Why own bonds (over cash) in fixed income these days?

[Kookaburra]

With the yield curve inverted and shorter duration (even money market) funds yielding more than longer maturities, why would an investor want to hold intermediate or long term bonds?

For the yield curve to un-invert, either shorter duration bond yields would need to go down and/or longer term yields would need to go up. Both of these events seems to favor staying in short duration (with respect to price movements). Once either occurs, then an investor could re-assess and switch. Wouldn’t they come out ahead with this approach, versus just going with the lower-yielding longer dated funds now?

Similarly, if one chooses to be in MM fund now, when their yields start going down (whenever the Fed pivots), one could then switch to bond funds. Wouldn’t they come out ahead by riding the higher current MM yields and then switching once the MM fund yields aren’t as comparatively attractive?

[livesoft]

Total Bond Market Index fund went UP more than 3% so far in 2023. How much did cash go up in the past 3 weeks?

[Kookaburra]

Total Bond Market Index fund went UP more than 3% so far in 2023. How much did cash go up in the past 3 weeks?

At the expense of its yield going down though. Wouldn’t it be better to buy it after its yield has gone up and its price down?

[toddthebod]

If interest rates return to what they were a year ago, you will have made a few more bucks over the short term but you will be way worse off in the long term.

Which would you rather have: 3.7% for 30 years, or 4.7% for one year followed by 2.1% for 29 years?

[Kookaburra]

If interest rates return to what they were a year ago, you will have made a few more bucks over the short term but you will be way worse off in the long term.

Which would you rather have: 3.7% for 30 years, or 4.7% for one year followed by 2.1% for 29 years?

But would interest rates really stay low for 29 years?

[toddthebod]

If interest rates return to what they were a year ago, you will have made a few more bucks over the short term but you will be way worse off in the long term.

Which would you rather have: 3.7% for 30 years, or 4.7% for one year followed by 2.1% for 29 years?

Why? Can’t I just sell the MM and buy the longer bonds in a year? Get the best of both worlds. I realize I’m missing something but can’t pin it exactly.

What? You can't buy bonds next year at today's yields. You get whatever the market yield is then. Last year 30 year bonds were yielding 2.1%. That might be all that's available.

[toddthebod]

If interest rates return to what they were a year ago, you will have made a few more bucks over the short term but you will be way worse off in the long term.

Which would you rather have: 3.7% for 30 years, or 4.7% for one year followed by 2.1% for 29 years?

But would interest rates really stay low for 29 years?

Probably not. They'll go up and down. But you can't predict which.

[livesoft]

I won't care what happens to bonds 5 years from now.

[Leif]

I've just put an order for 3 Mo. T-Bill. It is paying more than a money market. But it looks like the Fed is expected to raise rates by 1/4 of a point at the next FOMC meeting. So I expect MM rates will still trend up, but perhaps slower.

I just bought more intermediate term bond fund. Rates are running a bit over 4%, but it is at a good price relative to the last few years. If the Fed is successful at bring inflation down to the 2% range then I expect to see the NAV to tick up by the end of the year.

[NiceUnparticularMan]

For the yield curve to un-invert, either shorter duration bond yields would need to go down and/or longer term yields would need to go up. Both of these events seems to favor staying in short duration (with respect to price movements). Once either occurs, then an investor could re-assess and switch. Wouldn’t they come out ahead with this approach, versus just going with the lower-yielding longer dated funds now?

Similarly, if one chooses to be in MM fund now, when their yields start going down (whenever the Fed pivots), one could then switch to bond funds. Wouldn’t they come out ahead by riding the higher current MM yields and then switching once the MM fund yields aren’t as comparatively attractive?

See this post:

viewtopic.php?p=7069510#p7069510

And this chart:



Basically, historically what has happened more often than not after the yield curve inverts is short-term rates have come down, and long-term rates have ALSO come down, just less. And that is how the curve "normalizes"--all rates drop, but short-term rates drop faster.

OK, so short-term rates just came down and you want to buy longer bonds--oops, their rates also dropped, and now they are a lot more expensive than they would have been if you hadn't waited.

It depends on the scenario, but in many cases you would have lost a lot more due to the increase in long-term prices than you would have made off the relatively minor difference between short- and long-term rates over the relatively brief period rates were inverted.

[garlandwhizzer]

Cash is good as rates and inflation rise because it loses no principal value. Bonds are good as rates and inflation fall because their principal value increases in that environment. More and more investors now are betting that we've seen the peak of rates and inflation and both will decline in the future, particularly if we encounter a significant recession with rising unemployment pushing the FED to reverse restrictive monetary policy. Moving from cash into bonds, attempts to ride this wave to increase future returns. I suspect they are right, that the worst of inflation and rates are in fact behind us, but when decreasing rates will actually start is an unknown. I still hold considerable cash in spite of that. I am 75% equity, a volatile portfolio, and I like a solid anchor. Cash is a true non-volatile anchor that holds its face value no matter which direction the rate/inflation environment is moving in. Those investors who shunned cash and loaded up on long term nominal bonds because of their fabulous performance for almost 4 decades--they suffered greatly in 2021-2 when unexpected inflation arrived big time. You don't need to hold cash until you do need it. Given that cash minimizes risk and volatility, cash's expected long term return is likewise minimal relative to longer duration bonds. The right mix of cash and bonds varies a lot from one investor to another depending on their individual circumstances.

Garland Whizzer

[Florida Orange]

The bonds you're talking about buying are selling at a percentage (which may be more or less than 100%) of their nominal value depending on how much interest they pay relative to current rates. Any advantage in interest rates will be offset by the premium/discount that you pay for the bonds. It is extremely unlikely that you will profit from moving money around to whatever currently has the highest interest rate.

[secondopinion]

Cash is good as rates and inflation rise because it loses no principal value. Bonds are good as rates and inflation fall because their principal value increases in that environment. More and more investors now are betting that we've seen the peak of rates and inflation and both will decline in the future, particularly if we encounter a significant recession with rising unemployment pushing the FED to reverse restrictive monetary policy. Moving from cash into bonds, attempts to ride this wave to increase future returns. I suspect they are right, that the worst of inflation and rates are in fact behind us, but when decreasing rates will actually start is an unknown. I still hold considerable cash in spite of that. I am 75% equity, a volatile portfolio, and I like a solid anchor. Cash is a true non-volatile anchor that holds its face value no matter which direction the rate/inflation environment is moving in. Those investors who shunned cash and loaded up on long term nominal bonds because of their fabulous performance for almost 4 decades--they suffered greatly in 2021-2 when unexpected inflation arrived big time. You don't need to hold cash until you do need it. Given that cash minimizes risk and volatility, cash's expected long term return is likewise minimal relative to longer duration bonds. The right mix of cash and bonds varies a lot from one investor to another depending on their individual circumstances.

Garland Whizzer

Key point right here. I hold both long-term TIPS and cash-like bonds for safety (of course, depending on the investment timeframe). Long-term nominal bonds are mostly speculative if one does not have long-term nominal expenses. Those with such nominal expenses would benefit from the hedging that nominal bonds provide.

[dcabler]

For bonds, I hold only TIPS and I hold them via duration matching. Happy as can be that when I started that, they had positive real yields. But it was more important that I generate a fairly deterministic, inflation adjusted income stream than anything else. Because of that, I don't really care whether their market value is up, down, or sideways. The income stream continues....

People who build true, non-rolling bond ladders generally think likewise. Maybe even more so because they'd have to make an extra effort to see what the market value of their bonds are at any given point in time.

Cheers.

[squirrel1963]

By cash I assume you mean money market.
Trying to time the switch from bonds to MM and then back is a fool's errand.
Just be happy with whatever you get from your favorite bond index ETF and stop worrying about short term movements.

[squirrel1963]

The bonds you're talking about buying are selling at a percentage (which may be more or less than 100%) of their nominal value depending on how much interest they pay relative to current rates. Any advantage in interest rates will be offset by the premium/discount that you pay for the bonds. It is extremely unlikely that you will profit from moving money around to whatever currently has the highest interest rate.

+1

[gavinsiu]

But would interest rates really stay low for 29 years?

It could, just look at Japan.

[GAAP]

One reason might be because they want to duration match the fixed income portion of their portfolio to minimize interest rate.

Another is that they want to use US Treasuries specifically for their slightly negative correlation with stocks -- not available elsewhere.

Or perhaps they want some degree of reliable inflation protection which is only provided by inflation-protected bonds.

Or because they don't want to try to market-time interest rate changes.

And, of course, some combination of the above reasons.

[Trance]

But would interest rates really stay low for 29 years?

It could, just look at Japan.

This has been my hesitancy for buying bonds during the accumulation phase. If this was pre-2008 I'd consider EDV or BLV (extended long and long bond etfs from Vanguard) since my retirement horizon is 30+ years out. But not post financial crisis

[UpperNwGuy]

I do not invest in cash, short-term bonds, or long-term bonds. I invest in the same intermediate-term bonds that I have always invested in. To make a change would be a futile attempt to time the market.

[whodidntante]

Reinvestment risk.

[muffins14]

Total Bond Market Index fund went UP more than 3% so far in 2023. How much did cash go up in the past 3 weeks?

At the expense of its yield going down though. Wouldn’t it be better to buy it after its yield has gone up and its price down?

Sort of like right now, since yields have gone to a lot during 2022?

If rates start to drop, short duration will likely drop more and faster than long durations. If you need money in 1 year buy 1 year bonds. If you need money in 10 years then buy 10 year bonds.

[Dandy]

I think most fixed income allocations should include FDIC type products, as well as short term and intermediate bond funds.

[martincmartin]

With the yield curve inverted and shorter duration (even money market) funds yielding more than longer maturities, why would an investor want to hold intermediate or long term bonds?

An inverted yield curve means the market expects interest rates to be high in the short term, but lower after that. So an example, maybe 10% over the next year, then 4% the year after that. This means a 1 year treasury has 10% interest, but a two year treasury has 7%, because they expect the one year treasury that goes on sale one year from now to fetch 4%.

Let's say your money market account pays 9% over the next year. Well, it might only pay 3% in the year after that.

tl;dr: the intermediate & long term bond yields are locked in for the duration. The money market yield fluctuates. Markets are expecting the money market yield to go down.

[Kookaburra]

Total Bond Market Index fund went UP more than 3% so far in 2023. How much did cash go up in the past 3 weeks?

Easy come, easy go.

[GAAP]

It seems to me that quite a lot of people posting on this topic should also read other this topic on duration matching: viewtopic.php?t=318412.

[Marseille07]

Total Bond Market Index fund went UP more than 3% so far in 2023. How much did cash go up in the past 3 weeks?

Easy come, easy go.

Yeah, yield chasing isn't that crazy of an idea when the curve is inverted.

I don't even understand why the above poster brought up 3 weeks. Our investing horizon is probably a bit longer than that.

[secondopinion]

I hold fixed income as usual, but as usual I do not hold a total bond market index fund. Never have; never will.

I rather fix the nominal returns in some amount than rely on the Fed to have rates in a favorable way. Do I have some treasury bills? Sure (for my expenses pending). But my bond duration has been increasing as a lot of flight to cash has occurred.

[gg13]

Would one possible reason be a focus on minimizing risk for satisfying future cash flows rather than a focus on taking risks to achieve higher NPV? My focus is on the former. I would likely be buying treasuries right now but for the fact that most of my holdings are in retirement accounts (defined contribution plans) that only offer bond funds and, in one account, TIAA Traditional. We have been fortunate and I think I could establish our retirement cash flows through age 95 or even 98 if I purchased long term treasuries, but I am forced to use bond funds, which might earn more or might earn less.