Thinking about dialing back on int'l bonds and adding tips

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Raspberry-503
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Thinking about dialing back on int'l bonds and adding tips

Post by Raspberry-503 »

I have been following the Vanguard lifestyle overall asset allocation in my 60/40 portfolio (with hopefully 7-10 years to retirement). Vanguard is pretty heavy in Int'l bonds and I have been trying to understand why when many (not just on this forum) advise little to no int'l bonds. The 3-fund portfolio doesn't for example.
The argument that usd-hedged funds provide very little diversification is a powerful one, despite Vanguard's paper. I stayed with the Vanguard-like allocation because it didn't seem to be a big deal either way.

I had been trying with the idea of adding TIPS to the portfolio for a while, but a financial advisor I am no longer with talked me out of it, mostly pointing out that they are more likely to go in the red than a total is bond market (e.g. BND), but of course now everyone is talking inflation.

So maybe I am reacting to the FUD in the press (lots of talks of inflation in this forum lately too), or maybe I'm just finally getting the impetus to do some TIPS, especially as I'm getting closer (ish) to retirement.

Back then i had read an old article from Rick Ferri article advocating 20% of your bonds in TIPS. If i remember right it was written in the mod 2010s, so at a time where rates were still heading down, so i think the advice is even more pertinent today.

I own some I-Bonds, which i started as an emergency fund vehicle, and I now intend to buy $30K every year (we have a trust for the extra $10K) and while I found them as part of my 40% bond AA, they are not moving the needle fast enough.
Since they are also for inflation protection I'm thinking about making the I-Bonds+TIPS amount being 20% of my fixed income AA. The remaining 80% of fixed income would be split between intermediate term bonds (VBILX) and Total Bond Market (BND) because of the investment choices a available in my 401(k) and IRA which hold my bonds.

So I think I will sell enough BND in the IRA to buy TIPS.
I haven't yet researched TIPS funds/ETFs but it looks like they come in multiple time horizons, so i think I need to match the intermediate yield I am replacing.
Vanguard Inflation-Protected Securities Fund (VPISX) and it's Admiral Shares (VAIPX) seem to come up often (the regular investor fund ER is 0.20%).

I'm just worried I'm getting caught up in the media circus. That I'm catching up with my TIPS intentions late in the game and now buying at a premium. Also, but definition, even treasuries funds have inflation protection built-in as they will raise in value as inflation does.

On the other hand i don't think the move will hurt either, per Rick Ferri's article I am slightly increasing my diversification.
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Re: Thinking about dialing back on int'l bonds and adding tips

Post by Robot Monster »

Raspberry-503 wrote: Thu Nov 25, 2021 11:40 pm Also, [by] definition, even treasuries funds have inflation protection built-in as they will raise in value as inflation does.
Unsure what you mean by that. I suppose you could say that if bond yields went up in response to inflation, over time those higher yields would cause your BND fund to raise in value (after initially having dropped in value). I think, in the past, if someone had been presented with a scenario of 6% inflation, they'd expect bond yields to have soared in response. Trouble is, that didn't happen this time. See WillThrill's post. link
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Re: Thinking about dialing back on int'l bonds and adding tips

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Robot Monster wrote: Fri Nov 26, 2021 8:34 am
Raspberry-503 wrote: Thu Nov 25, 2021 11:40 pm Also, [by] definition, even treasuries funds have inflation protection built-in as they will raise in value as inflation does.
Unsure what you mean by that. I suppose you could say that if bond yields went up in response to inflation, over time those higher yields would cause your BND fund to raise in value (after initially having dropped in value). I think, in the past, if someone had been presented with a scenario of 6% inflation, they'd expect bond yields to have soared in response. Trouble is, that didn't happen this time. See WillThrill's post. link
Yeah I worded that very poorly, but yes I meant to say that as lower-yielding bonds mature, the fund will start carrying higher-yield bonds, although with a delay. I think we are still in the "delay" period with the recent inflation, and/or "the market" thinks the inflation is only temporary? Makes my head hurt but I think confirm I should get some inflation protection with TIPs as part of my diversification strategy.
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Re: Thinking about dialing back on int'l bonds and adding tips

Post by exodusNH »

Raspberry-503 wrote: Fri Nov 26, 2021 11:53 pm
Robot Monster wrote: Fri Nov 26, 2021 8:34 am
Raspberry-503 wrote: Thu Nov 25, 2021 11:40 pm Also, [by] definition, even treasuries funds have inflation protection built-in as they will raise in value as inflation does.
Unsure what you mean by that. I suppose you could say that if bond yields went up in response to inflation, over time those higher yields would cause your BND fund to raise in value (after initially having dropped in value). I think, in the past, if someone had been presented with a scenario of 6% inflation, they'd expect bond yields to have soared in response. Trouble is, that didn't happen this time. See WillThrill's post. link
Yeah I worded that very poorly, but yes I meant to say that as lower-yielding bonds mature, the fund will start carrying higher-yield bonds, although with a delay. I think we are still in the "delay" period with the recent inflation, and/or "the market" thinks the inflation is only temporary? Makes my head hurt but I think confirm I should get some inflation protection with TIPs as part of my diversification strategy.
I think most of us who have never had to experience inflation are now waking up to that risk. I'm still in the accumulation phase and haven't bought any bonds this year except I Bonds. They make up about 4% of my bond holdings. I intend them to be my the majority of my bond purchases next year.

I realize that they have an expected negative real return due to taxes, but they're going to act as part of my known expense floor. (E.g. property taxes and some of my heating.)

Depending on free cash next year, I may buy some EE bonds as well. I think those are only viable for me for a couple of more years because of the 20-year holding period where they make sense.
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Re: Thinking about dialing back on int'l bonds and adding tips

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I didn't realize how many TIP fund options there are. This list is quite old I think, but is a good place to start: http://www.altruistfa.com/tipsfunds.htm

Somehow I wasn't aware of Fidelity® Inflation-Protected Bond Index Fund (FIPDX). It seems like a good option, it's an undex ETF, has really low ER, and I'm with Fidelity to start with. Unless TIPS are an exception where active management is beneficial? But I'm not sure I understand how duration affects TIPS, and the main difference I see is that FIPDX has an average duration of 5.53 years (from https://fundresearch.fidelity.com/mutua ... /31635T104) and VAIPX average is 7.6 years (from https://investor.vanguard.com/mutual-fu ... olio/vaipx)
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Re: Thinking about dialing back on int'l bonds and adding tips

Post by David Jay »

And when inflation returns to the level of the last 35 years, what will you do then? Sell your TIPS fund and buy BND?
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Re: Thinking about dialing back on int'l bonds and adding tips

Post by grok87 »

i think it is easier to see the value of TIPS now. I think the currency hedged broad international bond index (VTABX) does bring valuable (potential) diversification to the table. it's just harder to see because it hasn't actually happened in a while. but if you look at 2013: the total bond index was down 2% but VTABX was up 1%.

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Last edited by grok87 on Sat Nov 27, 2021 9:12 am, edited 1 time in total.
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Re: Thinking about dialing back on int'l bonds and adding tips

Post by tibbitts »

In my case, by the time I think about changing something, it's almost always too late, and turns out to be the least advantageous time to make the change.
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Re: Thinking about dialing back on int'l bonds and adding tips

Post by Robot Monster »

Raspberry-503 wrote: Fri Nov 26, 2021 11:53 pm
Robot Monster wrote: Fri Nov 26, 2021 8:34 am
Raspberry-503 wrote: Thu Nov 25, 2021 11:40 pm Also, [by] definition, even treasuries funds have inflation protection built-in as they will raise in value as inflation does.
Unsure what you mean by that. I suppose you could say that if bond yields went up in response to inflation, over time those higher yields would cause your BND fund to raise in value (after initially having dropped in value). I think, in the past, if someone had been presented with a scenario of 6% inflation, they'd expect bond yields to have soared in response. Trouble is, that didn't happen this time. See WillThrill's post. link
Yeah I worded that very poorly, but yes I meant to say that as lower-yielding bonds mature, the fund will start carrying higher-yield bonds, although with a delay. I think we are still in the "delay" period with the recent inflation, and/or "the market" thinks the inflation is only temporary? Makes my head hurt but I think confirm I should get some inflation protection with TIPs as part of my diversification strategy.
If you're 60/40, I'm unsure you should be concerned about ‘financial repression’ – the suppression of interest rates below the rate of inflation. Yes, it will hurt your nominal bonds, but it may help your stocks; the more unappealing bonds become, the more pressured people are to invest in stocks. That said, it might not be unreasonable to split the bonds in a 60/40 between nominals and TIPS. The David Swensen portfolio has something like that split. link

Honestly, speaking as someone whose portfolio is mostly TIPS (50% TIPS with average duration of 14 years, 25% stocks and a little bit commodities, 25% cash) if I were in plain old 60/40, something like Wellington fund, I would just stay the course on that. Only if I were in Wellesley would I be concerned.

Inflation Adjusted Return from Jan 2021 - Oct 2021
Wellington Fund, 66.51% stocks, +9.04%
Wellesley Income Fund, 39.34% stocks, +1.13%
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Re: Thinking about dialing back on int'l bonds and adding tips

Post by Raspberry-503 »

David Jay wrote: Sat Nov 27, 2021 8:51 am And when inflation returns to the level of the last 35 years, what will you do then? Sell your TIPS fund and buy BND?
No, as I said in the OP, i was originally planning on having some TIPS, because of a number of books i was reading you split your bonds with tips (including Bogle's? Seemed to be common advice in the mid 2010s The David Swensen portfolio someone mentioned in this thread and the Rick Ferri article i mentioned are from that era) The fee-only fiduciary advisor in talked to as part as getting my portfolio in order talked me out of it, although i can't remember why. It may have been the same argument other have made, that your stocks are your inflation hedge.

The boglehead 3-fund portfolio doesn't bother with TIPS either (I'm guessing a total bond market fund may have some tips?)
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Re: Thinking about dialing back on int'l bonds and adding tips

Post by dwickenh »

tibbitts wrote: Sat Nov 27, 2021 9:09 am In my case, by the time I think about changing something, it's almost always too late, and turns out to be the least advantageous time to make the change.
You're not alone........

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Re: Thinking about dialing back on int'l bonds and adding tips

Post by MIretired »

(I'm guessing a total bond market fund may have some tips?)
TBM (VBTLX, BND) does not contain TIPS.
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Re: Thinking about dialing back on int'l bonds and adding tips

Post by rockstar »

My understanding is that I Bonds are backward looking 6 months. TIPS are backward looking a month. So the inflation ship has already sailed.

https://www.treasurydirect.gov/indiv/pr ... ibonds.htm

You can still buy I Bonds in January and capture the last 6 month adjustment. If you buy TIPS today, the adjustment is already baked in. You'll need even more inflation next year.

Investing all boils down to timing. And if you can't time, you buy everything. But then you dilute everything.
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Re: Thinking about dialing back on int'l bonds and adding tips

Post by abuss368 »

Raspberry-503 wrote: Fri Nov 26, 2021 11:53 pm
Robot Monster wrote: Fri Nov 26, 2021 8:34 am
Raspberry-503 wrote: Thu Nov 25, 2021 11:40 pm Also, [by] definition, even treasuries funds have inflation protection built-in as they will raise in value as inflation does.
Unsure what you mean by that. I suppose you could say that if bond yields went up in response to inflation, over time those higher yields would cause your BND fund to raise in value (after initially having dropped in value). I think, in the past, if someone had been presented with a scenario of 6% inflation, they'd expect bond yields to have soared in response. Trouble is, that didn't happen this time. See WillThrill's post. link
Yeah I worded that very poorly, but yes I meant to say that as lower-yielding bonds mature, the fund will start carrying higher-yield bonds, although with a delay. I think we are still in the "delay" period with the recent inflation, and/or "the market" thinks the inflation is only temporary? Makes my head hurt but I think confirm I should get some inflation protection with TIPs as part of my diversification strategy.
That is correct. There may be a delay but at some point higher yielding bonds should be issued in the markets for investors and funds to purchase.

If an investor is buying shares of the fund and reinvesting the dividends, this would help offset some of the inflation risks and provide for higher real returns (assuming inflation leveled off or perhaps decreased).

The question is when will the higher yielding bonds hit the markets?

Best.
Tony
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Re: Thinking about dialing back on int'l bonds and adding tips

Post by abuss368 »

Please remember that stocks over time should also provide positive real returns and fight inflation.

REITs are often mentioned as providing inflation protection as the underlying real estate has built in increases to leases and rental agreements.

Best.
Tony
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Re: Thinking about dialing back on int'l bonds and adding tips

Post by grok87 »

abuss368 wrote: Sat Nov 27, 2021 11:10 am Please remember that stocks over time should also provide positive real returns and fight inflation.

REITs are often mentioned as providing inflation protection as the underlying real estate has built in increases to leases and rental agreements.

Best.
Tony
it's instructive again to look at the 1970s
https://www.marketwatch.com/story/worri ... 1626658251
according to this link the real return for the S&P 500 from 1971-1981 was -16% or around -1.6% per year.

cheers,
grok
RIP Mr. Bogle.
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Re: Thinking about dialing back on int'l bonds and adding tips

Post by prioritarian »

Robot Monster wrote: Fri Nov 26, 2021 8:34 am
Raspberry-503 wrote: Thu Nov 25, 2021 11:40 pm Also, [by] definition, even treasuries funds have inflation protection built-in as they will raise in value as inflation does.
Unsure what you mean by that. I suppose you could say that if bond yields went up in response to inflation, over time those higher yields would cause your BND fund to raise in value (after initially having dropped in value). I think, in the past, if someone had been presented with a scenario of 6% inflation, they'd expect bond yields to have soared in response. Trouble is, that didn't happen this time. See WillThrill's post. link
Why would someone expect bond yields to soar? In fact, approx ten years ago inflation shot up 6% (from -2%) and the ten year yield actually went down.

Image
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Re: Thinking about dialing back on int'l bonds and adding tips

Post by Robot Monster »

prioritarian wrote: Mon Nov 29, 2021 12:13 am
Robot Monster wrote: Fri Nov 26, 2021 8:34 am
Raspberry-503 wrote: Thu Nov 25, 2021 11:40 pm Also, [by] definition, even treasuries funds have inflation protection built-in as they will raise in value as inflation does.
Unsure what you mean by that. I suppose you could say that if bond yields went up in response to inflation, over time those higher yields would cause your BND fund to raise in value (after initially having dropped in value). I think, in the past, if someone had been presented with a scenario of 6% inflation, they'd expect bond yields to have soared in response. Trouble is, that didn't happen this time. See WillThrill's post. link
Why would someone expect bond yields to soar? In fact, approx ten years ago inflation shot up 6% (from -2%) and the ten year yield actually went down.

Image
The real rate was positive during that time period. That chart does show the bond market experiencing negative real yield during a few instances, but nothing at all like what's happening now. Just look at how high that blue line is rising above the red one compared to the past.
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Re: Thinking about dialing back on int'l bonds and adding tips

Post by prioritarian »

Robot Monster wrote: Mon Nov 29, 2021 10:23 am
prioritarian wrote: Mon Nov 29, 2021 12:13 am
Robot Monster wrote: Fri Nov 26, 2021 8:34 am
Raspberry-503 wrote: Thu Nov 25, 2021 11:40 pm Also, [by] definition, even treasuries funds have inflation protection built-in as they will raise in value as inflation does.
Unsure what you mean by that. I suppose you could say that if bond yields went up in response to inflation, over time those higher yields would cause your BND fund to raise in value (after initially having dropped in value). I think, in the past, if someone had been presented with a scenario of 6% inflation, they'd expect bond yields to have soared in response. Trouble is, that didn't happen this time. See WillThrill's post. link
Why would someone expect bond yields to soar? In fact, approx ten years ago inflation shot up 6% (from -2%) and the ten year yield actually went down.

Image
The real rate was positive during that time period. That chart does show the bond market experiencing negative real yield during a few instances, but nothing at all like what's happening now. Just look at how high that blue line is rising above the red one compared to the past.
-2 to 4 is a 6% increase in inflation. negative real yield is not some novel economic phenomena and bonds have continued to function as equity diversifiers even during periods when negative real yields persisted for longer periods. i think the "replace bonds with cash-like investments" crowd are ignoring how bonds diversify equity risk.
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Re: Thinking about dialing back on int'l bonds and adding tips

Post by Robot Monster »

prioritarian wrote: Mon Nov 29, 2021 10:47 am
Robot Monster wrote: Mon Nov 29, 2021 10:23 am
prioritarian wrote: Mon Nov 29, 2021 12:13 am
Robot Monster wrote: Fri Nov 26, 2021 8:34 am
Raspberry-503 wrote: Thu Nov 25, 2021 11:40 pm Also, [by] definition, even treasuries funds have inflation protection built-in as they will raise in value as inflation does.
Unsure what you mean by that. I suppose you could say that if bond yields went up in response to inflation, over time those higher yields would cause your BND fund to raise in value (after initially having dropped in value). I think, in the past, if someone had been presented with a scenario of 6% inflation, they'd expect bond yields to have soared in response. Trouble is, that didn't happen this time. See WillThrill's post. link
Why would someone expect bond yields to soar? In fact, approx ten years ago inflation shot up 6% (from -2%) and the ten year yield actually went down.

Image
The real rate was positive during that time period. That chart does show the bond market experiencing negative real yield during a few instances, but nothing at all like what's happening now. Just look at how high that blue line is rising above the red one compared to the past.
-2 to 4 is a 6% increase in inflation. negative real yield is not some novel economic phenomena and bonds have continued to function as equity diversifiers even during periods when negative real yields persisted for longer periods. i think the "replace bonds with cash-like investments" crowd are ignoring how bonds diversify equity risk.


Just answering your question why people might have expected yields to have gone up presently. Not addressing what makes a good equity diversifier at the moment.

Let's see if I can reword this.

People might have expected rates to have risen so that real yields wouldn't be hugely negative.

If you look at your graph, from the time inflation was -2% to when it was 4%, real yields were mostly positive, but, yes, it was -2% around 2012. But not close to what we're seeing.

Hope that clarifies.
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