is share value of bond funds leveling out ?

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RustyShackleford
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is share value of bond funds leveling out ?

Post by RustyShackleford »

Unsurprisingly, I've seen the share prices of two bond funds (actually ETFs, BSV and BIV) that form a big part of my fixed-income holdings, fall rather precipitously in the last few months, as interest rates have fallen.

It's reasonable to ask, given that interest rates are very likely to experience significant further increases, if share prices will continue to fall ?

I recently read an article from Schwab: (https://www.schwab.com/learn/story/bond ... whats-next) that suggests that predicted further interest rate increases have already been priced into the market, e.g. "In our view, now that nominal yields are back at pre-pandemic levels seen in 2018, we believe that much of the rise in yields for the cycle is likely behind us."

Obviously this is very important to an investor looking to invest money in their FI portfolio.

Thoughts ? Is Schwab right ?
mega317
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Re: is share value of bond funds leveling out ?

Post by mega317 »

Check out this thread from a couple weeks ago:
https://bogleheads.org/forum/viewtopic.php?t=376852

Back up 2% from that post.
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jeffyscott
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Re: is share value of bond funds leveling out ?

Post by jeffyscott »

Fed expectations have shifted a bit lower/slower, for example:

Image
https://www.cmegroup.com/trading/intere ... -fomc.html
mary1492
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Re: is share value of bond funds leveling out ?

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jeffyscott
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Re: is share value of bond funds leveling out ?

Post by jeffyscott »

mary1492 wrote: Sat May 28, 2022 7:26 am It's not true that interest rates are very likely to experience further significant increases. I've said it all along, most of you folks are taking the Fed words at face value, and that is a very big mistake.
The Fed doesn't know what the Fed is going to do. It will depend on what actual inflation numbers (and other economic data) are as the data comes in.

The bigger mistake is those who think that the yields on 3 year, 5 year, 10 year, etc. bonds had not already priced in the Fed expectations and that future changes to those yields would be based on changes in Fed expectations and Fed actions that differ from those expectations.
IF there is a rate hike in July, it's only going to be 0.25%.
Expectations are still for 50 BP at the next meeting (93% chance based on website linked above, with the remainder expecting 75 BP), if it is 25 or if expectations shift in that direction, then the yields on longer bonds may drop some more (other factors could affect those rates as well, though).
Frank2012
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Re: is share value of bond funds leveling out ?

Post by Frank2012 »

jeffyscott wrote: Sat May 28, 2022 7:47 am
mary1492 wrote: Sat May 28, 2022 7:26 am It's not true that interest rates are very likely to experience further significant increases. I've said it all along, most of you folks are taking the Fed words at face value, and that is a very big mistake.
The Fed doesn't know what the Fed is going to do. It will depend on what actual inflation numbers (and other economic data) are as the data comes in.

The bigger mistake is those who think that the yields on 3 year, 5 year, 10 year, etc. bonds had not already priced in the Fed expectations and that future changes to those yields would be based on changes in Fed expectations and Fed actions that differ from those expectations.
IF there is a rate hike in July, it's only going to be 0.25%.
Expectations are still for 50 BP at the next meeting (93% chance based on website linked above, with the remainder expecting 75 BP), if it is 25 or if expectations shift in that direction, then the yields on longer bonds may drop some more (other factors could affect those rates as well, though).

But...the Fed is also reducing assets on its balance sheet starting in June and continuing for the next 3 months...won't all this selling of treasuries and mortgage backed securities have an impact on bonds and bond funds...and wouldn't that impact be to drive up yields furthering the losses to us long-suffering bond holders?

Full disclosure, I have 50% of my assets in bonds in the form of FUAMX (Fidelity 10-year Treasury) and VBTLX (Vanguard Total Bond), so this is of some concern to me, though I'm sticking with my IPS and staying the course as it were....
Robot Monster
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Re: is share value of bond funds leveling out ?

Post by Robot Monster »

mega317 wrote: Fri May 27, 2022 10:29 pm Check out this thread from a couple weeks ago:
https://bogleheads.org/forum/viewtopic.php?t=376852

Back up 2% from that post.
Thanks for remembering that. I see that that thread'd OP posted that, "...it still seems like shorting BND is a no-brainer. It has gone straight down, almost vertical, for all of 2022." Funny that OP almost nailed the 10yr yield top! OP posted on May 5th, where the 10yr closed that day at 3.068%, and on May 9th the 10yr seems to have peaked at an intraday high of 3.208%. Today the 10yr is 2.74%. So, far from it having been a no-brainer to short BND, it turned out you absolutely needed a brain. Get that person a brain!
gonefishing01
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Re: is share value of bond funds leveling out ?

Post by gonefishing01 »

mega317 wrote: Fri May 27, 2022 10:29 pm Check out this thread from a couple weeks ago:
https://bogleheads.org/forum/viewtopic.php?t=376852

Back up 2% from that post.
It’s uncanny how close to a top/bottom these threads appear. Reminds me of the Arkk crushing the market thread right at the top.
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Re: is share value of bond funds leveling out ?

Post by stevewolfe »

Frank2012 wrote: Sat May 28, 2022 8:11 am But...the Fed is also reducing assets on its balance sheet starting in June and continuing for the next 3 months...won't all this selling of treasuries and mortgage backed securities have an impact on bonds and bond funds...and wouldn't that impact be to drive up yields furthering the losses to us long-suffering bond holders?

Full disclosure, I have 50% of my assets in bonds in the form of FUAMX (Fidelity 10-year Treasury) and VBTLX (Vanguard Total Bond), so this is of some concern to me, though I'm sticking with my IPS and staying the course as it were....
They aren't going to be selling. They are just not going to reinvest all the funds they receive from maturing securities. You can read more about it here: https://www.stlouisfed.org/open-vault/2 ... 0in%20June.

Steve
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jeffyscott
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Re: is share value of bond funds leveling out ?

Post by jeffyscott »

Frank2012 wrote: Sat May 28, 2022 8:11 amBut...the Fed is also reducing assets on its balance sheet starting in June and continuing for the next 3 months...won't all this selling of treasuries and mortgage backed securities have an impact on bonds and bond funds...and wouldn't that impact be to drive up yields furthering the losses to us long-suffering bond holders?
It already has, everyone knows that is the expectation. Those who actively trade and, therefore, set the prices at which they are willing to buy/sell bonds have been bidding accordingly.

Now if they do something different from those expectations (or the expectations of what they are going to do changes) then that would affect the prices at the time it happens.
mary1492
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Re: is share value of bond funds leveling out ?

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nedsaid
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Re: is share value of bond funds leveling out ?

Post by nedsaid »

mary1492 wrote: Sat May 28, 2022 7:26 am
RustyShackleford wrote: Fri May 27, 2022 8:29 pm It's reasonable to ask, given that interest rates are very likely to experience significant further increases, if share prices will continue to fall ?
It's not true that interest rates are very likely to experience further significant increases. I've said it all along, most of you folks are taking the Fed words at face value, and that is a very big mistake. We know this from history, as in late 2018 the Fed told everyone that there would be three rate hikes in 2019, only to come through with one at the beginning, and then immediately reverse it. Over the past couple months folks that have been selling their bond allocations, pointing to a guarantee that interest rates are going much higher are likely going to be upset with their decision as this plays out. We see their threads starting every few days.

Based on data released yesterday, showing inflation slowing, we are likely near the end of rate hikes. Interest rates and the bond market immediately reflected this. There will very likely be no rate hikes beyond June and July. I would suggest that given the data released yesterday, IF there is a rate hike in July, it's only going to be 0.25%. We might even see just 0.25% in June. I would hope the Fed has learned from past mistakes, and begins to ease up, acknowledging that they need to allow time for the prior rate hikes to work their way through the economy, which can take up to 6 months. Further hiking at this time, could jeopardize the soft landing they are looking for.

For the investor committed to a fixed income portfolio, there should have been no changes to approach. For those primarily using funds, buy more while prices are down and yields are up. For those in individual bonds, as maturities/redemptions/interest roll in, redeploy the cash in to new bonds or other fixed income securities at lower prices and higher yield.
I suspect that you are not alone in your opinion. Not quite 30% of my retirement is in a Private Client Group managed portfolio. The last 2 months they have redeployed cash to buy more of an Investment Grade Intermediate Term Bond Fund, in other words what Bogleheads would consider a Core Bond position. My guess is that they believe that inflation has peaked and that there is opportunity in plain vanilla nominal bonds. You would think they would be loading up on TIPS but they have not. Over time, the managers have mostly rebalanced the portfolio but will make mild tactical shifts.

As far as the rest of my portfolio, I did mild rebalancing when stocks were still hot and did modest purchases of TIPS but nothing dramatic. So it is pretty much steady as she goes. No dramatic moves from me. I am watching the real yields from TIPS, that is after inflation, and those real yields have been turning positive. If nominal bonds rally, and TIPS real yields stay mostly positive, I may do another mild shift to TIPS. In retrospect, I realized that I didn't have enough TIPS but I refused to just pile into them. I had to hold my nose and buy more TIPS in three modest installments because real yields were negative. At that time, TIPS were the least dirty shirt in the laundry hamper.
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Frank2012
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Re: is share value of bond funds leveling out ?

Post by Frank2012 »

jeffyscott wrote: Sat May 28, 2022 8:50 am
Frank2012 wrote: Sat May 28, 2022 8:11 amBut...the Fed is also reducing assets on its balance sheet starting in June and continuing for the next 3 months...won't all this selling of treasuries and mortgage backed securities have an impact on bonds and bond funds...and wouldn't that impact be to drive up yields furthering the losses to us long-suffering bond holders?
It already has, everyone knows that is the expectation. Those who actively trade and, therefore, set the prices at which they are willing to buy/sell bonds have been bidding accordingly.

Now if they do something different from those expectations (or the expectations of what they are going to do changes) then that would affect the prices at the time it happens.
Agree with your post, thanks!
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Re: is share value of bond funds leveling out ?

Post by Frank2012 »

mary1492 wrote: Sat May 28, 2022 9:08 am
Frank2012 wrote: Sat May 28, 2022 8:11 am
jeffyscott wrote: Sat May 28, 2022 7:47 am
mary1492 wrote: Sat May 28, 2022 7:26 am It's not true that interest rates are very likely to experience further significant increases. I've said it all along, most of you folks are taking the Fed words at face value, and that is a very big mistake.
The Fed doesn't know what the Fed is going to do. It will depend on what actual inflation numbers (and other economic data) are as the data comes in.

The bigger mistake is those who think that the yields on 3 year, 5 year, 10 year, etc. bonds had not already priced in the Fed expectations and that future changes to those yields would be based on changes in Fed expectations and Fed actions that differ from those expectations.
IF there is a rate hike in July, it's only going to be 0.25%.
Expectations are still for 50 BP at the next meeting (93% chance based on website linked above, with the remainder expecting 75 BP), if it is 25 or if expectations shift in that direction, then the yields on longer bonds may drop some more (other factors could affect those rates as well, though).

But...the Fed is also reducing assets on its balance sheet starting in June and continuing for the next 3 months...won't all this selling of treasuries and mortgage backed securities have an impact on bonds and bond funds...and wouldn't that impact be to drive up yields furthering the losses to us long-suffering bond holders?

Full disclosure, I have 50% of my assets in bonds in the form of FUAMX (Fidelity 10-year Treasury) and VBTLX (Vanguard Total Bond), so this is of some concern to me, though I'm sticking with my IPS and staying the course as it were....
You don't have losses unless you sell.

How are you a long-suffering bondholder? How long has this downturn in bonds been, 5 months? There's been a bull market in bonds for the prior 40 years!

I have 99% in (individual) municipal bonds, treasuries, and CDs. I view this as a wonderful opportunity to grab higher yields, for as long as the situation persists. I have absolutely no losses. My yields/profits are locked in the day I buy the security. Does the bottom line on my portfolio fluctuate day to day? Of course, but those aren't profits/losses.
I've not been selling anything, in fact I've been adding to my index funds monthly via my IRA, and last week added to the index funds in my taxable accounts...otherwise, no selling except for annual rebalancing.

But, like others, I have taken notice that my portfolio is taking a hit, and I'm not used to my bond funds taking such a hit. But again, following my IPS and not panicking!
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Re: is share value of bond funds leveling out ?

Post by billaster »

Frank2012 wrote: Sat May 28, 2022 8:11 am But...the Fed is also reducing assets on its balance sheet starting in June and continuing for the next 3 months...won't all this selling of treasuries and mortgage backed securities have an impact on bonds and bond funds...and wouldn't that impact be to drive up yields furthering the losses to us long-suffering bond holders?
Yes, it will increase yields, but the important question is how much. And the answer is not a lot.

There's been a lot of research on the effects of quantitative easing on longer term yields. The general consensus is about 0.20%. That is, when the Fed was purchasing $80 billion in Treasuries per month, it depressed yields by about 0.20%.

When the Fed stopped purchasing Treasuries, in its gradual taper from last December through May, you would expect it to increase yields by about 0.20% as the effect of quantitative easing as removed.

In a symmetrical way, as the Fed sells $60 billion in Treasuries a month (or stops rolling over maturing Treasuries, a distinction without a difference) you would expect it to increase yields another, or a bit less than, 0.20%. Note that the sell off is somewhat slower than the purchases -- $60 billion vs $80 billion per month.

Keep in mind that the yield change due to asset purchases or sales is superimposed on the changes in the Fed's Federal Funds Rate, with the Federal Funds Rate doing the heavy lifting. For example the asset sales moves the yield 0.20% but the Federal Funds Rate change in May alone moved yields 0.50%.

Also keep in mind that the asset liquidation program is a one-time effect. It raises yields by 0.20% and that is constant for as long as the Fed keeps liquidating assets at the same monthly rate. It can do no more. Meanwhile the Fed can continue to increase the Federal Funds Rate as high as it wants.
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Re: is share value of bond funds leveling out ?

Post by Frank2012 »

billaster wrote: Sat May 28, 2022 11:14 am
Frank2012 wrote: Sat May 28, 2022 8:11 am But...the Fed is also reducing assets on its balance sheet starting in June and continuing for the next 3 months...won't all this selling of treasuries and mortgage backed securities have an impact on bonds and bond funds...and wouldn't that impact be to drive up yields furthering the losses to us long-suffering bond holders?
Yes, it will increase yields, but the important question is how much. And the answer is not a lot.

There's been a lot of research on the effects of quantitative easing on longer term yields. The general consensus is about 0.20%. That is, when the Fed was purchasing $80 billion in Treasuries per month, it depressed yields by about 0.20%.

When the Fed stopped purchasing Treasuries, in its gradual taper from last December through May, you would expect it to increase yields by about 0.20% as the effect of quantitative easing as removed.

In a symmetrical way, as the Fed sells $60 billion in Treasuries a month (or stops rolling over maturing Treasuries, a distinction without a difference) you would expect it to increase yields another, or a bit less than, 0.20%. Note that the sell off is somewhat slower than the purchases -- $60 billion vs $80 billion per month.

Keep in mind that the yield change due to asset purchases or sales is superimposed on the changes in the Fed's Federal Funds Rate, with the Federal Funds Rate doing the heavy lifting. For example the asset sales moves the yield 0.20% but the Federal Funds Rate change in May alone moved yields 0.50%.

Also keep in mind that the asset liquidation program is a one-time effect. It raises yields by 0.20% and that is constant for as long as the Fed keeps liquidating assets at the same monthly rate. It can do no more. Meanwhile the Fed can continue to increase the Federal Funds Rate as high as it wants.
billaster, excellent post, thanks for adding to my understanding, much appreciated!
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Re: is share value of bond funds leveling out ?

Post by nedsaid »

billaster wrote: Sat May 28, 2022 11:14 am
Frank2012 wrote: Sat May 28, 2022 8:11 am But...the Fed is also reducing assets on its balance sheet starting in June and continuing for the next 3 months...won't all this selling of treasuries and mortgage backed securities have an impact on bonds and bond funds...and wouldn't that impact be to drive up yields furthering the losses to us long-suffering bond holders?
Yes, it will increase yields, but the important question is how much. And the answer is not a lot.

There's been a lot of research on the effects of quantitative easing on longer term yields. The general consensus is about 0.20%. That is, when the Fed was purchasing $80 billion in Treasuries per month, it depressed yields by about 0.20%.

When the Fed stopped purchasing Treasuries, in its gradual taper from last December through May, you would expect it to increase yields by about 0.20% as the effect of quantitative easing as removed.

In a symmetrical way, as the Fed sells $60 billion in Treasuries a month (or stops rolling over maturing Treasuries, a distinction without a difference) you would expect it to increase yields another, or a bit less than, 0.20%. Note that the sell off is somewhat slower than the purchases -- $60 billion vs $80 billion per month.

Keep in mind that the yield change due to asset purchases or sales is superimposed on the changes in the Fed's Federal Funds Rate, with the Federal Funds Rate doing the heavy lifting. For example the asset sales moves the yield 0.20% but the Federal Funds Rate change in May alone moved yields 0.50%.

Also keep in mind that the asset liquidation program is a one-time effect. It raises yields by 0.20% and that is constant for as long as the Fed keeps liquidating assets at the same monthly rate. It can do no more. Meanwhile the Fed can continue to increase the Federal Funds Rate as high as it wants.
Please cite examples of the research you are referring to.
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Re: is share value of bond funds leveling out ?

Post by BigJohn »

mary1492 wrote: Sat May 28, 2022 7:26 am Based on data released yesterday, showing inflation slowing, we are likely near the end of rate hikes. Interest rates and the bond market immediately reflected this. There will very likely be no rate hikes beyond June and July. I would suggest that given the data released yesterday, IF there is a rate hike in July, it's only going to be 0.25%. We might even see just 0.25% in June. I would hope the Fed has learned from past mistakes, and begins to ease up, acknowledging that they need to allow time for the prior rate hikes to work their way through the economy, which can take up to 6 months. Further hiking at this time, could jeopardize the soft landing they are looking for.
The inflation statistics are pretty noisy. I don’t think anyone should conclude anything about a future trend based on one month up or down a bit. The reality is that no one, not even the Fed, knows what direction this will take in the next six months. It might be the beginning of a downward trend or next month may bounce back up.

My crystal ball remains broken so making any decisions on whether interest rates have leveled out or not isn’t prudent. I agree with you that the correct approach for a long term investor is to avoid these behavioral errors and stay the course.
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Re: is share value of bond funds leveling out ?

Post by nedsaid »

How much has Quantitative easing affected interest rates? Hard to say, I think it has been more than 0.2%.

I don't know these folks, don't know if this white paper comes from a good source but opinion here in this 2015 paper is that Quantitative Easing has reduced interest rates by 4%.

https://www.frbsf.org/wp-content/upload ... eynard.pdf
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Re: is share value of bond funds leveling out ?

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Re: is share value of bond funds leveling out ?

Post by billaster »

nedsaid wrote: Sat May 28, 2022 4:08 pm How much has Quantitative easing affected interest rates? Hard to say, I think it has been more than 0.2%.

I don't know these folks, don't know if this white paper comes from a good source but opinion here in this 2015 paper is that Quantitative Easing has reduced interest rates by 4%.

https://www.frbsf.org/wp-content/upload ... eynard.pdf
That paper isn't saying what you think it is saying. It is talking about QE as it relates to the Federal Funds Rate, not market interest rates.

One clue, even if you don't understand the paper, is that 10-year treasury rates haven't even been close to 4% before during or after quantitative easing in the last 15 years, so couldn't possibly have a 4% effect on yields.
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Re: is share value of bond funds leveling out ?

Post by nedsaid »

billaster wrote: Sat May 28, 2022 7:02 pm
nedsaid wrote: Sat May 28, 2022 4:08 pm How much has Quantitative easing affected interest rates? Hard to say, I think it has been more than 0.2%.

I don't know these folks, don't know if this white paper comes from a good source but opinion here in this 2015 paper is that Quantitative Easing has reduced interest rates by 4%.

https://www.frbsf.org/wp-content/upload ... eynard.pdf
That paper isn't saying what you think it is saying. It is talking about QE as it relates to the Federal Funds Rate, not market interest rates.

One clue, even if you don't understand the paper, is that 10-year treasury rates haven't even been close to 4% before during or after quantitative easing in the last 15 years, so couldn't possibly have a 4% effect on yields.
The Fed Funds rate is set by the Fed, the longer term rates are set by the markets. I understand that. I don't think that Quantitative easing has affected longer term interest rates by 4%, hard to say what the effect really is, but 0.2% seems too low. The sense that I got from the paper is that the Fed had a bigger effect than what you are saying.

What I do know is that lots of things changed in the markets in the aftermath of the 2008-2009 Financial Crisis. It seemed that interest rates were artificially low even with low inflation rates and even whiffs of deflation. It used to be that longer term bonds were priced with yields about 3% over inflation, a relationship that never held true again after the 2008-2009 Financial Crisis. Everything seemed, well, different. One big change is that the Fed did things in the aftermath of the crisis that it had never done before. It intervened in other areas of the Bond Market than just US Treasuries. The Fed and the TARP Program did some pretty wild things to unfreeze the Bond Market, it has been a long time and my recollection has faded.

Financial repression not only happened with short term rates but also happened in the longer maturities of the Bond Market which is something I didn't expect.

Part of what happened was the creation of money on the Government side with deficits and Fed action while at the same time lending by the Private Banks was suppressed. For example, it is much harder to obtain a mortgage today than it was in 2007! The paper did discuss the role of Private Banks in creating money. A lot of what happened was that much of the new monies created just sat there and didn't do much of anything. The money creation by the Government sector was offset by money destruction in the private sector and after the crisis, the new monies created by private banks was less than before.

It seems like there was a demarcation in the markets with the financial crisis. Sort of like B.C. and A.D. It was like the rules changed because of the 2008-2009 financial crisis and the Fed had an awful lot to do with it. Dodd-Frank and Sarbanes-Oxley years before that also changed the rules. Hard for me to see such dramatic changes and then turn around and say that the Fed actions had minimal impact. The markets pre-2008 are a whole lot different than the post-2008 markets. Lots of things have changed.

I did a Google search and pulled up the paper and posted the link. Don't know how good of a source this is or who the people are.

I have asked you twice to cite examples of the research you are basing your opinions on. So far you have not provided any examples. You just talk about research in general. Sources?
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Re: is share value of bond funds leveling out ?

Post by billaster »

nedsaid wrote: Sat May 28, 2022 7:35 pm The Fed Funds rate is set by the Fed, the longer term rates are set by the markets. I understand that. I don't think that Quantitative easing has affected longer term interest rates by 4%, hard to say what the effect really is, but 0.2% seems too low. The sense that I got from the paper is that the Fed had a bigger effect than what you are saying.
This paper isn't about QE related to yields. The paper is by an economist who was predicting a high inflation rate as a result of quantitative easing in 2012-2014. He claimed that the Federal Reserve must raise the Federal Funds Rate to 4% in order to control inflation in the aftermath of QE in 2014.

He turned out to be entirely wrong on both counts. The Federal Reserve keep their funds rate at zero for two more years after QE and then gradually raised their funds rate to 2.4% in 2019. And inflation never showed up over that entire period.

The paper simply isn't relevant to the question of the effect of QE on intermediate to long term interest rates.
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Re: is share value of bond funds leveling out ?

Post by billaster »

nedsaid wrote: Sat May 28, 2022 7:35 pm Hard for me to see such dramatic changes and then turn around and say that the Fed actions had minimal impact.
Nobody is saying that the Fed had minimal impact. They certainly had a very large impact by holding their Federal Funds Rate at zero for more than 7 years. That's the really big deal. Aside from that, quantitative easing had only a minor impact on Treasury yields. It had a larger effect on riskier mortgage backed securities and corporate yields.
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Re: is share value of bond funds leveling out ?

Post by nedsaid »

billaster wrote: Sat May 28, 2022 7:57 pm
nedsaid wrote: Sat May 28, 2022 7:35 pm The Fed Funds rate is set by the Fed, the longer term rates are set by the markets. I understand that. I don't think that Quantitative easing has affected longer term interest rates by 4%, hard to say what the effect really is, but 0.2% seems too low. The sense that I got from the paper is that the Fed had a bigger effect than what you are saying.
This paper isn't about QE related to yields. The paper is by an economist who was predicting a high inflation rate as a result of quantitative easing in 2012-2014. He claimed that the Federal Reserve must raise the Federal Funds Rate to 4% in order to control inflation in the aftermath of QE in 2014.

He turned out to be entirely wrong on both counts. The Federal Reserve keep their funds rate at zero for two more years after QE and then gradually raised their funds rate to 2.4% in 2019. And inflation never showed up over that entire period.

The paper simply isn't relevant to the question of the effect of QE on intermediate to long term interest rates.
Okay, thank you for the analysis. I did a search for the effects of Quantitative easing on interest rates and that is what came up. Not much.
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Re: is share value of bond funds leveling out ?

Post by nedsaid »

billaster wrote: Sat May 28, 2022 8:06 pm
nedsaid wrote: Sat May 28, 2022 7:35 pm Hard for me to see such dramatic changes and then turn around and say that the Fed actions had minimal impact.
Nobody is saying that the Fed had minimal impact. They certainly had a very large impact by holding their Federal Funds Rate at zero for more than 7 years. That's the really big deal. Aside from that, quantitative easing had only a minor impact on Treasury yields. It had a larger effect on riskier mortgage backed securities and corporate yields.
Fair comment. How much effect on mortgage backed securities and how much effect on corporate yields?
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billaster
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Re: is share value of bond funds leveling out ?

Post by billaster »

nedsaid wrote: Sat May 28, 2022 8:13 pm
billaster wrote: Sat May 28, 2022 8:06 pm
nedsaid wrote: Sat May 28, 2022 7:35 pm Hard for me to see such dramatic changes and then turn around and say that the Fed actions had minimal impact.
Nobody is saying that the Fed had minimal impact. They certainly had a very large impact by holding their Federal Funds Rate at zero for more than 7 years. That's the really big deal. Aside from that, quantitative easing had only a minor impact on Treasury yields. It had a larger effect on riskier mortgage backed securities and corporate yields.
Fair comment. How much effect on mortgage backed securities and how much effect on corporate yields?
It's hard to tease out changes from other macroeconomic events, so opinions vary, but my best estimate is that QE lowered Treasuries by about 0.2% and MBS and corporates by about 1.0%. You can look at all interest rates over the period from 2009 to 2019 just before the pandemic. There were three periods of quantitative easing and rates over that entire period just didn't move all that much in response. The zero federal funds rate was just anchoring everything at low yields. Quantitative easing was just a last resort by the Fed when zero federal fund rates wasn't enough.
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Beensabu
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Re: is share value of bond funds leveling out ?

Post by Beensabu »

In my extremely unprofessional opinion, I would be very surprised if the NAVs of investment grade bond funds fell much further from here. They might fall a little more, but it's probably mostly over. I have no links or data or citations or anything to back up my opinion. Zero. None. Just eyeballing a NAV chart over here and it's looking slightly oversold (at least as far as treasuries are concerned). Doesn't mean it can't hover around this price for a few years.

I'm not going to lie, I'm kind of annoyed at myself for overpaying at the end of last January. Eh, at least now I know how to identify a reasonable price point for making a big allocation shift to bonds next time (if there is next time), and it's not like last time will matter by then anyway. You live and you learn.
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grabiner
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Re: is share value of bond funds leveling out ?

Post by grabiner »

RustyShackleford wrote: Fri May 27, 2022 8:29 pm Unsurprisingly, I've seen the share prices of two bond funds (actually ETFs, BSV and BIV) that form a big part of my fixed-income holdings, fall rather precipitously in the last few months, as interest rates have fallen.

It's reasonable to ask, given that interest rates are very likely to experience significant further increases, if share prices will continue to fall ?
The value of a bond falls if the yield on that bond rises. But the rate that the Fed intends to increase is a very-short-term rate, not the intermediate-term rates on the bonds in BIV.
I recently read an article from Schwab: (https://www.schwab.com/learn/story/bond ... whats-next) that suggests that predicted further interest rate increases have already been priced into the market
This should always be the expectation. A bond trader can buy a five-year bond, or buy Treasury bills and renew them as they mature. For the five-year bond to be worth buying, it needs to outperform the expected short-term rate over the next five years by enough to compensate for its risk. Thus, if investors expect short-term rates to rise, long-term rates will be higher than short-term rates, but they won't change if short-term rate increases match expectations.

Currently, the Treasury yield curve is close to flat beyond two years, which implies that bond traders don't expect rates on bonds more than two years from maturity to change much.
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Re: is share value of bond funds leveling out ?

Post by billaster »

grabiner wrote: Sat May 28, 2022 10:19 pm Currently, the Treasury yield curve is close to flat beyond two years, which implies that bond traders don't expect rates on bonds more than two years from maturity to change much.
Which also implies that bond traders think inflation is coming back down quickly.
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Re: is share value of bond funds leveling out ?

Post by grabiner »

billaster wrote: Sat May 28, 2022 10:39 pm
grabiner wrote: Sat May 28, 2022 10:19 pm Currently, the Treasury yield curve is close to flat beyond two years, which implies that bond traders don't expect rates on bonds more than two years from maturity to change much.
Which also implies that bond traders think inflation is coming back down quickly.
This can also be confirmed by comparing Treasury and TIPS yields. A 5-year Treasury yields 2.74%, while a 5-year TIPS yields -0.24%. This would be break-even if inflation is 2.98% over those five years.
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Re: is share value of bond funds leveling out ?

Post by jeffyscott »

grabiner wrote: Sat May 28, 2022 10:49 pm
billaster wrote: Sat May 28, 2022 10:39 pm
grabiner wrote: Sat May 28, 2022 10:19 pm Currently, the Treasury yield curve is close to flat beyond two years, which implies that bond traders don't expect rates on bonds more than two years from maturity to change much.
Which also implies that bond traders think inflation is coming back down quickly.
This can also be confirmed by comparing Treasury and TIPS yields. A 5-year Treasury yields 2.74%, while a 5-year TIPS yields -0.24%. This would be break-even if inflation is 2.98% over those five years.
And based on one year treasury yield curve and TIPS quotes for next April and July (since there is no yield curve rate to go by), break even inflation is somewhere around 4.5-4.8%: viewtopic.php?p=6693608#p6693608

That and the ~3% over 5, imply about 2.5% per year average for the 4 year period starting a year from now.
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Re: is share value of bond funds leveling out ?

Post by BigJohn »

mary1492 wrote: Sat May 28, 2022 4:43 pm
BigJohn wrote: Sat May 28, 2022 3:46 pm
mary1492 wrote: Sat May 28, 2022 7:26 am Based on data released yesterday, showing inflation slowing, we are likely near the end of rate hikes. Interest rates and the bond market immediately reflected this. There will very likely be no rate hikes beyond June and July. I would suggest that given the data released yesterday, IF there is a rate hike in July, it's only going to be 0.25%. We might even see just 0.25% in June. I would hope the Fed has learned from past mistakes, and begins to ease up, acknowledging that they need to allow time for the prior rate hikes to work their way through the economy, which can take up to 6 months. Further hiking at this time, could jeopardize the soft landing they are looking for.
The inflation statistics are pretty noisy. I don’t think anyone should conclude anything about a future trend based on one month up or down a bit. The reality is that no one, not even the Fed, knows what direction this will take in the next six months. It might be the beginning of a downward trend or next month may bounce back up.

My crystal ball remains broken so making any decisions on whether interest rates have leveled out or not isn’t prudent. I agree with you that the correct approach for a long term investor is to avoid these behavioral errors and stay the course.
Say what you like - interest rates reacted pretty swiftly as did the bond market.
I agree but that doesn’t mean they’re right or that their crystal ball is working any better than mine. If you believe the markets are always near 100% efficient, then your assumptions are truly the best, most informed long term view. Personally I think the markets are a bit less rational/efficient right now as I’ve seen way to much jumping around based on short term news of the day. Maybe that’s the best they can do since no one really knows the long term outlook given the complexity of the systems involved. But as the past two years have shown us, lots of things we never expected can happen.
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Re: is share value of bond funds leveling out ?

Post by BigJohn »

mary1492 wrote: Sat May 28, 2022 4:43 pm
BigJohn wrote: Sat May 28, 2022 3:46 pm
mary1492 wrote: Sat May 28, 2022 7:26 am Based on data released yesterday, showing inflation slowing, we are likely near the end of rate hikes. Interest rates and the bond market immediately reflected this. There will very likely be no rate hikes beyond June and July. I would suggest that given the data released yesterday, IF there is a rate hike in July, it's only going to be 0.25%. We might even see just 0.25% in June. I would hope the Fed has learned from past mistakes, and begins to ease up, acknowledging that they need to allow time for the prior rate hikes to work their way through the economy, which can take up to 6 months. Further hiking at this time, could jeopardize the soft landing they are looking for.
The inflation statistics are pretty noisy. I don’t think anyone should conclude anything about a future trend based on one month up or down a bit. The reality is that no one, not even the Fed, knows what direction this will take in the next six months. It might be the beginning of a downward trend or next month may bounce back up.

My crystal ball remains broken so making any decisions on whether interest rates have leveled out or not isn’t prudent. I agree with you that the correct approach for a long term investor is to avoid these behavioral errors and stay the course.
Say what you like - interest rates reacted pretty swiftly as did the bond market.
Just statistical noise. Last month's number was not cause for celebration nor is the number today a cause for any increased panic. However, I'm going to bet that today the bond market will react like it is. In my mind what the numbers are saying is that inflation is holding steady at an elevated rate in the range of 8-9%. As I said, no one, not even the Fed, knows where this is going or how long it will take to get inflation trending down. As a result, making changes based on a prediction of interest rate movements is just as likely to end badly as it is to help. So you can either make a bet or stay the course, you're call.
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Re: is share value of bond funds leveling out ?

Post by nisiprius »

I believe people are (naturally, and as always) enthusiastically overinterpreting short-term random noise. Certainly there's nothing about that glitchy little hook at the end to make me think "leveling out."

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Re: is share value of bond funds leveling out ?

Post by Tamalak »

You should root for bond funds to go even lower. Unlike stocks, which can go down for many reasons, bonds' price sinkage almost always means higher future returns.
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Re: is share value of bond funds leveling out ?

Post by BigJohn »

nisiprius wrote: Fri Jun 10, 2022 8:41 am I believe people are (naturally, and as always) enthusiastically overinterpreting short-term random noise. Certainly there's nothing about that glitchy little hook at the end to make me think "leveling out."
Amen!

I wonder if that natural tendency is related to our confirmation bias or just our inherent need to always find a pattern? I learned a lot from "Thinking Fast and Slow" as well as other behavioral finance books. Even people who are truly experts in statistics, can and do make errors in interpreting the significance of their own data. And that error is almost always on the side of seeing trends or relationships when it's just statistical noise.
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