Bonds: What Are They Doing? Are They Doing Things?? Let's Find Out!

[rockstar]

<snip>
If one needs to meet expenses, it must be very difficult to have to part with anything but cash right now (which of course has had its own downturn through inflation, but psychologically, selling depressed assets must be far worse).

Not only psychologically, but financially too. Say cash has earned 0.5% over the last year. VBTLX growth over the last year is -10.6% (including dividend reinvestment). With year over year inflation at about 8.5%, you lost about 8% real in cash and 19.1% real in VBTLX.

Kevin

With the 2 year treasury over 3%, it's hard to come up with a good reason to take duration risk unless you want to lock in a specific rate.

[willthrill81]

Perhaps it's already been mentioned in this thread, but intermediate-term Treasuries are now in a deeper nominal drawdown than they reached during the stagflationary period of the late 1970s and early 1980s (-11% then vs. -15% now). I'm not sure if the nominal drawdowns in the 1940s were deeper, and the inflation-adjusted drawdowns were definitely worse in the 1970s though.

[aj76er]

Perhaps it's already been mentioned in this thread, but intermediate-term Treasuries are now in a deeper nominal drawdown than they reached during the stagflationary period of the late 1970s and early 1980s (-11% then vs. -15% now). I'm not sure if the nominal drawdowns in the 1940s were deeper, and the inflation-adjusted drawdowns were definitely worse in the 1970s though.

The future backtesting over this time period will be interesting to say the least.

[Marseille07]

The Ten now at 3.45%...just wow. I saw 3.30% earlier and thought it'd go down today but nope.

[rab]

The Ten now at 3.45%...just wow. I saw 3.30% earlier and thought it'd go down today but nope.

The short end is even crazier. As I'm typing this the 2-year is at 3.41%.

[rockstar]

5 year TIPS almost up 20bps since yesterday. If I can get 2% real yields, I want to lock that in for a bond portfolio.

[JayB]

There is also a problem that interest coupons paid out have to be reinvested and held to the end of the holding period to know what it means to get an interest payment over a period of time...

Although the common wisdom is that all bond coupon payments have to be reinvested at the purchase yield to maturity (YTM) in order to achieve the stated YTM at that time, this has been debunked by Cebula & Yang (2008; https://www.researchgate.net/publicatio ... s_Promised)

They argue that "YTM measures the rate of return from holding a bond no matter how coupon payments are disposed... yield to maturity is always earned no matter how coupon payments are allocated – spent or reinvested at any rate."

This perspective should be useful in contemplating how to deploy coupon payments or at least how to think about yield to maturity from coupon-paying bonds. If you are trying to estimate your total return at the bond maturity date after reinvesting coupon payments, the authors refer to this as Realized Compounding Yield (RCY), which is distinct from YTM. For zero coupon bonds, they would be the same value.

[dbr]

There is also a problem that interest coupons paid out have to be reinvested and held to the end of the holding period to know what it means to get an interest payment over a period of time...

Although the common wisdom is that all bond coupon payments have to be reinvested at the purchase yield to maturity (YTM) in order to achieve the stated YTM at that time, this has been debunked by Cebula & Yang (2008; https://www.researchgate.net/publicatio ... s_Promised)

They argue that "YTM measures the rate of return from holding a bond no matter how coupon payments are disposed... yield to maturity is always earned no matter how coupon payments are allocated – spent or reinvested at any rate."

This perspective should be useful in contemplating how to deploy coupon payments or at least how to think about yield to maturity from coupon-paying bonds. If you are trying to estimate your total return at the bond maturity date after reinvesting coupon payments, the authors refer to this as Realized Compounding Yield (RCY), which is distinct from YTM. For zero coupon bonds, they would be the same value.

The math makes perfect sense. What people say about the math can be ambiguous, confusing, or even wrong -- not uncommon with investing, apparently.

[absurdisreal]

Can someone please give me a layman example of why buying a bond index fund like VBTLX or BND is much different from buying a stock? (assuming for simplicity that it's in a non-taxable space).

I know that there are a ton of complexities to the underlying bond market, but the price is way down and it pays an ok dividend around 2%. Is the share price not expected to rise back to historical normal due to certain factors? Especially once inflation/rates settle down? Bond fund prices have not sustained very long at this low point in the last 20 years. From a simple view it looks like a high probability that you could sell for an easy 10-20% gain in the nearer future plus a div while you wait.

I know there's no such thing as easy or sure things in the market, go ahead and burst my bubble BHs and thank you!

[dbr]

Can someone please give me a layman example of why buying a bond index fund like VBTLX or BND is much different from buying a stock? (assuming for simplicity that it's in a non-taxable space).

I know that there are a ton of complexities to the underlying bond market, but the price is way down and it pays an ok dividend around 2%. Is the share price not expected to rise back to historical normal due to certain factors? Especially once inflation/rates settle down? Bond fund prices have not sustained very long at this low point in the last 20 years. From a simple view it looks like a high probability that you could sell for an easy 10-20% gain in the nearer future plus a div while you wait.

I know there's no such thing as easy or sure things in the market, go ahead and burst my bubble BHs and thank you!

From the point of view of distributing asset into a portfolio and characterizing that portfolio by the tenets of modern portfolio theory one could argue that stocks and bonds differ in the magnitude of the expected return, in the magnitude of the expected risk, and in being generally uncorrelated in time dependence of returns (though correlations are notoriously unstable).

One could extend the theory to the concept that stock returns are predicted by the factors of stock market, size, and value and bond returns by the factors of term and credit risk.

I personally like the idea of looking at things from a unified view of portfolio characteristics. That is certainly a good fit when trying to estimate future wealth or the sustainability of retirement withdrawals.

Other people like to look at individual investment assets as unique beings that are different in many aspects and those people can digress on why financially stocks and bonds are completely different kinds of assets. A principle of diversification would say that these assets are completely diversified from each other and any temporary correlation in returns is simply a random result.

[absurdisreal]

From the point of view of distributing asset into a portfolio and characterizing that portfolio by the tenets of modern portfolio theory one could argue that stocks and bonds differ in the magnitude of the expected return, in the magnitude of the expected risk, and in being generally uncorrelated in time dependence of returns (though correlations are notoriously unstable).

One could extend the theory to the concept that stock returns are predicted by the factors of stock market, size, and value and bond returns by the factors of term and credit risk.

I personally like the idea of looking at things from a unified view of portfolio characteristics. That is certainly a good fit when trying to estimate future wealth or the sustainability of retirement withdrawals.

Other people like to look at individual investment assets as unique beings that are different in many aspects and those people can digress on why financially stocks and bonds are completely different kinds of assets. A principle of diversification would say that these assets are completely diversified from each other and any temporary correlation in returns is simply a random result.

dbr,
Apologies, my question is probably a bit rudimentary for this thread. You gave a great general overview reply that is better than my question deserved, thank you for that. And (not surprisingly because BH!) you avoided the market timing aspect of my question.

But I'd really like to know the difference in the following perspective of looking at the graphs- If VTI dropped to a 15 year low right now, BH or not, I think everyone here would be backing up the truck. What makes it different because it's the bond index price graph? Why isn't this 15-20 year price anomaly an actionable bargain like it might be with a stock fund?

[Beensabu]

If VTI dropped to a 15 year low right now, BH or not, I think everyone here would be backing up the truck.

You'd think so, wouldn't you? But they actually wouldn't, for the most part. That would be terrifying.

What makes it different because it's the bond index price graph? Why isn't this 15-20 year price anomaly an actionable bargain like it might be with a stock fund?

When it comes to the stock and bond markets, a bargain is not a bargain until it is no longer a bargain. Does that make sense?

It's only a bargain to most in retrospect, because you can look back and see it recovered and then some.

At the time, there is mostly uncertainty (and fear, to some extent). Even those who think it's a bargain have the whole "but what if it's not..." in the back of their head.

[dbr]

From the point of view of distributing asset into a portfolio and characterizing that portfolio by the tenets of modern portfolio theory one could argue that stocks and bonds differ in the magnitude of the expected return, in the magnitude of the expected risk, and in being generally uncorrelated in time dependence of returns (though correlations are notoriously unstable).

One could extend the theory to the concept that stock returns are predicted by the factors of stock market, size, and value and bond returns by the factors of term and credit risk.

I personally like the idea of looking at things from a unified view of portfolio characteristics. That is certainly a good fit when trying to estimate future wealth or the sustainability of retirement withdrawals.

Other people like to look at individual investment assets as unique beings that are different in many aspects and those people can digress on why financially stocks and bonds are completely different kinds of assets. A principle of diversification would say that these assets are completely diversified from each other and any temporary correlation in returns is simply a random result.

dbr,
Apologies, my question is probably a bit rudimentary for this thread. You gave a great general overview reply that is better than my question deserved, thank you for that. And (not surprisingly because BH!) you avoided the market timing aspect of my question.

But I'd really like to know the difference in the following perspective of looking at the graphs- If VTI dropped to a 15 year low right now, BH or not, I think everyone here would be backing up the truck. What makes it different because it's the bond index price graph? Why isn't this 15-20 year price anomaly an actionable bargain like it might be with a stock fund?

From a point of view of naive ignorance there is no difference. By "naive ignorance" I coined a term that means that as investors we don't actually know that an investment should continue going down or will soon go back up again and that is equally true for stocks and bonds.

As to how stocks and bonds are different, someone else can explain what we might expect stocks to do but for bonds there actually is some system involved. A bond is definitely going to pay back a face value when it matures and it is definitely going to pay an interest "coupon" periodically, so those fixed points put constraints on what a bond can do. The wild card is the price on the market at any point in time. This is driven up and down by decreases or increases, respectively, in the current interest rates that apply to that bond. The mechanics involved mean that when interest rates go up, bond prices are instantly depressed but eventually over time the total value of the position including interest paid out can eventually exceed what one would have gotten. The same thing applies vice-versa when interest rates fall. In that sense after interest rates go up and prices have fallen one might jump on a bond. Of course if interest rates continue to go up prices will continue to fall though eventually the investor will gain back more from higher yields than he otherwise would obtain. If interest rates reverse and fall then the opposite happens. While this sounds like a certain amount of predictability the whole thing stands and falls on how well one can predict the future course of interest rates, which is really hard to do.

A person that buys a bond and holds it to maturity will know when he buys the bond exactly what the outcome will be. For stocks there is no such concept. But not all is over regarding bonds. What a person has to pay to buy a bond today and what is the current yield is beyond the control of the investor. So the investor is at the mercy of history regarding what he can get at any time and you can't predict today what you can get tomorrow.

As an illustration of this TIPS which are sold at auction have a fixed rate, 1/8% recently, but sell at a premium or a discount which determines the yield to maturity. Recently TIPS have sold at a premium and if held to maturity have a sure loss in real dollars. Now real rates have changes and TIPS would sell at a slight discount and have a sure gain in real dollars. To have predicted when what would be what starting a few years ago would not be easy to do. Predicting what the TIPS real yield will be a year from now would not be easy.

[Robot Monster]

Just an observation...

Even though we're seeing inflation reach levels we haven't seen in decades, the 5-Year Breakeven Inflation Rate in more recent times isn't that much higher than the 3% that's current as of yesterday (June 15th).

Nov 2004: 2.76%
March 2005: 2.87%
May 2006: 2.68%

In fact, the current 3% isn't that much higher than it was a year ago.

June 2021: 2.47%

[Marseille07]

The Ten crashing hard today for some reason.

[rockstar]

The Ten crashing hard today for some reason.

No idea why. The 18 cents gas cut shouldn't be that meaningful.

[Marseille07]

The Ten crashing hard today for some reason.

No idea why. The 18 cents gas cut shouldn't be that meaningful.

Might be because Chair Powell called recession a 'possibility' earlier today.

[Kevin M]

The Ten crashing hard today for some reason.

Yields came down across the curve today, and have dropped since the recent peak on 6/14.



Kevin

[rockstar]

The Ten crashing hard today for some reason.

Yields came down across the curve today, and have dropped since the recent peak on 6/14.



Kevin

I guess that explains why the pain in the equities has stopped for the time being. Maybe we go sideways for a bit. No idea how much lower rates are going to go.

[Trance]

The Ten crashing hard today for some reason.

Is this a sign that the interest rate should go higher or is expected to and so people are waiting to buy?

[Marseille07]

Is this a sign that the interest rate should go higher or is expected to and so people are waiting to buy?

The way I look at it is that people *bought* today and therefore the Ten crashed.

Why are they buying today? My guess is because the Chair mentioned recession a possibility. I believe he's speaking tomorrow as well.

[Kevin M]

Is this a sign that the interest rate should go higher or is expected to and so people are waiting to buy?

The way I look at it is that people *bought* today and therefore the Ten crashed.

Why are they buying today? My guess is because the Chair mentioned recession a possibility. I believe he's speaking tomorrow as well.

Crashed seems like too strong of a word.



It looks to me like just another wiggle among all the other wiggles we've had this year.

Kevin

[Robot Monster]

From Bloomberg:

"Bond Yields Sink on Recession Fear"
--Traders mull Powell saying rate hikes may spark downturn
--Rising odds Fed will pivot back to easy policy by May 2023

"HSBC’s Major Sees Most Value in Long End of US Curve"

Bloomberg link

CNBC headline: "10-year Treasury yield slips to lowest level in nearly two weeks on recession fears"

[NoRegret]

Anyone adding long bonds here?

[NoRegret]

Anyone adding long bonds here?

Crickets.

Given the price action this morning (10 yr down to 2.87% as I type this) I thought there’d be a greater response. Quite telling.

[Da5id]

Anyone adding long bonds here?

Crickets.

Given the price action this morning (10 yr down to 2.87% as I type this) I thought there’d be a greater response. Quite telling.

Quite telling about what? The fact that most bogleheads (as far as I can see from peoples posts) don't tactically change their bond duration in response to market changes?

[Robot Monster]

Anyone adding long bonds here?

Crickets.

Given the price action this morning (10 yr down to 2.87% as I type this) I thought there’d be a greater response. Quite telling.

If you're into tactically changing bond duration in response to market changes...

Alfonso Peccatiello is beginning to accumulate some long-end bonds (US: TLT; Europe: IBGL).

Source: "Time To Buy Bonds?"
article link

About Alf link

[rockstar]

From Bloomberg:

"Bond Yields Sink on Recession Fear"
--Traders mull Powell saying rate hikes may spark downturn
--Rising odds Fed will pivot back to easy policy by May 2023

"HSBC’s Major Sees Most Value in Long End of US Curve"

Bloomberg link

CNBC headline: "10-year Treasury yield slips to lowest level in nearly two weeks on recession fears"

First, rates started going up and equities went down. Now, it seems folks are selling equities and buy bonds. We live in interesting times. The last half of this year should be interesting.

[Apathizer]

From Bloomberg:

"Bond Yields Sink on Recession Fear"
--Traders mull Powell saying rate hikes may spark downturn
--Rising odds Fed will pivot back to easy policy by May 2023

"HSBC’s Major Sees Most Value in Long End of US Curve"

Bloomberg link

CNBC headline: "10-year Treasury yield slips to lowest level in nearly two weeks on recession fears"

First, rates started going up and equities went down. Now, it seems folks are selling equities and buy bonds. We live in interesting times. The last half of this year should be interesting.

I made some pretty fortuitous moves early this year. I sold most of my taxable assets and paid off most of my mortgage (4.2%). Since then I've been rebuilding my taxable account, about 50% globally diversified bonds, 50% globally diversified factor-slanted equities. I didn't know the crap would hit the fan a few months later; I just got lucky.

While everything is down, stocks are down about 20% while bonds are 'only' down about 10% YTD. With such high interest rates I expect bonds to recover more quickly than stocks. Times like this are when long-term money is made. To me, the best long-term approach right now is to buy as much of you can of everything whenever you can. Every paycheck that's what I do.

[MattB]

Times like this are when long-term money is made.

[slicendice]

Anyone adding long bonds here?

LTT/TIPS with one hand stocks with the other, every month. It feels like an equal opportunity bear market. Eventually one of these asset classes will stop dropping right?.....

[NoRegret]

Anyone adding long bonds here?

Crickets.

Given the price action this morning (10 yr down to 2.87% as I type this) I thought there’d be a greater response. Quite telling.

If you're into tactically changing bond duration in response to market changes...

Alfonso Peccatiello is beginning to accumulate some long-end bonds (US: TLT; Europe: IBGL).

Source: "Time To Buy Bonds?"
article link

About Alf link

I subscribe to Alf's Macro Compass newsletter. I used to follow him on Twitter but had to unfollow because he clustered up my feed, sourdough bread notwithstanding...

I fully understand his point, but I think leveraged short end is a better trade -- because of chance of bull steepening.

[NoRegret]

Anyone adding long bonds here?

Crickets.

Given the price action this morning (10 yr down to 2.87% as I type this) I thought there’d be a greater response. Quite telling.

Quite telling about what? The fact that most bogleheads (as far as I can see from peoples posts) don't tactically change their bond duration in response to market changes?

Evidence is for lack of new incremental buying or some recognition of a trend change -- I already counted BH's regular contribution to total bond in the baseline. BHs are known to maintain the course: iceberg* be damned.

*The recent high in 10-year yield was 3.48% which was above the high of 3.24% in 2018. This was the first time since 1981 it made a higher high, previously it had many false breaks of the downtrend line but ultimately resolved lower.

I'm waiting for the posters who claimed fortuitous luck (or pure foresight) of getting out of nominal bonds prior to this year saying they're getting back in at any duration. For the record, I have bought some nominal treasuries, mostly short to intermediate. I was early but with the recent drop in yields their total return is turning positive.