Investing in bonds

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Vulcan
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Re: Investing in bonds

Post by Vulcan »

mary1492 wrote: Sat Nov 27, 2021 3:29 pm
Vulcan wrote: Sat Nov 27, 2021 3:04 pm That is a great piece by Roger Aliaga-Diaz, Vanguard Chief Economist.

I used his quote below I once read somewhere as an epigraph to my IPS:

“It's difficult to make market calls above and beyond what the markets have already priced in. Not only do you have to be systematically correct, but everyone else has to be systematically wrong.”
I disagree with the quote. It may be the case if the market was 100% efficient, but it isn't...Fama was demonstrably wrong. Index funds prove the point in that they are buying and selling without regard to any fundamentals, technicals, valuation, or anything at all. They buy and sell on the basis of money inflows and outflows, index reconstitution, and nothing else. So, back to the quote, it doesn't require everyone else having to be systematically wrong. It's simply a matter of identifying market inefficiency and taking advantage of and exploiting it.
He didn't say "it's impossible". He said "it's difficult".

Whenever you are making a bet against the market, chances are there's someone (alive or artificial) from the likes of Jane Street or Citadel on the other end of that trade. Good luck betting against them.
If you torture the data long enough, it will confess to anything. ~Ronald Coase
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Vulcan
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Re: Investing in bonds

Post by Vulcan »

BitTooAggressive wrote: Sat Nov 27, 2021 11:10 pm I disagree. When interest rates are almost zero and you have inflation interest rates will be going higher.
And you are the only one privy to that information - so you are confident it's not already priced in?

Why do you disclose it in the public forum then?

Go and make billions trading against the market!
If you torture the data long enough, it will confess to anything. ~Ronald Coase
restingonmylaurels
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Re: Investing in bonds

Post by restingonmylaurels »

grabiner wrote: Wed Nov 24, 2021 8:00 pm Buy a bond fund with a duration no longer than your time horizon.

If you buy a ten-year bond and hold it for ten years, you know how much money you will get when it matures. The price might decline next year if rates rise, but the increased rate and yield will make up the loss.

Similarly, if you buy Total Bond Market Index, which has a 7-year duration, and the yields on its bonds rise 1% over some time period, you will lose 7%, but make up 1% per year over seven years to get the same return. If you have to sell in less than seven years, you may get a lower return. (If you are investing for retirement, your time horizon is more than 7 years even if you are already retired. If you are 65 and will live to 85, you will be spending money every year for 20 years, so you have a 10-year horizon.)

Bond traders already know about the probability of rising rates. This is why long-term bonds are traded at yields significantly higher than short-term bonds; the buyers of long-term bonds expect enough benefit from the higher yield to make up for the expected loss from rising rates and the higher risk. The only reason to vary your own bond strategy is your personal needs, as noted above; Total Bond Market is inappropriate if you are going to use the money to buy a house next year.
Simple and logical advice which should suit almost any circumstance.

However, you assume that one knows or has a time horizon. What if you really have no time horizon, which I assume means you will not ever need to draw the bond fund's capital but are fine to only draw its dividends forever. Does this imply you should be in long bonds or is there another answer?
Northern Flicker
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Re: Investing in bonds

Post by Northern Flicker »

exodusNH wrote: Sat Nov 27, 2021 3:50 pm
ivgrivchuck wrote: Thu Nov 25, 2021 4:49 pm
1937bert wrote: Wed Nov 24, 2021 11:26 am Best way to invest in bonds in rising interest rate environment?
I-bonds
I Bonds are great, but they pay 0% nominal.
I bonds currently pay 0% real, not 0% nominal.
Northern Flicker
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Re: Investing in bonds

Post by Northern Flicker »

grabiner wrote: Buy a bond fund with a duration no longer than your time horizon.

If you buy a ten-year bond and hold it for ten years, you know how much money you will get when it matures. The price might decline next year if rates rise, but the increased rate and yield will make up the loss.
It is worth mentioning that duration only matches term to maturity for a zero coupon bond. For bonds with coupon payments, the duration of the cash flows is shorter than the term to maturity.

The point about having a duration less than or equal to horizon is still correct even when duration is less than term to maturity.
mary1492
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Re: Investing in bonds

Post by mary1492 »

xyzzy
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mary1492
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Re: Investing in bonds

Post by mary1492 »

xyzzy
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grabiner
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Re: Investing in bonds

Post by grabiner »

9-5 Suited wrote: Sat Nov 27, 2021 10:34 pm Asking how to invest in bonds in a rising rate environment is like asking how to invest in stocks in a declining stock price environment. The question is fatally flawed because there is no such way to know you’re in that environment before it happens. Thus, you don’t invest in bonds differently today than you did a year ago.
There is a difference between the two, but one with little practical application. If bond traders expect rates to rise, they expect the short-term returns of long-term bonds to be lower than the yield. But because of that expectation, they will only trade long-term bonds at yields which give adequate compensation for the expected loss. This will be reflected in the yield curve; a steep yield curve is needed to give a normal risk premium in short-term returns for long-term bonds over short-term bonds.

But the conclusion is still the same. If the market expects long-term rates to rise by 1% next year, this should not affect your decision whether to buy long-term or short-term bonds; that decision depends on your time horizon and sensitivity to interest-rate risk. If you make a decision based on an assumption that rates will rise more than 1%, you are timing the bond market, which doesn't work well.

(Note that you can benefit from non-marketable fixed-income decisions. Interest rates and future expectations may make it more or less attractive to buy non-marketable I bonds or EE bonds, or to pay down a fixed-rate loan.)
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Vulcan
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Re: Investing in bonds

Post by Vulcan »

mary1492 wrote: Sun Nov 28, 2021 6:28 am
Vulcan wrote: Sat Nov 27, 2021 11:34 pm
mary1492 wrote: Sat Nov 27, 2021 3:29 pm
Vulcan wrote: Sat Nov 27, 2021 3:04 pm That is a great piece by Roger Aliaga-Diaz, Vanguard Chief Economist.

I used his quote below I once read somewhere as an epigraph to my IPS:

“It's difficult to make market calls above and beyond what the markets have already priced in. Not only do you have to be systematically correct, but everyone else has to be systematically wrong.”
I disagree with the quote. It may be the case if the market was 100% efficient, but it isn't...Fama was demonstrably wrong. Index funds prove the point in that they are buying and selling without regard to any fundamentals, technicals, valuation, or anything at all. They buy and sell on the basis of money inflows and outflows, index reconstitution, and nothing else. So, back to the quote, it doesn't require everyone else having to be systematically wrong. It's simply a matter of identifying market inefficiency and taking advantage of and exploiting it.
He didn't say "it's impossible". He said "it's difficult".

Whenever you are making a bet against the market, chances are there's someone (alive or artificial) from the likes of Jane Street or Citadel on the other end of that trade. Good luck betting against them.
And the reason so many folks make such statements is that they really do not know what they are doing and have no business participating in the market.
Just to make sure I understand: are you talking about Roger Aliaga-Diaz, Vanguard's Chief Economist?
If you torture the data long enough, it will confess to anything. ~Ronald Coase
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9-5 Suited
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Re: Investing in bonds

Post by 9-5 Suited »

BitTooAggressive wrote: Sat Nov 27, 2021 11:10 pm
9-5 Suited wrote: Sat Nov 27, 2021 10:34 pm
BitTooAggressive wrote: Sat Nov 27, 2021 12:18 pm The rising rates was a premise of the question.
Asking how to invest in bonds in a rising rate environment is like asking how to invest in stocks in a declining stock price environment. The question is fatally flawed because there is no such way to know you’re in that environment before it happens. Thus, you don’t invest in bonds differently today than you did a year ago.

Pick an AA you can stick with and match your bond duration to your investment horizon. That’s the answer to how to invest in bonds in a “rising rate environment”.
I disagree. When interest rates are almost zero and you have inflation interest rates will be going higher.
Check out this thread from 2015: viewtopic.php?t=177294

It’s not as simple as what you’re saying. Low current rates don’t give you special insight to the future that market participants haven’t priced in already.

I know some say the Fed’s actions are keeping rates artificially low, and of course they maybe (probably are?) right. But I’m not sure that really tells us much that is actionable since future actions could continue to push rates even lower as has happened in Europe where they have negative rates.

Matching bond duration to time horizon cures interest rate risk ills. It’s your best defense. And if you fear unexpected inflation, use TIPS and iBonds instead of nominal bonds. That’s very valid, I do it as well.
BitTooAggressive
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Re: Investing in bonds

Post by BitTooAggressive »

9-5 Suited wrote: Sun Nov 28, 2021 11:08 pm
BitTooAggressive wrote: Sat Nov 27, 2021 11:10 pm
9-5 Suited wrote: Sat Nov 27, 2021 10:34 pm
BitTooAggressive wrote: Sat Nov 27, 2021 12:18 pm The rising rates was a premise of the question.
Asking how to invest in bonds in a rising rate environment is like asking how to invest in stocks in a declining stock price environment. The question is fatally flawed because there is no such way to know you’re in that environment before it happens. Thus, you don’t invest in bonds differently today than you did a year ago.

Pick an AA you can stick with and match your bond duration to your investment horizon. That’s the answer to how to invest in bonds in a “rising rate environment”.
I disagree. When interest rates are almost zero and you have inflation interest rates will be going higher.
Check out this thread from 2015: viewtopic.php?t=177294

It’s not as simple as what you’re saying. Low current rates don’t give you special insight to the future that market participants haven’t priced in already.

I know some say the Fed’s actions are keeping rates artificially low, and of course they maybe (probably are?) right. But I’m not sure that really tells us much that is actionable since future actions could continue to push rates even lower as has happened in Europe where they have negative rates.

Matching bond duration to time horizon cures interest rate risk ills. It’s your best defense. And if you fear unexpected inflation, use TIPS and iBonds instead of nominal bonds. That’s very valid, I do it as well.
Thanks for the link. I have seen the thread. I have moved my bonds to short term tips fund well about 75 percent VTAPX. The remaining are just VBIRX.

I am more than willing to sacrifice a tiny bit of yield to reduce my interest rate risk.
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