Bonds don't seem to hedge against downturns anymore

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

Post by GAAP »

Tamalak wrote: Mon Jun 27, 2022 12:13 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, 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%)
How long term? In theory, nobody would buy a bond if they thought they would lose money to inflation -- but that depends upon a lot of other things being a better option.

If I were to estimate bond fund returns right now, I would take the SEC yield of the bond fund and discount it for inflation -- almost certainly a negative number at the moment.

Generally, I assume status quo when making future estimates -- inertia in the economy essentially. I would generally also only revisit that estimate annually. I don't need such approximations on a shorter term interval. Frequent estimates are a recipe for bipolar investing behavior.
“Adapt what is useful, reject what is useless, and add what is specifically your own.” ― Bruce Lee
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Beensabu
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Re: Bonds don't seem to hedge against downturns anymore

Post by Beensabu »

Tamalak wrote: Mon Jun 27, 2022 12:13 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, 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? I've been having trouble finding any basis for forecasting my real returns for BND (for now I'm using 0%)
I have no clue. I was just making an observation that if you wait long enough, it'll happen eventually. Of course, how long is "long enough" is going to vary. As has been pointed out, the last 12 years has not been long enough for total bond to have have had a positive real return (you have to go to 13 years for that). However, at the beginning of this year, 12 years was long enough. If you're going to throw a big NAV drop together with high inflation into the period being looked at, that's obviously going to affect your real return. So then you have to wait for the higher yield going forward to start showing up in return (which it will) and for inflation to come down and re-stabilize (this will eventually happen too). Then, of course, yields will eventually come down again with NAV going up at some point.

It's debatable whether "long enough" will happen in time for a particular individual, sure. I get that if someone just started investing in total bond sometime in the last 12 years, they're going "I've lost money in real terms!" And that's a more intense feeling the closer to Jan 2022 you started investing in bonds. But maybe there's an argument there for maintaining a bond allocation over the very long term, including early accumulation, rather than reallocating in late accumulation -- since you don't know ahead of time what market conditions will actually be in late accumulation... Perhaps this particular period of time ends up changing the glide path recommendations that have developed over the last 20 years or so.

I expect 1% real returns for long-term treasuries over a 50-year period, so using 0% for BND sounds reasonable enough to me.
"The only thing that makes life possible is permanent, intolerable uncertainty; not knowing what comes next." ~Ursula LeGuin
dbr
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Re: Bonds don't seem to hedge against downturns anymore

Post by dbr »

Tamalak wrote: Mon Jun 27, 2022 12:13 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, 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%)
I have no idea what theoretical dictum might apply but here is a sample comparison of five year Treasury yield to inflation:

https://www.bing.com/images/search?view ... ajaxserp=0
garlandwhizzer
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Re: Bonds don't seem to hedge against downturns anymore

Post by garlandwhizzer »

nedsaid wrote:

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.
1+

My thoughts exactly mirror this.There is a lot of risk out there in both stock and bond markets now from known unknowns and from unknown unknowns. Unknown unknowns like the Ukraine War, the Great Resignation, and the Covid pandemic induced supply chain dispuptions--none of which anyone expected or predicted, have brought havoc on stocks, bonds, inflation expectations, and economies worldwide. These unpredictable events underline the critical role that blind chance and uncertainty play in the markets and in economies. All are unknown unknowns that created chain disruptions that aided and abetted inflation. Add to that to the known unknowns like 14 years of persistent zero rates and trillions in QE from the FED in addition to massive government debt driven fiscal stimulus. In spite of what modern monetary policy says, there is often a price to pay later down the road when you open the monetary floodgates in a financial emergency. It was the combination af all these plus others that drove the rapid, sudden and severe rebirth of inflation which after declining for 39 years, many presumed to be dead and gone for good. That resurgence of inflation in my view marks the start of a new and more difficult era for financial assets going forward.

Many thought during the boom times of 2009 - 2021, that both bond and stock markets were consistently performing far ahead of their fundamental expectations, but most of us were having too much fun enjoying the ride to consider that what goes up in excess can come down in excess. Highly speculative massive winner names like BTC, TSLA, ARKK stocks, MEME stocks, SPACS, etc., enjoyed massive bull runs. Those of us who retained some belief that underlying fundamentals are important to long term returns didn't climb on board that express train to riches. We are now glad that we were cautious about the get rich quick strategy which worked until it didn't. But we also were too optimistic about the future, just less so. We share the pain but less so. No one anticipates the near or intermediate term future accurately on a consistent basis.

It's hard to retain optimism when both stocks and bonds are suffering and the specter of possible stagflation in the future suddenly appears as a real risk. Those of us who have lived through stagflation know what a nightmare it can be. When the markets were booming we got excessively optimistic and neglect future risks. Now that markets are headed in the opposite direction, our perceptions of the future may likewise err on the pessimistic side. Like nedsaid, I struggle to remain optimistic. Pessimism is not a winning long term strategy. At some point in the future, inflation will be under control, rates will be headed down, the Ukraine War will be over, supply chain constrictions will disappear, and a long period of persistent real economic growth will stretch into the future. It's a question of when, not if. No one knows when reliably.

One of the hallmarks of long term successful investors is the ability to tolerate long periods of frustration, fear, and disappointment without departing from a sound diversified investment strategy which however continues to lose. As Bogle said, "Don't just do something, stand there." That's what I'm doing.

Garland Whizzer
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