Bonds don't seem to hedge against downturns anymore

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Vulcan
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Re: Bonds don't seem to hedge against downturns anymore

Post by Vulcan »

Beensabu wrote: Tue Jun 21, 2022 4:38 pm
Vulcan wrote: Tue Jun 21, 2022 3:00 pm
Beensabu wrote: Tue Jun 21, 2022 2:18 pm The NAV of a bond fund goes up and down. Both directions. And you still get a positive real return over the long-term
Maybe
Is this where we quibble about the definition of "long-term"?
As John Keynes famously quipped, in the long run we are all dead.

In the meantime, if you bought Total Bond index fund 12 years ago, you are sitting on negative real returns right now.

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If you torture the data long enough, it will confess to anything. ~Ronald Coase
wander
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Re: Bonds don't seem to hedge against downturns anymore

Post by wander »

We only own EE and I bonds ($40k every year) and those seem to perform fine lately. The downside is we cannot sell bonds to buy equity.
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HomerJ
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Re: Bonds don't seem to hedge against downturns anymore

Post by HomerJ »

Marseille07 wrote: Tue Jun 21, 2022 7:45 pm
HomerJ wrote: Tue Jun 21, 2022 7:06 pm No, I see them as all the same.

You pay the piper with yields falling... Sure, NAV went up.. your bond fund is worth more... But it's yielding less and if you're retired, you have to SELL some of the bond fund to get that 3%-4% withdrawal. Which means, next year, you have less in the fund paying a low dividend.

I'd rather the bonds just pay 4%+, and I get the dividends each year, and not touch the bond fund.
Not at all the same, very different.

Do you think the 1982 retirees are concerned that the yields fell, their NAV increased and they have to sell the bond fund to get that 3%~4% withdrawal? Of course not. They're super happy that the NAV increased.

Now the opposite is happening; if the above is true, then the opposite is also true.
Nope, completely the same...

When I'm getting 8% a year from bonds in 5 years, and my 50% bonds dividends are completely funding my retirement, I'll be happy too.
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Vulcan
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Re: Bonds don't seem to hedge against downturns anymore

Post by Vulcan »

BigJohn wrote: Tue Jun 21, 2022 7:57 pm
Marseille07 wrote: Tue Jun 21, 2022 6:00 pm I don't follow why you guys think you can approximate when bond funds recover.

If BND's duration is 6.9 years, could you tell me when you think BND recovers? The math isn't as simple as 2022 + 6.9 = 2029.
The point is I don't really care as long as I know I will recover sometime between 2027 and 2031.
In nominal terms.
If you torture the data long enough, it will confess to anything. ~Ronald Coase
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Re: Bonds don't seem to hedge against downturns anymore

Post by Beensabu »

Vulcan wrote: Tue Jun 21, 2022 9:30 pm
Beensabu wrote: Tue Jun 21, 2022 4:38 pm
Vulcan wrote: Tue Jun 21, 2022 3:00 pm
Beensabu wrote: Tue Jun 21, 2022 2:18 pm The NAV of a bond fund goes up and down. Both directions. And you still get a positive real return over the long-term
Maybe
Is this where we quibble about the definition of "long-term"?
As John Keynes famously quipped, in the long run we are all dead.

In the meantime, if you bought Total Bond index fund 12 years ago, you are sitting on negative real returns right now.
It's true. At least it still beat cash.
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Marseille07
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Re: Bonds don't seem to hedge against downturns anymore

Post by Marseille07 »

HomerJ wrote: Tue Jun 21, 2022 10:46 pm Nope, completely the same...

When I'm getting 8% a year from bonds in 5 years, and my 50% bonds dividends are completely funding my retirement, I'll be happy too.
8% isn't so rosy when your NAV decreases by 35% as the yields rise from 3% to 8% in 5 years. "50% bonds dividends" ain't enough to finance 3~4% of withdrawals at that point.

This is why, very generally speaking, rising yields = bad, falling yields = good.
Last edited by Marseille07 on Tue Jun 21, 2022 11:16 pm, edited 6 times in total.
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Re: Bonds don't seem to hedge against downturns anymore

Post by BigJohn »

Vulcan wrote: Tue Jun 21, 2022 10:51 pm
BigJohn wrote: Tue Jun 21, 2022 7:57 pm
Marseille07 wrote: Tue Jun 21, 2022 6:00 pm I don't follow why you guys think you can approximate when bond funds recover.

If BND's duration is 6.9 years, could you tell me when you think BND recovers? The math isn't as simple as 2022 + 6.9 = 2029.
The point is I don't really care as long as I know I will recover sometime between 2027 and 2031.
In nominal terms.
Yes, that’s true but no different than nominal individual bonds were the principle is eroded by inflation. That’s why 60% of my bonds are TIPS.
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Vulcan
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Re: Bonds don't seem to hedge against downturns anymore

Post by Vulcan »

BigJohn wrote: Tue Jun 21, 2022 11:06 pm
Vulcan wrote: Tue Jun 21, 2022 10:51 pm
BigJohn wrote: Tue Jun 21, 2022 7:57 pm
Marseille07 wrote: Tue Jun 21, 2022 6:00 pm I don't follow why you guys think you can approximate when bond funds recover.

If BND's duration is 6.9 years, could you tell me when you think BND recovers? The math isn't as simple as 2022 + 6.9 = 2029.
The point is I don't really care as long as I know I will recover sometime between 2027 and 2031.
In nominal terms.
Yes, that’s true but no different than nominal individual bonds were the principle is eroded by inflation. That’s why 60% of my bonds are TIPS.
If you bought Vanguard TIPS Fund 10 years ago, you are sitting on negative real returns.

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If you torture the data long enough, it will confess to anything. ~Ronald Coase
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Re: Bonds don't seem to hedge against downturns anymore

Post by BigJohn »

Vulcan wrote: Tue Jun 21, 2022 11:13 pm
BigJohn wrote: Tue Jun 21, 2022 11:06 pm
Vulcan wrote: Tue Jun 21, 2022 10:51 pm
BigJohn wrote: Tue Jun 21, 2022 7:57 pm
Marseille07 wrote: Tue Jun 21, 2022 6:00 pm I don't follow why you guys think you can approximate when bond funds recover.

If BND's duration is 6.9 years, could you tell me when you think BND recovers? The math isn't as simple as 2022 + 6.9 = 2029.
The point is I don't really care as long as I know I will recover sometime between 2027 and 2031.
In nominal terms.
Yes, that’s true but no different than nominal individual bonds were the principle is eroded by inflation. That’s why 60% of my bonds are TIPS.
If you bought Vanguard TIPS Fund 10 years ago, you are sitting on negative real returns.

Image
Not quite sure what point you are trying to make. This exchange started as a comment on individual bonds vs a bond fund and recovery from interest rate increases. TIPS have the same duration risk as any other bond so the drop in the last year is to be expected. Just bonds doing what bonds are supposed to do
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Vulcan
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Re: Bonds don't seem to hedge against downturns anymore

Post by Vulcan »

BigJohn wrote: Tue Jun 21, 2022 11:28 pm Not quite sure what point you are trying to make.
I am simply pointing out, that just like the nominals, TIPS do not in fact always recover in real terms over periods of over a decade.
If you torture the data long enough, it will confess to anything. ~Ronald Coase
mary1492
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Re: Bonds don't seem to hedge against downturns anymore

Post by mary1492 »

BigJohn wrote: Tue Jun 21, 2022 7:54 pm
Individual bonds, on the other hand, can have bid-ask spreads of fifty to five hundred basis points. No, this isn't a typo. You will, unfortunately, have no idea that you are paying these hefty fees to the market maker. This is one of the financial industry's dirty little secrets. Okay, maybe not so little.
First, let's get terminology correct - there are no market makers in the bond markets. There is no requirement to have bids/offers on any security. There are "dealers" - analogous to car dealers if you like. They may offer to buy bonds which someone wants to sell, or they may not. Likewise, they may turn around and sell bonds which they have acquired, or they may not (generally they will). For bonds they want to sell, they may offer them for the hefty markup, which you have come to believe in, or they may sell for a loss. The latter has become more common YTD as a result of rising interest rates coupled with poor liquidity (relative to equity markets), at least in the municipal bond market. The key here is that there is no such thing as a "market order" when we are discussing bonds, and thus no such thing as a "market maker" that is always there to fill a market order.

At least in the municipal bond market, it is generally very clear what the spreads are. All trades are publicly logged and available for everyone to see. When I purchase a municipal bond, 90%+ of the time I know what the dealer paid for them, the date/time the dealer purchased them, and I can bid accordingly when that bond is being offered. Liquidity is extremely poor. Further, because (at least YTD) of volatility in interest rates coupled with the poor liquidity, it is not unusual being able to purchase bonds for less than what the dealer paid for them. I am at an advantage relative to the big institutional investor who is looking to purchase 100, 500, or 1000 or more bonds at a time. I'm more than happy with 5, 10, or 20...or not purchasing at all. The bond fund manager has to purchase or sell, I have no particular requirement any day of the week.

When we're discussing the secondary treasury market (in the follow up comments), we do not see these spreads because liquidity is extremely good - with a robust market. However, once again, there are no "market makers". What we see as far as the narrow spreads is a result of the instrument, the outstanding number of bonds, what it represents, and the security of the issuer standing behind it.
Well, I'm glad you've found a system that works for you. My comments are based on two well respected and expert forum contributors. Even if you assume you can take cost out of the equation, the diversification and liquidity benefits remain.
It is not "a system" at all. It is simply a matter of educating myself, understanding how the market works, and understanding the bond(s) I am purchasing (or very infrequently, selling - and always for a profit). These are things which the bond fundholder never does, instead deferring to the fund manager (who has ulterior motives) or gambling by deferring to the market (in the case of index funds/ETFs).

What other folks say or do is also unimportant to me. Some folks will take the words of "gurus" at face value, never investigate further (generally for fear of loss), and thus "settle" for what the market gives them - which is "gambling" and not "investing" as most would like to believe. Their favorite quotes are along the lines of "Nobody knows nothing and so I just put my money in an index fund" or "How can I know more than all the professionals and the market"? ...and then we have a period like we have this year, and we see a flood of threads questioning why folks have a bond allocation at all.

Why Rick Ferri chooses to own a municipal bond fund is good for him, and for most folks who like to think they are "investing". If you're satisfied with what the market will hand you, and are willing to sit passively and just watch it happen, I am happy that meets your objectives. My returns (i.e. lack of losses) this year have solidified my views. The amount of time/effort I choose to put in to bond research and selection has easily paid for itself. My bond portfolio will easily recover by year end, and going forward I will have increased my cash flows and yields.

When it comes to municipal bonds, bond fundholders are at a significant disadvantage. Any fees paid for management is too much - because there is very little knowledge needed to succeed in municipal bonds, the risks are that low. I will refer you to a report which Moody's updates every other year, which goes in to great depth about the municipal bond market, and how the risk of default is orders of magnitude lower than in the corporate bond market for equivalently rated bonds. Pay particular attention to Exhibit 4 on Page 12. I'd contend that if we stick to investment grade munis (A-rated or better), we could have a monkey throw darts at a wall of them to create a portfolio and never see a default (1 in 10,000 over 10 years).

https://www.fidelity.com/bin-public/060 ... l-bond.pdf

I am sure that Rick Ferri is familiar with this report and would concur that any municipal bond investor who simply sticks to investment grade munis (A-rated or better) would likely never see a single default in his/her lifetime. Bond funds wade in to the non-investment grade space, looking for yield boosters, but at higher (supposedly calculated) risk. They will claim this is why you pay for fund management, to uncover these hidden gems...and then you find that they own a nice chunk of Puerto Rico munis.

My municipal bond guru is James Klotz at FMSBonds. He will tell you everything I have just posted and vouch how municipal bond FUND investors are at a distinct disadvantage to folks who hold a portfolio of individual munis.

https://www.fmsbonds.com/news-and-persp ... nt-values/
On a positive note, holders of individual bonds have a much better outlook than investors in muni mutual funds and ETFs.

The managed mutual funds and ETFs will face a much greater challenge to return to their 2021 prices than will their individual bond counterparts.

Investors in individual bonds have a stated maturity date and fixed-income payments that cannot be altered.

Mutual Funds and ETFs have no maturity date as they contain a variety of bonds with various maturity dates. This means there is no promise to return their original principal and dividend payments are not fixed.

The decline in the Net Asset Values of these funds can be quite unsettling, considering the holders are also assessed management fees.
I've said enough. I really did not want to get in to a debate on this. I just get really tired of seeing the same, many times unjustified claims being made when it comes to bonds and funds, specifically when it comes to municipal bonds. I'll tap out. If you want to continue discussing or refuting, go for it.

Feel free to drop me a note on anything above - am happy to share my experience.
SantaClaraSurfer
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Re: Bonds don't seem to hedge against downturns anymore

Post by SantaClaraSurfer »

mary1492 wrote: Wed Jun 22, 2022 2:35 am When it comes to municipal bonds, bond fundholders are at a significant disadvantage. Any fees paid for management is too much...
VCLAX: Vanguard CA LT Muni Fund
.09% ER
42% Portfolio Turnover
Bonds Held: 1426
Avg. Stated Maturity: 17.4 years
Avg. Duration: 6.2 years
AUM: $4.7 B. (Includes $500M of VCITX)

I don't think the above fund is a bad investment moving forward, or the fees too much.

I own VCITX (ER .17%) and am building to VCLAX. The tax equivalent yield is currently over 5% for my marginal household rate, and purchasing steadily is a win/win as my average share price has been declining and my yield increasing. If yields revert, my NAV should snap back again; if share prices drop further, the tax equivalent yields should become even more appealing.

CA buyer note: my understanding is the capital gains on any eventual sale from this fund are currently subject to CA State Income Tax (while the distributions are not.)
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Re: Bonds don't seem to hedge against downturns anymore

Post by HootingSloth »

Vulcan wrote: Tue Jun 21, 2022 11:13 pm
BigJohn wrote: Tue Jun 21, 2022 11:06 pm
Vulcan wrote: Tue Jun 21, 2022 10:51 pm
BigJohn wrote: Tue Jun 21, 2022 7:57 pm
Marseille07 wrote: Tue Jun 21, 2022 6:00 pm I don't follow why you guys think you can approximate when bond funds recover.

If BND's duration is 6.9 years, could you tell me when you think BND recovers? The math isn't as simple as 2022 + 6.9 = 2029.
The point is I don't really care as long as I know I will recover sometime between 2027 and 2031.
In nominal terms.
Yes, that’s true but no different than nominal individual bonds were the principle is eroded by inflation. That’s why 60% of my bonds are TIPS.
If you bought Vanguard TIPS Fund 10 years ago, you are sitting on negative real returns.

Image
Just for some additional context (I had to look myself because I was curious), VIPSX has an effective duration of about 7 years. When VIPSX was purchased on May 31, 2012, the 7-year daily Treasury par real yield curve rate was -0.82%. Over the subsequent 10 years, VIPSX has returned -0.62% real, so it has done a bit better than what you may have expected when you bought it.
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Re: Bonds don't seem to hedge against downturns anymore

Post by Elysium »

HootingSloth wrote: Thu Jun 23, 2022 8:30 am
Vulcan wrote: Tue Jun 21, 2022 11:13 pm
BigJohn wrote: Tue Jun 21, 2022 11:06 pm
Vulcan wrote: Tue Jun 21, 2022 10:51 pm
BigJohn wrote: Tue Jun 21, 2022 7:57 pm
The point is I don't really care as long as I know I will recover sometime between 2027 and 2031.
In nominal terms.
Yes, that’s true but no different than nominal individual bonds were the principle is eroded by inflation. That’s why 60% of my bonds are TIPS.
If you bought Vanguard TIPS Fund 10 years ago, you are sitting on negative real returns.

Image
Just for some additional context (I had to look myself because I was curious), VIPSX has an effective duration of about 7 years. When VIPSX was purchased on May 31, 2012, the 7-year daily Treasury par real yield curve rate was -0.82%. Over the subsequent 10 years, VIPSX has returned -0.62% real, so it has done a bit better than what you may have expected when you bought it.
VAIPX has returned on or above par inflation since it's existence, and in past 10 years. Last six months have skewed things a bit because of the NAV hit taken from rising real yields, but it's misleading to take the last 6 months NAV hit to say past 10 years have been below inflation, it has not. Inflation averaged below 2% 10 years prior to 2021 and VAIPX returned above that. 2021 inflation was 7% and VAIPX performed 5.68%, below inflation since real rates were negative. This was known at the time. So you accepted negative real rates since it was a better deal than nominal bonds at that time, and it did exactly as expected. Then this year it has taken a hit, but still less than nominals, and the higher real yields will make up lost NAV over the next 7 years. Meanwhile current real yield is -0.48%, and I expect it to get to positive territory by end of year or beginning next year.

Given that VAIPX should return on par with inflation over next 7 years, if not above. It doesn't matter whether it returned exactly above inflation or not. For instance, if inflation averages 5% over next 7 years and VAIPX returned -0.50% real then that's a win, you still kept about the same level as inflation. The rest is how you adjust your spending and how inflation is affecting your life personally, as everyone's case is slightly different. I am fairly confident of holding VAIPX for a good portion of my bond portfolio over the next 7 years knowing it is going to give me inflation matching, plus or minus real rates and any change in NAV due to rate changes.
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Re: Bonds don't seem to hedge against downturns anymore

Post by HootingSloth »

Elysium wrote: Thu Jun 23, 2022 11:05 am
HootingSloth wrote: Thu Jun 23, 2022 8:30 am
Vulcan wrote: Tue Jun 21, 2022 11:13 pm If you bought Vanguard TIPS Fund 10 years ago, you are sitting on negative real returns.
Just for some additional context (I had to look myself because I was curious), VIPSX has an effective duration of about 7 years. When VIPSX was purchased on May 31, 2012, the 7-year daily Treasury par real yield curve rate was -0.82%. Over the subsequent 10 years, VIPSX has returned -0.62% real, so it has done a bit better than what you may have expected when you bought it.
VAIPX has returned on or above par inflation since it's existence, and in past 10 years. Last six months have skewed things a bit because of the NAV hit taken from rising real yields, but it's misleading to take the last 6 months NAV hit to say past 10 years have been below inflation, it has not. Inflation averaged below 2% 10 years prior to 2021 and VAIPX returned above that. 2021 inflation was 7% and VAIPX performed 5.68%, below inflation since real rates were negative. This was known at the time. So you accepted negative real rates since it was a better deal than nominal bonds at that time, and it did exactly as expected. Then this year it has taken a hit, but still less than nominals, and the higher real yields will make up lost NAV over the next 7 years. Meanwhile current real yield is -0.48%, and I expect it to get to positive territory by end of year or beginning next year.

Given that VAIPX should return on par with inflation over next 7 years, if not above. It doesn't matter whether it returned exactly above inflation or not. For instance, if inflation averages 5% over next 7 years and VAIPX returned -0.50% real then that's a win, you still kept about the same level as inflation. The rest is how you adjust your spending and how inflation is affecting your life personally, as everyone's case is slightly different. I am fairly confident of holding VAIPX for a good portion of my bond portfolio over the next 7 years knowing it is going to give me inflation matching, plus or minus real rates and any change in NAV due to rate changes.
You may have meant to respond to Vulcan, or maybe my post was unclear. TIPS funds seem to me to be doing what they are supposed to be doing, and I think people who purchased them, and understood them at the time they made the purchase, should be pleased.
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Re: Bonds don't seem to hedge against downturns anymore

Post by Vulcan »

HootingSloth wrote: Thu Jun 23, 2022 11:13 am You may have meant to respond to Vulcan, or maybe my post was unclear. TIPS funds seem to me to be doing what they are supposed to be doing, and I think people who purchased them, and understood them at the time they made the purchase, should be pleased.
Yeah. I own TIPS myself. I was simply responding to an earlier poster who implied that given a long-enough time frame bonds will always recover losses:
Beensabu wrote: Tue Jun 21, 2022 2:18 pm The NAV of a bond fund goes up and down. Both directions. And you still get a positive real return over the long-term
Inflation-adjusted bond recovery is not something one can count on. But with TIPS, one can at least hope to limit the real downside in an inflationary environment.
If you torture the data long enough, it will confess to anything. ~Ronald Coase
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Re: Bonds don't seem to hedge against downturns anymore

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This topic is now in the Investing - Theory, News & General forum (general theoretical question on investments).
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Re: Bonds don't seem to hedge against downturns anymore

Post by BigJohn »

Vulcan wrote: Thu Jun 23, 2022 11:33 am
HootingSloth wrote: Thu Jun 23, 2022 11:13 am You may have meant to respond to Vulcan, or maybe my post was unclear. TIPS funds seem to me to be doing what they are supposed to be doing, and I think people who purchased them, and understood them at the time they made the purchase, should be pleased.
Yeah. I own TIPS myself. I was simply responding to an earlier poster who implied that given a long-enough time frame bonds will always recover losses:
Beensabu wrote: Tue Jun 21, 2022 2:18 pm The NAV of a bond fund goes up and down. Both directions. And you still get a positive real return over the long-term
Inflation-adjusted bond recovery is not something one can count on. But with TIPS, one can at least hope to limit the real downside in an inflationary environment.
The point I was making was that they would recover losses in a similar way and timeframe as individual bonds not that there was any “guarantee”.

And yes, TIPS are doing exactly what I bought them for 4 years ago. Looking forward to the dividend distribution at the end of this month :beer
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Re: Bonds don't seem to hedge against downturns anymore

Post by Charles Joseph »

K8ya wrote: Mon Jun 20, 2022 7:53 am Seems in 08 and now they both fell when the downturn happened. Am I misunderstanding their purpose? I feel like just going 100% stock if they don't actually guard against downturns which are temporary anyways
S&P fund is down 20% YTD. Total bond fund is down 11% YTD. Half as much.

In a rising rate environment, when bonds and stocks tend to decline together, that is still ballast, is it not?
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Re: Bonds don't seem to hedge against downturns anymore

Post by rockstar »

Charles Joseph wrote: Thu Jun 23, 2022 6:35 pm
K8ya wrote: Mon Jun 20, 2022 7:53 am Seems in 08 and now they both fell when the downturn happened. Am I misunderstanding their purpose? I feel like just going 100% stock if they don't actually guard against downturns which are temporary anyways
S&P fund is down 20% YTD. Total bond fund is down 11% YTD. Half as much.

In a rising rate environment, when bonds and stocks tend to decline together, that is still ballast, is it not?
Add the 8% of inflation, and both look terrible. It really boils down to duration risk here. If you were in t-bills, this would look better even with inflation. And you have given up equity returns to hold those bonds as well.
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Re: Bonds don't seem to hedge against downturns anymore

Post by z3r0c00l »

After inflation this was the worst year for bonds since 1842 and they still offered more stability than stocks.

So I would say cut them some slack. :moneybag
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Re: Bonds don't seem to hedge against downturns anymore

Post by rockstar »

z3r0c00l wrote: Thu Jun 23, 2022 7:03 pm After inflation this was the worst year for bonds since 1842 and they still offered more stability than stocks.

So I would say cut them some slack. :moneybag
Go back three years, five years, ten years and compare. Bonds have been a drag on returns and provided very little ballast when you take into account the opportunity cost of holding them.
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Re: Bonds don't seem to hedge against downturns anymore

Post by z3r0c00l »

rockstar wrote: Thu Jun 23, 2022 7:25 pm
z3r0c00l wrote: Thu Jun 23, 2022 7:03 pm After inflation this was the worst year for bonds since 1842 and they still offered more stability than stocks.

So I would say cut them some slack. :moneybag
Go back three years, five years, ten years and compare. Bonds have been a drag on returns and provided very little ballast when you take into account the opportunity cost of holding them.
Bonds offered considerable ballast in 2009, 2019, and 2020. This year, again their worst in 180 years, bonds still offered some ballast against stocks. Short bonds in particular, they are down 10% or so after inflation. Stocks are down about 30% in the same time.
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Re: Bonds don't seem to hedge against downturns anymore

Post by HomerJ »

rockstar wrote: Thu Jun 23, 2022 7:25 pm
z3r0c00l wrote: Thu Jun 23, 2022 7:03 pm After inflation this was the worst year for bonds since 1842 and they still offered more stability than stocks.

So I would say cut them some slack. :moneybag
Go back three years, five years, ten years and compare. Bonds have been a drag on returns and provided very little ballast when you take into account the opportunity cost of holding them.
Opportunity cost only works looking backwards.

Bonds kept me from doing anything in 2011, 2016, 2018, 2020.

Even 2022.

I could have lost my job in any of those years, especially 2020... Having a ton of bonds made 2020 EASY.

Bonds (which includes cash/CDs/stable-value funds/I-bonds) absolutely have given me peace of mind over the past 10 years.

Looking backwards is pointless and stupid.

OF COURSE, I would have been 100% stocks (triple-leveraged probably) if I could look backwards...
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Re: Bonds don't seem to hedge against downturns anymore

Post by rockstar »

HomerJ wrote: Thu Jun 23, 2022 8:29 pm
rockstar wrote: Thu Jun 23, 2022 7:25 pm
z3r0c00l wrote: Thu Jun 23, 2022 7:03 pm After inflation this was the worst year for bonds since 1842 and they still offered more stability than stocks.

So I would say cut them some slack. :moneybag
Go back three years, five years, ten years and compare. Bonds have been a drag on returns and provided very little ballast when you take into account the opportunity cost of holding them.
Opportunity cost only works looking backwards.

Bonds kept me from doing anything in 2011, 2016, 2018, 2020.

Even 2022.

I could have lost my job in any of those years, especially 2020... Having a ton of bonds made 2020 EASY.

Bonds (which includes cash/CDs/stable-value funds/I-bonds) absolutely have given me peace of mind over the past 10 years.

Looking backwards is pointless and stupid.

OF COURSE, I would have been 100% stocks (triple-leveraged probably) if I could look backwards...
This is hindsight bias. If you bought bonds because they had provided a ballast in the past, then it's the same argument.
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Re: Bonds don't seem to hedge against downturns anymore

Post by HomerJ »

rockstar wrote: Thu Jun 23, 2022 9:04 pm This is hindsight bias. If you bought bonds because they had provided a ballast in the past, then it's the same argument.
I'm not sure what you mean. How is it the same argument?

Your argument is that bonds was a bad choice because the stocks did well.

That's only known looking backwards. Meanwhile having a large chunk in bonds did keep me from selling during stock downturns.

Even today. Yes, Total Bond has dropped quite a bit, but not as much as stocks, and I have other fixed-income... cash, CDs, stable-value fund, short-term Treasury, and IBonds.

So far, all of those have worked well.
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Re: Bonds don't seem to hedge against downturns anymore

Post by Tom_T »

If the argument is "stocks did better than bonds so it was a waste of time to own bonds", that is meaningless. Is the suggestion that a 60-year-old should be 100% equities? The presumption seems to be that the only investments worth owning are those that have the highest potential return. That, of course, is absolutely false.
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Re: Bonds don't seem to hedge against downturns anymore

Post by steve roy »

Taylor Larimore wrote: Mon Jun 20, 2022 8:12 am
K8ya wrote: Mon Jun 20, 2022 7:53 am Seems in 08 and now they both fell when the downturn happened. Am I misunderstanding their purpose? I feel like just going 100% stock if they don't actually guard against downturns which are temporary anyways
K8ya:

Vanguard Total Bond Market Index Fund gained +5% in "08." No one knows what it will do this year.

Best wishes.
Taylor
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Vanguard's short-term TIPS ETF gained 5.3% in 2021.

Not too shabby.
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Re: Bonds don't seem to hedge against downturns anymore

Post by rockstar »

HomerJ wrote: Thu Jun 23, 2022 10:47 pm
rockstar wrote: Thu Jun 23, 2022 9:04 pm This is hindsight bias. If you bought bonds because they had provided a ballast in the past, then it's the same argument.
I'm not sure what you mean. How is it the same argument?

Your argument is that bonds was a bad choice because the stocks did well.

That's only known looking backwards. Meanwhile having a large chunk in bonds did keep me from selling during stock downturns.

Even today. Yes, Total Bond has dropped quite a bit, but not as much as stocks, and I have other fixed-income... cash, CDs, stable-value fund, short-term Treasury, and IBonds.

So far, all of those have worked well.
The ballast argument is also only looking backwards. What I'm saying is that you can't predict the future based on the past. Back testing doesn't help while your portfolio is dropping.
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Re: Bonds don't seem to hedge against downturns anymore

Post by Marseille07 »

rockstar wrote: Fri Jun 24, 2022 11:04 am The ballast argument is also only looking backwards. What I'm saying is that you can't predict the future based on the past. Back testing doesn't help while your portfolio is dropping.
It's all about the yields though. If the Fed slashes the rates, bonds do well. If they keep hiking, they don't.

I'm well aware the Ten is not the FF rate, but they're interwoven.
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Re: Bonds don't seem to hedge against downturns anymore

Post by MnD »

Sometimes they do and sometimes they don't.
For retirees in the 1966-82 sequences, all that adding bonds did is help them go broke sooner.
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Re: Bonds don't seem to hedge against downturns anymore

Post by dbr »

I guess anyone who thinks investing is a magic enterprise to just get richer and richer year in and year out is going to be rudely disappointed.

HTHU
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Re: Bonds don't seem to hedge against downturns anymore

Post by Beensabu »

rockstar wrote: Fri Jun 24, 2022 11:04 am Back testing doesn't help while your portfolio is dropping.
Sure it does! At least it does until Vulcan comes along and rains on your parade by calling 12 years long term. :P
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Re: Bonds don't seem to hedge against downturns anymore

Post by JackoC »

rockstar wrote: Fri Jun 24, 2022 11:04 am
HomerJ wrote: Thu Jun 23, 2022 10:47 pm
rockstar wrote: Thu Jun 23, 2022 9:04 pm This is hindsight bias. If you bought bonds because they had provided a ballast in the past, then it's the same argument.
I'm not sure what you mean. How is it the same argument?

Your argument is that bonds was a bad choice because the stocks did well.

That's only known looking backwards. Meanwhile having a large chunk in bonds did keep me from selling during stock downturns.

Even today. Yes, Total Bond has dropped quite a bit, but not as much as stocks, and I have other fixed-income... cash, CDs, stable-value fund, short-term Treasury, and IBonds.

So far, all of those have worked well.
The ballast argument is also only looking backwards. What I'm saying is that you can't predict the future based on the past. Back testing doesn't help while your portfolio is dropping.
Back testing can be worse than useless I agree. Sometimes people try to estimate expected return for bonds from now based on past bond return But if f I buy a 30 yr zero coupon bond at yield 3% APY (price .412) and in 10 yrs the 20 yr yield drops to 1%, my return for the first 10 yrs , (.8195/.412)^(1/10)-1=7.1% is an obviously wrong estimate of my return for the remaining 20 yrs, which is that case is simply 1%. People showing color graphs of past bond fund returns as if that's relevant to future ones aren't exactly doing that, but a variation on it. On a first order basis yield now to the investing horizon now is the best estimate of bond expected return to that horizon*. Past return is at best irrelevant.

That said, certain *relative* relationships might be estimated from past results, especially where there is no forward-looking market indicator, comparable to yield. There are some complicated derivative products whose value depends on correlation inputs and we might figure those 'marks' are set carefully with real money to lose if set too optimistically and real business to lose if set too pessimistically from the dealer POV. However that info isn't very transparent even in the professional market, much less something you can Google. With no accessible market based forward looking indicator for say bond/stock return correlation, and you have to assume something in a portfolio context, there's nowhere else to look but past results. You just need to realize correlation is notoriously unstable. The statement 'bonds don't seem to hedge stocks anymore' is naive not because it's backward looking but because if you looked back further, you'd find long term govt bond and stock return correlation was fairly close to zero. A joint stock/bond sell off is what you expect when the stock sell off is driven by some combination of rise in inflation and market expectation of higher real rates to counter it (as of 6/24 it's almost purely the latter, the 10 yr TIPS B/e now is actually down slightly on the year, the sell off is slightly more than all in the rise in real term rates, 1,54% rise in the 10 yr TIPS yield; higher real rates directly reduce the present value of real future earnings so bad for stocks, as opposed to an increase in expected inflation which for moderate inflation we might assume will be compensated by earnings also inflating so perhaps neutral for stocks).

*once basics like that are understood, one can proceed to secondary topics like term premium, a positive term premium could add to the return of a constant maturity X bond position over a horizon of Y years, Y>X; often people don't include return 'leakage' factors like embedded call/prepayment options and sales of downgraded bonds from the non-treasury components of 'total bond', though that leakage can be significant, etc.
Last edited by JackoC on Sat Jun 25, 2022 10:38 am, edited 1 time in total.
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Re: Bonds don't seem to hedge against downturns anymore

Post by burritoLover »

rockstar wrote: Thu Jun 23, 2022 7:25 pm
z3r0c00l wrote: Thu Jun 23, 2022 7:03 pm After inflation this was the worst year for bonds since 1842 and they still offered more stability than stocks.

So I would say cut them some slack. :moneybag
Go back three years, five years, ten years and compare. Bonds have been a drag on returns and provided very little ballast when you take into account the opportunity cost of holding them.
What relevance does 3, 5, or 10 years have with any asset class? It is just noise. Doesn't inform you of anything. Bond yields would be a lot lower if they guaranteed to not be a drag on returns over 3, 5 or 10 years.
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Re: Bonds don't seem to hedge against downturns anymore

Post by rockstar »

burritoLover wrote: Sat Jun 25, 2022 8:05 am
rockstar wrote: Thu Jun 23, 2022 7:25 pm
z3r0c00l wrote: Thu Jun 23, 2022 7:03 pm After inflation this was the worst year for bonds since 1842 and they still offered more stability than stocks.

So I would say cut them some slack. :moneybag
Go back three years, five years, ten years and compare. Bonds have been a drag on returns and provided very little ballast when you take into account the opportunity cost of holding them.
What relevance does 3, 5, or 10 years have with any asset class? It is just noise. Doesn't inform you of anything. Bond yields would be a lot lower if they guaranteed to not be a drag on returns over 3, 5 or 10 years.
When you buy a bond, you should only expect to collect the YTM. You shouldn't expect anything else.
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Re: Bonds don't seem to hedge against downturns anymore

Post by garlandwhizzer »

Bonds will diversify in the future when we have a significant recession which has an above average probability within the next 18 months. When the economy goes into the tank, the lemmings will run from equity back into bonds. Don't give up on them IMO. Shorten your average bond duration, if necessary, to stabilize fixed income principal value. Most of the damage to bonds is over or almost over, although don't expect them to do historically well going forward. It is less clear that we're now at the apex of damage to equities. It may be early to buy the dip. Forward profit estimates are currently too high IMO, not reflecting the potential economic damage of rising rates on future corporate profits. Another leg down in equity and in the economy is a real possibility.

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Re: Bonds don't seem to hedge against downturns anymore

Post by nedsaid »

I don't have a market forecast other than I believe that the worst for bonds is over and if and when inflation rates start to fall, bonds will then start to recover. The ultimate investor's nightmare Is 1970's Stagflation. Is that frightening scenario in our future? Don't know but certainly it is a credible possibility. Stagflation is tough on both stocks and bonds.
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Re: Bonds don't seem to hedge against downturns anymore

Post by rockstar »

nedsaid wrote: Sat Jun 25, 2022 12:54 pm I don't have a market forecast other than I believe that the worst for bonds is over and if and when inflation rates start to fall, bonds will then start to recover. The ultimate investor's nightmare Is 1970's Stagflation. Is that frightening scenario in our future? Don't know but certainly it is a credible possibility. Stagflation is tough on both stocks and bonds.
I'd wait for a couple of months of inflation falling and the Fed backing off on raising rates further before calling it all over. We've had a good week for equities, but bond yields have also dropped a ton on a percentage basis too. And we have no idea how Q2 earnings are going to go over.
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Re: Bonds don't seem to hedge against downturns anymore

Post by nedsaid »

rockstar wrote: Sat Jun 25, 2022 1:09 pm
nedsaid wrote: Sat Jun 25, 2022 12:54 pm I don't have a market forecast other than I believe that the worst for bonds is over and if and when inflation rates start to fall, bonds will then start to recover. The ultimate investor's nightmare Is 1970's Stagflation. Is that frightening scenario in our future? Don't know but certainly it is a credible possibility. Stagflation is tough on both stocks and bonds.
I'd wait for a couple of months of inflation falling and the Fed backing off on raising rates further before calling it all over. We've had a good week for equities, but bond yields have also dropped a ton on a percentage basis too. And we have no idea how Q2 earnings are going to go over.
Looking at the US Treasury Yield Curve, interest rates have dropped since June 14th. The 30 year yield has dropped from 3.45% to 3.26%, the 10 year from 3.49% to 3.13%, the 5 year from 3.61% to 3.18%, and the one year from 3.15% to 2.83%. I wouldn't call that a ton but it isn't insignificant either. It looks like inflation expectations are falling to my untrained eye. Let's see what happens.
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Re: Bonds don't seem to hedge against downturns anymore

Post by rockstar »

nedsaid wrote: Sat Jun 25, 2022 3:32 pm
rockstar wrote: Sat Jun 25, 2022 1:09 pm
nedsaid wrote: Sat Jun 25, 2022 12:54 pm I don't have a market forecast other than I believe that the worst for bonds is over and if and when inflation rates start to fall, bonds will then start to recover. The ultimate investor's nightmare Is 1970's Stagflation. Is that frightening scenario in our future? Don't know but certainly it is a credible possibility. Stagflation is tough on both stocks and bonds.
I'd wait for a couple of months of inflation falling and the Fed backing off on raising rates further before calling it all over. We've had a good week for equities, but bond yields have also dropped a ton on a percentage basis too. And we have no idea how Q2 earnings are going to go over.
Looking at the US Treasury Yield Curve, interest rates have dropped since June 14th. The 30 year yield has dropped from 3.45% to 3.26%, the 10 year from 3.49% to 3.13%, the 5 year from 3.61% to 3.18%, and the one year from 3.15% to 2.83%. I wouldn't call that a ton but it isn't insignificant either. It looks like inflation expectations are falling to my untrained eye. Let's see what happens.
That's ten days. Let's see what happens with the next CPI print.
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Re: Bonds don't seem to hedge against downturns anymore

Post by Marseille07 »

rockstar wrote: Sun Jun 26, 2022 12:18 pm That's ten days. Let's see what happens with the next CPI print.
And the next FOMC meeting.

I think this is a recurring theme, peeps somehow rush to buy bonds in-between CPI & FOMC then start panicking once those events come closer.
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Re: Bonds don't seem to hedge against downturns anymore

Post by nedsaid »

rockstar wrote: Sun Jun 26, 2022 12:18 pm
nedsaid wrote: Sat Jun 25, 2022 3:32 pm
rockstar wrote: Sat Jun 25, 2022 1:09 pm
nedsaid wrote: Sat Jun 25, 2022 12:54 pm I don't have a market forecast other than I believe that the worst for bonds is over and if and when inflation rates start to fall, bonds will then start to recover. The ultimate investor's nightmare Is 1970's Stagflation. Is that frightening scenario in our future? Don't know but certainly it is a credible possibility. Stagflation is tough on both stocks and bonds.
I'd wait for a couple of months of inflation falling and the Fed backing off on raising rates further before calling it all over. We've had a good week for equities, but bond yields have also dropped a ton on a percentage basis too. And we have no idea how Q2 earnings are going to go over.
Looking at the US Treasury Yield Curve, interest rates have dropped since June 14th. The 30 year yield has dropped from 3.45% to 3.26%, the 10 year from 3.49% to 3.13%, the 5 year from 3.61% to 3.18%, and the one year from 3.15% to 2.83%. I wouldn't call that a ton but it isn't insignificant either. It looks like inflation expectations are falling to my untrained eye. Let's see what happens.
That's ten days. Let's see what happens with the next CPI print.
Yes, I was very surprised that the last inflation report was so bad. I expected that there would be improvement in the numbers. So I am not telling people to go rushing in and buy nominal bonds like crazy. On the other hand, there are always reasons for optimism. Sometimes it is hard to perceive the difference between an emerging trend in the market and just plain noise. Folks often will see what they want to see in the data. As I often say, not running a market timing service here.
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Re: Bonds don't seem to hedge against downturns anymore

Post by Elysium »

nedsaid wrote: Sat Jun 25, 2022 3:32 pm
rockstar wrote: Sat Jun 25, 2022 1:09 pm
nedsaid wrote: Sat Jun 25, 2022 12:54 pm I don't have a market forecast other than I believe that the worst for bonds is over and if and when inflation rates start to fall, bonds will then start to recover. The ultimate investor's nightmare Is 1970's Stagflation. Is that frightening scenario in our future? Don't know but certainly it is a credible possibility. Stagflation is tough on both stocks and bonds.
I'd wait for a couple of months of inflation falling and the Fed backing off on raising rates further before calling it all over. We've had a good week for equities, but bond yields have also dropped a ton on a percentage basis too. And we have no idea how Q2 earnings are going to go over.
Looking at the US Treasury Yield Curve, interest rates have dropped since June 14th. The 30 year yield has dropped from 3.45% to 3.26%, the 10 year from 3.49% to 3.13%, the 5 year from 3.61% to 3.18%, and the one year from 3.15% to 2.83%. I wouldn't call that a ton but it isn't insignificant either. It looks like inflation expectations are falling to my untrained eye. Let's see what happens.
It's not that easy. These last few days is unlikely a trend, some pull back on Oil prices may be causing this effect. But it's temporary in all likelihood as the effects of more sanctions by EU is not coming until another six months. Oil will possibly test the highs again if that happens. Other issues: number of jobs available, still too high proportionate to number of applicants, the Fed would like to see it drop significantly, hiring freezes and lay-offs would do that, higher rates squeezing business credit could be another. What else? supply chain issues from China's zero tolerance Covid lockdowns, they are easing, but are they? or are they not interested in easing the supply chain issues because it benefits US and Europe. So some countering is going on there to combat the effects.

It's a multi-front battle against rising inflation and growth it appears, we may not get out easily this time around. Will have to wait and see. Got to be prepared to give up gains from last 5 years. Personally, I've been counting everything since 2017 as gravy.
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Re: Bonds don't seem to hedge against downturns anymore

Post by rockstar »

Elysium wrote: Sun Jun 26, 2022 6:43 pm
nedsaid wrote: Sat Jun 25, 2022 3:32 pm
rockstar wrote: Sat Jun 25, 2022 1:09 pm
nedsaid wrote: Sat Jun 25, 2022 12:54 pm I don't have a market forecast other than I believe that the worst for bonds is over and if and when inflation rates start to fall, bonds will then start to recover. The ultimate investor's nightmare Is 1970's Stagflation. Is that frightening scenario in our future? Don't know but certainly it is a credible possibility. Stagflation is tough on both stocks and bonds.
I'd wait for a couple of months of inflation falling and the Fed backing off on raising rates further before calling it all over. We've had a good week for equities, but bond yields have also dropped a ton on a percentage basis too. And we have no idea how Q2 earnings are going to go over.
Looking at the US Treasury Yield Curve, interest rates have dropped since June 14th. The 30 year yield has dropped from 3.45% to 3.26%, the 10 year from 3.49% to 3.13%, the 5 year from 3.61% to 3.18%, and the one year from 3.15% to 2.83%. I wouldn't call that a ton but it isn't insignificant either. It looks like inflation expectations are falling to my untrained eye. Let's see what happens.
It's not that easy. These last few days is unlikely a trend, some pull back on Oil prices may be causing this effect. But it's temporary in all likelihood as the effects of more sanctions by EU is not coming until another six months. Oil will possibly test the highs again if that happens. Other issues: number of jobs available, still too high proportionate to number of applicants, the Fed would like to see it drop significantly, hiring freezes and lay-offs would do that, higher rates squeezing business credit could be another. What else? supply chain issues from China's zero tolerance Covid lockdowns, they are easing, but are they? or are they not interested in easing the supply chain issues because it benefits US and Europe. So some countering is going on there to combat the effects.

It's a multi-front battle against rising inflation and growth it appears, we may not get out easily this time around. Will have to wait and see. Got to be prepared to give up gains from last 5 years. Personally, I've been counting everything since 2017 as gravy.
Its seems optimistic that a 75bps increase and less than two weeks changes everything.
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Re: Bonds don't seem to hedge against downturns anymore

Post by AlwaysLearningMore »

Vulcan wrote: Tue Jun 21, 2022 9:30 pm In the meantime, if you bought Total Bond index fund 12 years ago, you are sitting on negative real returns right now.

Image
Perhaps Bill Bernstein has a point about favoring individually held Treasury Notes.
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Re: Bonds don't seem to hedge against downturns anymore

Post by nedsaid »

Elysium wrote: Sun Jun 26, 2022 6:43 pm
nedsaid wrote: Sat Jun 25, 2022 3:32 pm
rockstar wrote: Sat Jun 25, 2022 1:09 pm
nedsaid wrote: Sat Jun 25, 2022 12:54 pm I don't have a market forecast other than I believe that the worst for bonds is over and if and when inflation rates start to fall, bonds will then start to recover. The ultimate investor's nightmare Is 1970's Stagflation. Is that frightening scenario in our future? Don't know but certainly it is a credible possibility. Stagflation is tough on both stocks and bonds.
I'd wait for a couple of months of inflation falling and the Fed backing off on raising rates further before calling it all over. We've had a good week for equities, but bond yields have also dropped a ton on a percentage basis too. And we have no idea how Q2 earnings are going to go over.
Looking at the US Treasury Yield Curve, interest rates have dropped since June 14th. The 30 year yield has dropped from 3.45% to 3.26%, the 10 year from 3.49% to 3.13%, the 5 year from 3.61% to 3.18%, and the one year from 3.15% to 2.83%. I wouldn't call that a ton but it isn't insignificant either. It looks like inflation expectations are falling to my untrained eye. Let's see what happens.
It's not that easy. These last few days is unlikely a trend, some pull back on Oil prices may be causing this effect. But it's temporary in all likelihood as the effects of more sanctions by EU is not coming until another six months. Oil will possibly test the highs again if that happens. Other issues: number of jobs available, still too high proportionate to number of applicants, the Fed would like to see it drop significantly, hiring freezes and lay-offs would do that, higher rates squeezing business credit could be another. What else? supply chain issues from China's zero tolerance Covid lockdowns, they are easing, but are they? or are they not interested in easing the supply chain issues because it benefits US and Europe. So some countering is going on there to combat the effects.

It's a multi-front battle against rising inflation and growth it appears, we may not get out easily this time around. Will have to wait and see. Got to be prepared to give up gains from last 5 years. Personally, I've been counting everything since 2017 as gravy.
I have stated that it is likely that inflation has already peaked but of course for the reasons you and others have cited, there is no way to know at this point. I also have discussed that we might be headed towards Stagflation, which is a nightmare for Bogleheads as Stagflation is tough on both Stocks and Bonds. As much as I can, I choose to be optimistic and choose to look for opportunities wherever they can be found. This current environment can make it hard to be optimistic but I am doing my very best. I don't have a crystal ball.
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Re: Bonds don't seem to hedge against downturns anymore

Post by rockstar »

nedsaid wrote: Mon Jun 27, 2022 10:16 am
Elysium wrote: Sun Jun 26, 2022 6:43 pm
nedsaid wrote: Sat Jun 25, 2022 3:32 pm
rockstar wrote: Sat Jun 25, 2022 1:09 pm
nedsaid wrote: Sat Jun 25, 2022 12:54 pm I don't have a market forecast other than I believe that the worst for bonds is over and if and when inflation rates start to fall, bonds will then start to recover. The ultimate investor's nightmare Is 1970's Stagflation. Is that frightening scenario in our future? Don't know but certainly it is a credible possibility. Stagflation is tough on both stocks and bonds.
I'd wait for a couple of months of inflation falling and the Fed backing off on raising rates further before calling it all over. We've had a good week for equities, but bond yields have also dropped a ton on a percentage basis too. And we have no idea how Q2 earnings are going to go over.
Looking at the US Treasury Yield Curve, interest rates have dropped since June 14th. The 30 year yield has dropped from 3.45% to 3.26%, the 10 year from 3.49% to 3.13%, the 5 year from 3.61% to 3.18%, and the one year from 3.15% to 2.83%. I wouldn't call that a ton but it isn't insignificant either. It looks like inflation expectations are falling to my untrained eye. Let's see what happens.
It's not that easy. These last few days is unlikely a trend, some pull back on Oil prices may be causing this effect. But it's temporary in all likelihood as the effects of more sanctions by EU is not coming until another six months. Oil will possibly test the highs again if that happens. Other issues: number of jobs available, still too high proportionate to number of applicants, the Fed would like to see it drop significantly, hiring freezes and lay-offs would do that, higher rates squeezing business credit could be another. What else? supply chain issues from China's zero tolerance Covid lockdowns, they are easing, but are they? or are they not interested in easing the supply chain issues because it benefits US and Europe. So some countering is going on there to combat the effects.

It's a multi-front battle against rising inflation and growth it appears, we may not get out easily this time around. Will have to wait and see. Got to be prepared to give up gains from last 5 years. Personally, I've been counting everything since 2017 as gravy.
I have stated that it is likely that inflation has already peaked but of course for the reasons you and others have cited, there is no way to know at this point. I also have discussed that we might be headed towards Stagflation, which is a nightmare for Bogleheads as Stagflation is tough on both Stocks and Bonds. As much as I can, I choose to be optimistic and choose to look for opportunities wherever they can be found. This current environment can make it hard to be optimistic but I am doing my very best. I don't have a crystal ball.
Michael Burry is now predicting disinflationary pressures due to a build up of excess inventory in retail. And he expects the Fed to change course and lower rates in the future. He’s probably not wrong, but he might be early, which isn’t new. But this also suggest a recession with low to no growth, rather than stagflation.

Now, I did get gas today for 50 cents less than the last time. So that’s kinda a big deal. Now, if we go the opposite direction, then TIPS are going to feel some pain making nominal make more sense. Some diversification between nominal and TIPS probably makes sense here, rather than all in one bucket.

I’m really curious what the next CPI print is going to look like.
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Re: Bonds don't seem to hedge against downturns anymore

Post by BigJohn »

rockstar wrote: Mon Jun 27, 2022 10:58 am
nedsaid wrote: Mon Jun 27, 2022 10:16 am
Elysium wrote: Sun Jun 26, 2022 6:43 pm
nedsaid wrote: Sat Jun 25, 2022 3:32 pm
rockstar wrote: Sat Jun 25, 2022 1:09 pm

I'd wait for a couple of months of inflation falling and the Fed backing off on raising rates further before calling it all over. We've had a good week for equities, but bond yields have also dropped a ton on a percentage basis too. And we have no idea how Q2 earnings are going to go over.
Looking at the US Treasury Yield Curve, interest rates have dropped since June 14th. The 30 year yield has dropped from 3.45% to 3.26%, the 10 year from 3.49% to 3.13%, the 5 year from 3.61% to 3.18%, and the one year from 3.15% to 2.83%. I wouldn't call that a ton but it isn't insignificant either. It looks like inflation expectations are falling to my untrained eye. Let's see what happens.
It's not that easy. These last few days is unlikely a trend, some pull back on Oil prices may be causing this effect. But it's temporary in all likelihood as the effects of more sanctions by EU is not coming until another six months. Oil will possibly test the highs again if that happens. Other issues: number of jobs available, still too high proportionate to number of applicants, the Fed would like to see it drop significantly, hiring freezes and lay-offs would do that, higher rates squeezing business credit could be another. What else? supply chain issues from China's zero tolerance Covid lockdowns, they are easing, but are they? or are they not interested in easing the supply chain issues because it benefits US and Europe. So some countering is going on there to combat the effects.

It's a multi-front battle against rising inflation and growth it appears, we may not get out easily this time around. Will have to wait and see. Got to be prepared to give up gains from last 5 years. Personally, I've been counting everything since 2017 as gravy.
I have stated that it is likely that inflation has already peaked but of course for the reasons you and others have cited, there is no way to know at this point. I also have discussed that we might be headed towards Stagflation, which is a nightmare for Bogleheads as Stagflation is tough on both Stocks and Bonds. As much as I can, I choose to be optimistic and choose to look for opportunities wherever they can be found. This current environment can make it hard to be optimistic but I am doing my very best. I don't have a crystal ball.
Michael Burry is now predicting disinflationary pressures due to a build up of excess inventory in retail. And he expects the Fed to change course and lower rates in the future. He’s probably not wrong, but he might be early, which isn’t new. But this also suggest a recession with low to no growth, rather than stagflation.

Now, I did get gas today for 50 cents less than the last time. So that’s kinda a big deal. Now, if we go the opposite direction, then TIPS are going to feel some pain making nominal make more sense. Some diversification between nominal and TIPS probably makes sense here, rather than all in one bucket.

I’m really curious what the next CPI print is going to look like.
As long as inflation is above the breakeven point (~3%), disinflation won’t hurt TIPS vs nominals. Now, if we get actual deflation, it’s a very different story.
"The greatest enemy of a good plan is the dream of a perfect plan" - Carl Von Clausewitz
Tamalak
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Joined: Fri May 06, 2016 2:29 pm

Re: Bonds don't seem to hedge against downturns anymore

Post by Tamalak »

Beensabu wrote: Tue Jun 21, 2022 2:18 pm The NAV of a bond fund goes up and down. Both directions. And you still get a positive real return over the long-term, as long as you don't panic when NAV goes down.
Is there something in the nature of bond funds that requires their average long term yield to hover over average long term inflation? They've clearly done this historically but I don't know if that's due to any financial law of physics or not. I've been having trouble finding any basis for forecasting my real returns for BND (for now I'm using 0%)
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