are real.

If the rise in interest rates is coupled with a stock pullback and I wish to rebalance I am much better off having switched to the shorter duration. This is no myth.
First of all, the reference to “paper value” is simply shorthand for the marked to market loss a bond that you intend to hold to maturity (or to the duration of the fund) experiences. It’s a paper loss under that constraint as it will disappear as the bond matures. But of course if you sell before that point you will experience a real loss, hence the entire darn point of matching your bond durations to your intended holding period.

And the idea you describe of going short in bonds to wait for rates to rise is called market timing, a principal sin on this forum. It’s no different than saying I’m going to sell my equities and go to cash while waiting for valuations to improve. Market timing is a very bad idea wrought with behavioral bias, as true of bonds as it is stocks.

Don’t believe me? Look up posts on this very forum from 5 years ago discussing what is certain to be a rising rate environment and advocating going to short bonds. Oops! Sucks for those market timers who, shocker, can’t actually predict the bond market better than the rest of the market participants.
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Re: Investing in bonds

Post by arcticpineapplecorp. »

1937bert wrote: Wed Nov 24, 2021 12:26 pm Best way to invest in bonds in rising interest rate environment?
what rising interest rate environment?

the bond market rises and falls and rises and falls and so on and so forth (even over the course of one day this is true, see below):

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BitTooAggressive
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Re: Investing in bonds

Post by BitTooAggressive »

9-5 Suited wrote: Sat Nov 27, 2021 11:34 am
BitTooAggressive wrote: Fri Nov 26, 2021 6:38 am
9-5 Suited wrote: Thu Nov 25, 2021 5:41 pm
BitTooAggressive wrote: Thu Nov 25, 2021 3:03 pm
1937bert wrote: Wed Nov 24, 2021 12:26 pm Best way to invest in bonds in rising interest rate environment?
Bonds are a terrible investment in a rising rate environment.
This is creeping up toward the top of the list of investing myths. It’s demonstrably false but widely believed. If you holds bonds that are duration-matched to your investment horizon you have neutralized interest rate risk. If rates go up, your bonds or bond fund will decline in paper value but the higher yields will bring you to break even at roughly the duration of the fund.

This is driven by inherent bond mathematics. Don’t be drawn in by the short-term impact on the asset value. Unless you have inappropriate bond duration, you’re fine.

Same goes for the people advocating staying in very short bonds. That is terribly misguided advice resulting from the same misunderstanding.
I see nothing wrong with shortening the duration with rates rising and then lengthening the duration with stable or falling rates.

It’s funny that you refer to the loss bonds take during the rise in rates as paper value, but you are restored by the higher yields.

I assure you both the increase in yields and loss of principal are real.

If the rise in interest rates is coupled with a stock pullback and I wish to rebalance I am much better off having switched to the shorter duration. This is no myth.
First of all, the reference to “paper value” is simply shorthand for the marked to market loss a bond that you intend to hold to maturity (or to the duration of the fund) experiences. It’s a paper loss under that constraint as it will disappear as the bond matures. But of course if you sell before that point you will experience a real loss, hence the entire darn point of matching your bond durations to your intended holding period.

And the idea you describe of going short in bonds to wait for rates to rise is called market timing, a principal sin on this forum. It’s no different than saying I’m going to sell my equities and go to cash while waiting for valuations to improve. Market timing is a very bad idea wrought with behavioral bias, as true of bonds as it is stocks.

Don’t believe me? Look up posts on this very forum from 5 years ago discussing what is certain to be a rising rate environment and advocating going to short bonds. Oops! Sucks for those market timers who, shocker, can’t actually predict the bond market better than the rest of the market participants.
The rising rates was a premise of the question.
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Vulcan
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Re: Investing in bonds

Post by Vulcan »

Robot Monster wrote: Thu Nov 25, 2021 6:52 pm
1937bert wrote: Wed Nov 24, 2021 12:26 pm Best way to invest in bonds in rising interest rate environment?
"Rising rates don’t negate benefits of bonds" link
That is a great piece by Roger Aliaga-Diaz, Vanguard Chief Economist.

I used his quote below I once read somewhere as an epigraph to my IPS:

“It's difficult to make market calls above and beyond what the markets have already priced in. Not only do you have to be systematically correct, but everyone else has to be systematically wrong.”
If you torture the data long enough, it will confess to anything. ~Ronald Coase
mary1492
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Re: Investing in bonds

Post by mary1492 »

Vulcan wrote: Sat Nov 27, 2021 4:04 pm
Robot Monster wrote: Thu Nov 25, 2021 6:52 pm
1937bert wrote: Wed Nov 24, 2021 12:26 pm Best way to invest in bonds in rising interest rate environment?
"Rising rates don’t negate benefits of bonds" link
That is a great piece by Roger Aliaga-Diaz, Vanguard Chief Economist.

I used his quote below I once read somewhere as an epigraph to my IPS:

“It's difficult to make market calls above and beyond what the markets have already priced in. Not only do you have to be systematically correct, but everyone else has to be systematically wrong.”
I disagree with the quote. It may be the case if the market was 100% efficient, but it isn't...Fama was demonstrably wrong. Index funds prove the point in that they are buying and selling without regard to any fundamentals, technicals, valuation, or anything at all. They buy and sell on the basis of money inflows and outflows, index reconstitution, and nothing else. So, back to the quote, it doesn't require everyone else having to be systematically wrong. It's simply a matter of identifying market inefficiency and taking advantage of and exploiting it.
exodusNH
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Re: Investing in bonds

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ivgrivchuck wrote: Thu Nov 25, 2021 5:49 pm
1937bert wrote: Wed Nov 24, 2021 12:26 pm Best way to invest in bonds in rising interest rate environment?
I-bonds
I Bonds are great, but they pay 0% nominal. They only look really good right now because of the CPI adjustments. When we get back to 2-2.5% inflation, they won't look so good, though I do intend to keep buying them.
mary1492
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Re: Investing in bonds

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exodusNH wrote: Sat Nov 27, 2021 4:50 pm
ivgrivchuck wrote: Thu Nov 25, 2021 5:49 pm
1937bert wrote: Wed Nov 24, 2021 12:26 pm Best way to invest in bonds in rising interest rate environment?
I-bonds
I Bonds are great, but they pay 0% nominal. They only look really good right now because of the CPI adjustments. When we get back to 2-2.5% inflation, they won't look so good, though I do intend to keep buying them.
You shouldn't care what they pay nominally if you aren't able to present a better alternative...or one that's even close.
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Re: Investing in bonds

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1937bert wrote: Wed Nov 24, 2021 12:26 pm Best way to invest in bonds in rising interest rate environment?
Investing in bonds is straightforward. Predicting whether we will have a rising rate environment moving forward is not. What type of bond portfolio is appropriate for a given investor would be based on their life circumstances and what the rest of their portfolio looks like, and not on forecasting the future trajectory of interest rates.
My postings are my opinion, and never should be construed as a recommendation to buy, sell, or hold any particular investment.
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Re: Investing in bonds

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BitTooAggressive wrote: Sat Nov 27, 2021 1:18 pm The rising rates was a premise of the question.
Asking how to invest in bonds in a rising rate environment is like asking how to invest in stocks in a declining stock price environment. The question is fatally flawed because there is no such way to know you’re in that environment before it happens. Thus, you don’t invest in bonds differently today than you did a year ago.

Pick an AA you can stick with and match your bond duration to your investment horizon. That’s the answer to how to invest in bonds in a “rising rate environment”.
exodusNH
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Re: Investing in bonds

Post by exodusNH »

mary1492 wrote: Sat Nov 27, 2021 4:53 pm
exodusNH wrote: Sat Nov 27, 2021 4:50 pm
ivgrivchuck wrote: Thu Nov 25, 2021 5:49 pm
1937bert wrote: Wed Nov 24, 2021 12:26 pm Best way to invest in bonds in rising interest rate environment?
I-bonds
I Bonds are great, but they pay 0% nominal. They only look really good right now because of the CPI adjustments. When we get back to 2-2.5% inflation, they won't look so good, though I do intend to keep buying them.
You shouldn't care what they pay nominally if you aren't able to present a better alternative...or one that's even close.
My point was that people are going gaga over 7%, without taking into account that's the annualized rate, only good for six months, and certainly not guaranteed. Are the hypothetical "they" interested in I Bonds because they are paying 7% or because they feel that an inflation-protected, tax-deferred bond has a place in their portfolio?

If they are jumping on them because of the 7%, it's important to understand that they'll probably pay closer to 2% for the majority of the holding period. EE Bonds could be a better option if you can hold them for exactly 20 years.

Nominal bonds should adjust ahead of inflation in the long run.
BitTooAggressive
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Re: Investing in bonds

Post by BitTooAggressive »

9-5 Suited wrote: Sat Nov 27, 2021 11:34 pm
BitTooAggressive wrote: Sat Nov 27, 2021 1:18 pm The rising rates was a premise of the question.
Asking how to invest in bonds in a rising rate environment is like asking how to invest in stocks in a declining stock price environment. The question is fatally flawed because there is no such way to know you’re in that environment before it happens. Thus, you don’t invest in bonds differently today than you did a year ago.

Pick an AA you can stick with and match your bond duration to your investment horizon. That’s the answer to how to invest in bonds in a “rising rate environment”.
I disagree. When interest rates are almost zero and you have inflation interest rates will be going higher.
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