Bonds: What Are They Doing? Are They Doing Things?? Let's Find Out!

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Robot Monster
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Re: Bonds in free fall

Post by Robot Monster »

rockstar wrote: Sun Jan 09, 2022 4:37 pm Rates will be much higher by the end of the year.
I posted this in another thread, but just in case you didn't see it, could be of some interest.
Bond buyers face a “new conundrum” where Treasury yields will stay low even as the Federal Reserve hikes rates, despite the surge in the first week of the year, according to Goldman Sachs.

The investment bank expects the bond market to be reluctant to lift the terminal rate during the coming tightening cycle. So while raising its year-end forecast for the two-year yield, its calls for longer-dated yields stand. Goldman projects the five-year note to end 2022 at 1.8%, the 10-year to climb to 2% and the 30-year to reach 2.25%. A Bloomberg survey of 2022 predictions for these Treasury benchmarks shows median yields of 1.63%, 2.01% and 2.40%, respectively.
Jan 6th Bloomberg article link
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willthrill81
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Re: Bonds in free fall

Post by willthrill81 »

xraygoggles wrote: Sun Jan 09, 2022 4:49 pm This is a great thread which nicely explains what happened last week:

https://twitter.com/biancoresearch/stat ... 52513?s=20
Wow! What a great read! Thanks.

This confirmed what I have long suspected: the Fed's buying of Treasuries, both nominal and TIPS, has not been proportionate to their relative sizes. The Fed has bought more TIPS in the last two years than the Treasury issued over that time, meaning that TIPS yields are "no longer a market signal about inflation expectations."

Things could easily get really ugly (by bond standards at least) for bondholders in the near future.
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Robot Monster
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Re: Bonds in free fall

Post by Robot Monster »

For all those who don't want to dig through that Twitter thread, here's the extract of Jim Bianco saying the Fed ruined those break evens as an inflation indicator.

(You'll need to click this Twitter link to see the charts he refers to.) He says:
What about TIPS and narrowing break evens?

As the right chart shows, the Fed took over this market. They now own 25% of this market, up from less than 10% pre-pandemic.

The left chart shows the Fed has bought more TIPS than the Treasury issued the last two years!!

TIPS are no longer a market signal about inflation expectations, the Fed ruined this with its big footprint.

TIPS are flow driven and flows are dominated by expectations of the speed of the Fed printer.


(Yes, I did post this upthread in response to someone, but apparently no one saw it, so bears repetition.)
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Re: Bonds in free fall

Post by rockstar »

Robot Monster wrote: Sun Jan 09, 2022 5:01 pm
rockstar wrote: Sun Jan 09, 2022 4:37 pm Rates will be much higher by the end of the year.
I posted this in another thread, but just in case you didn't see it, could be of some interest.
Bond buyers face a “new conundrum” where Treasury yields will stay low even as the Federal Reserve hikes rates, despite the surge in the first week of the year, according to Goldman Sachs.

The investment bank expects the bond market to be reluctant to lift the terminal rate during the coming tightening cycle. So while raising its year-end forecast for the two-year yield, its calls for longer-dated yields stand. Goldman projects the five-year note to end 2022 at 1.8%, the 10-year to climb to 2% and the 30-year to reach 2.25%. A Bloomberg survey of 2022 predictions for these Treasury benchmarks shows median yields of 1.63%, 2.01% and 2.40%, respectively.
Jan 6th Bloomberg article link
I have had a low opinion of Goldman since the GFC. If they can't even make predictions to stay afloat without being bailed out, I don't trust their opinion.
Robot Monster
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Re: Bonds in free fall

Post by Robot Monster »

rockstar wrote: Sun Jan 09, 2022 5:23 pm
Robot Monster wrote: Sun Jan 09, 2022 5:01 pm
rockstar wrote: Sun Jan 09, 2022 4:37 pm Rates will be much higher by the end of the year.
I posted this in another thread, but just in case you didn't see it, could be of some interest.
Bond buyers face a “new conundrum” where Treasury yields will stay low even as the Federal Reserve hikes rates, despite the surge in the first week of the year, according to Goldman Sachs.

The investment bank expects the bond market to be reluctant to lift the terminal rate during the coming tightening cycle. So while raising its year-end forecast for the two-year yield, its calls for longer-dated yields stand. Goldman projects the five-year note to end 2022 at 1.8%, the 10-year to climb to 2% and the 30-year to reach 2.25%. A Bloomberg survey of 2022 predictions for these Treasury benchmarks shows median yields of 1.63%, 2.01% and 2.40%, respectively.
Jan 6th Bloomberg article link
I have had a low opinion of Goldman since the GFC. If they can't even make predictions to stay afloat without being bailed out, I don't trust their opinion.
You may very well be right that the yield surges past 2% by year end. I see a Bloomberg article from yesterday that says: (boldface is mine)
The torrid selloff that raced through the Treasury market this past week has investors bracing for further losses that would push the benchmark 10-year yield toward 2%, with growing expectations the Federal Reserve is poised to act quickly to tamp down the steepest inflation in four decades.

The relentless surge in yields has drawn comparisons with the sharp rise a year ago that extended across the opening three months of 2021. So far, the 10-year note yield has jumped from 1.51% on Dec. 31 to as much as 1.8% on Friday, the highest since January 2020. That sets up the market to soon challenge the year-end target of 2.04% from strategists surveyed by Bloomberg.
SeasOfCheese
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Re: Bonds in free fall

Post by SeasOfCheese »

willthrill81 wrote: Sun Jan 09, 2022 4:01 pm
Angst wrote: Sun Jan 09, 2022 3:54 pm
willthrill81 wrote: Sun Jan 09, 2022 3:31 pm
Triple digit golfer wrote: Sun Jan 09, 2022 3:29 pm
willthrill81 wrote: Sun Jan 09, 2022 3:20 pm

I know precisely what it is.
How can one time the market without predicting which direction the market will go?
By playing the odds. Does a card counter know what card will be dealt next?
I think one has to know the total number of cards for that to work, otherwise it's meaningless. And no one knows how many market up and market down cards are out there, we just have recent history to base our odds upon. That's kinda night and day, market games vs card games
It's not a 'night and day' difference, but it's true that the rules of card games are known in advance, and that's not true of the market. That's why any investment strategy involves risk.
I liked card counting back in the day. Never won much doing it but I was able to spend much longer at the tables drinking Heinekens for free.

As far as how this relates to bonds? I guess I view the bond market as if most of the 10's and aces have already been dealt by the Fed. So it's time to get up from the table and hit the loo, until the deck gets reshufled.
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Re: Bonds in free fall

Post by rockstar »

Robot Monster wrote: Sun Jan 09, 2022 5:44 pm
rockstar wrote: Sun Jan 09, 2022 5:23 pm
Robot Monster wrote: Sun Jan 09, 2022 5:01 pm
rockstar wrote: Sun Jan 09, 2022 4:37 pm Rates will be much higher by the end of the year.
I posted this in another thread, but just in case you didn't see it, could be of some interest.
Bond buyers face a “new conundrum” where Treasury yields will stay low even as the Federal Reserve hikes rates, despite the surge in the first week of the year, according to Goldman Sachs.

The investment bank expects the bond market to be reluctant to lift the terminal rate during the coming tightening cycle. So while raising its year-end forecast for the two-year yield, its calls for longer-dated yields stand. Goldman projects the five-year note to end 2022 at 1.8%, the 10-year to climb to 2% and the 30-year to reach 2.25%. A Bloomberg survey of 2022 predictions for these Treasury benchmarks shows median yields of 1.63%, 2.01% and 2.40%, respectively.
Jan 6th Bloomberg article link
I have had a low opinion of Goldman since the GFC. If they can't even make predictions to stay afloat without being bailed out, I don't trust their opinion.
You may very well be right that the yield surges past 2% by year end. I see a Bloomberg article from yesterday that says: (boldface is mine)
The torrid selloff that raced through the Treasury market this past week has investors bracing for further losses that would push the benchmark 10-year yield toward 2%, with growing expectations the Federal Reserve is poised to act quickly to tamp down the steepest inflation in four decades.

The relentless surge in yields has drawn comparisons with the sharp rise a year ago that extended across the opening three months of 2021. So far, the 10-year note yield has jumped from 1.51% on Dec. 31 to as much as 1.8% on Friday, the highest since January 2020. That sets up the market to soon challenge the year-end target of 2.04% from strategists surveyed by Bloomberg.
It really boils down to how much impact the run off of the balance sheet will have on yields. And that Goldman prediction came out before the FOMC meeting notes, where they explicitly state they plan to run-off the balance sheet. I would have to assume that they would have a forecast revision post a March increase.

I honestly wouldn't be surprised if rates (10 year) get back to where they were in 2019. Now, I have zero clue how fast it will take for them to get back to those rates. Two years seems as good as a guess as any. Of course, if inflation doesn't start to drop, maybe we get back there faster. But I really don't think low rates are a huge driver of inflation right now other than for homes and rentals for the average consumer. And the Fed did say that plan to run off their MBS portfolio faster than their treasury portfolio, so we should see mortgage rates climb faster. This should slow down the price increases for homes, but this is more than offset by a low supply.

The big take away for me to keep my eye on my guardrails and figure out where I want to allocate the proceeds. I don't mine locking in a real return on bonds for 5-10 years.
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Re: Bonds in free fall

Post by willthrill81 »

Robot Monster wrote: Sun Jan 09, 2022 5:17 pm For all those who don't want to dig through that Twitter thread, here's the extract of Jim Bianco saying the Fed ruined those break evens as an inflation indicator.

(You'll need to click this Twitter link to see the charts he refers to.) He says:
What about TIPS and narrowing break evens?

As the right chart shows, the Fed took over this market. They now own 25% of this market, up from less than 10% pre-pandemic.

The left chart shows the Fed has bought more TIPS than the Treasury issued the last two years!!

TIPS are no longer a market signal about inflation expectations, the Fed ruined this with its big footprint.

TIPS are flow driven and flows are dominated by expectations of the speed of the Fed printer.


(Yes, I did post this upthread in response to someone, but apparently no one saw it, so bears repetition.)
As I've been concerned about for some time now, that means that the TIPS break-even rates, which are usually taken to be fairly close indicators of the bond market's expected inflation, are overly conservative right now, possibly significantly. This means that nominal bondholders are more likely than not to continue to see significant real losses for some time.
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Re: Bonds in free fall

Post by DB2 »

rockstar wrote: Sun Jan 09, 2022 5:23 pm
I have had a low opinion of Goldman since the GFC. If they can't even make predictions to stay afloat without being bailed out, I don't trust their opinion.
Goldman has often done the opposite of what they state publicly in terms of predictions.
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Re: Bonds in free fall

Post by Tony-S »

willthrill81 wrote: Sun Jan 09, 2022 6:27 pm As I've been concerned about for some time now, that means that the TIPS break-even rates, which are usually taken to be fairly close indicators of the bond market's expected inflation, are overly conservative right now, possibly significantly. This means that nominal bondholders are more likely than not to continue to see significant real losses for some time.
So, what’s the move to make right now? Move TBM money to dividend or value funds?
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Re: Bonds in free fall

Post by willthrill81 »

Tony-S wrote: Sun Jan 09, 2022 6:40 pm
willthrill81 wrote: Sun Jan 09, 2022 6:27 pm As I've been concerned about for some time now, that means that the TIPS break-even rates, which are usually taken to be fairly close indicators of the bond market's expected inflation, are overly conservative right now, possibly significantly. This means that nominal bondholders are more likely than not to continue to see significant real losses for some time.
So, what’s the move to make right now? Move TBM money to dividend or value funds?
I would hesitate to trade fixed income for stocks unless you wish to make a permanent AA change. Rather, it would make more sense to me to buy I bonds and TIPS. If inflation is higher than the current TIPS breakeven rate, then TIPS will beat nominal Treasuries.
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Re: Bonds in free fall

Post by DB2 »

willthrill81 wrote: Sun Jan 09, 2022 6:42 pm
Tony-S wrote: Sun Jan 09, 2022 6:40 pm
willthrill81 wrote: Sun Jan 09, 2022 6:27 pm As I've been concerned about for some time now, that means that the TIPS break-even rates, which are usually taken to be fairly close indicators of the bond market's expected inflation, are overly conservative right now, possibly significantly. This means that nominal bondholders are more likely than not to continue to see significant real losses for some time.
So, what’s the move to make right now? Move TBM money to dividend or value funds?
I would hesitate to trade fixed income for stocks unless you wish to make a permanent AA change. Rather, it would make more sense to me to buy I bonds and TIPS. If inflation is higher than the current TIPS breakeven rate, then TIPS will beat nominal Treasuries.
Short-term Tips, right? Like VTIP?
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Re: Bonds in free fall

Post by Doc »

willthrill81 wrote: Sun Jan 09, 2022 6:42 pm I would hesitate to trade fixed income for stocks unless you wish to make a permanent AA change. Rather, it would make more sense to me to buy I bonds and TIPS. If inflation is higher than the current TIPS breakeven rate, then TIPS will beat nominal Treasuries.
Agree with the no AA change. But why not go into T-bills for 3 to 6 months while the market normalizes?
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Re: Bonds in free fall

Post by 000 »

Doc wrote: Sun Jan 09, 2022 7:12 pm
willthrill81 wrote: Sun Jan 09, 2022 6:42 pm I would hesitate to trade fixed income for stocks unless you wish to make a permanent AA change. Rather, it would make more sense to me to buy I bonds and TIPS. If inflation is higher than the current TIPS breakeven rate, then TIPS will beat nominal Treasuries.
Agree with the no AA change. But why not go into T-bills for 3 to 6 months while the market normalizes?
What if rates end up going down? Then do you capitulate and buy duration, or keep waiting?
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Re: Bonds in free fall

Post by willthrill81 »

000 wrote: Sun Jan 09, 2022 7:29 pm
Doc wrote: Sun Jan 09, 2022 7:12 pm
willthrill81 wrote: Sun Jan 09, 2022 6:42 pm I would hesitate to trade fixed income for stocks unless you wish to make a permanent AA change. Rather, it would make more sense to me to buy I bonds and TIPS. If inflation is higher than the current TIPS breakeven rate, then TIPS will beat nominal Treasuries.
Agree with the no AA change. But why not go into T-bills for 3 to 6 months while the market normalizes?
What if rates end up going down? Then do you capitulate and buy duration, or keep waiting?
Rates going down with inflation nearly 7%?
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Re: Bonds in free fall

Post by willthrill81 »

DB2 wrote: Sun Jan 09, 2022 7:01 pm
willthrill81 wrote: Sun Jan 09, 2022 6:42 pm
Tony-S wrote: Sun Jan 09, 2022 6:40 pm
willthrill81 wrote: Sun Jan 09, 2022 6:27 pm As I've been concerned about for some time now, that means that the TIPS break-even rates, which are usually taken to be fairly close indicators of the bond market's expected inflation, are overly conservative right now, possibly significantly. This means that nominal bondholders are more likely than not to continue to see significant real losses for some time.
So, what’s the move to make right now? Move TBM money to dividend or value funds?
I would hesitate to trade fixed income for stocks unless you wish to make a permanent AA change. Rather, it would make more sense to me to buy I bonds and TIPS. If inflation is higher than the current TIPS breakeven rate, then TIPS will beat nominal Treasuries.
Short-term Tips, right? Like VTIP?
Across the curve.
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Re: Bonds in free fall

Post by 000 »

willthrill81 wrote: Sun Jan 09, 2022 7:31 pm Rates going down with inflation nearly 7%?
Sure, why not? They aren't going to defeat 7% inflation by raising rates a little bit and they may be unable to raise them a lot so maybe they just won't bother. Or an external event could cause deflationary crash.
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Re: Bonds in free fall

Post by Firefly80 »

000 wrote: Sun Jan 09, 2022 7:43 pm
willthrill81 wrote: Sun Jan 09, 2022 7:31 pm Rates going down with inflation nearly 7%?
Sure, why not? They aren't going to defeat 7% inflation by raising rates a little bit and they may be unable to raise them a lot so maybe they just won't bother. Or an external event could cause deflationary crash.

COVID-22 ?
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Re: Bonds in free fall

Post by willthrill81 »

000 wrote: Sun Jan 09, 2022 7:43 pm
willthrill81 wrote: Sun Jan 09, 2022 7:31 pm Rates going down with inflation nearly 7%?
Sure, why not? They aren't going to defeat 7% inflation by raising rates a little bit and they may be unable to raise them a lot so maybe they just won't bother. Or an external event could cause deflationary crash.
Then my earlier recommendation for TIPS would be a great one. 8-)
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Re: Bonds in free fall

Post by BlueEars »

Doc wrote: Sun Jan 09, 2022 7:12 pm
willthrill81 wrote: Sun Jan 09, 2022 6:42 pm I would hesitate to trade fixed income for stocks unless you wish to make a permanent AA change. Rather, it would make more sense to me to buy I bonds and TIPS. If inflation is higher than the current TIPS breakeven rate, then TIPS will beat nominal Treasuries.
Agree with the no AA change. But why not go into T-bills for 3 to 6 months while the market normalizes?
Maybe this is a good idea for some fraction of my bond fund money currently in short term investment grade. If people here are confused about the Treasury operations and the effect on breakeven rates, then that signals a distrust of the bond market. Other large bond investors understand the dynamics a lot better then the individuals here I would think.

I chose to move my RMD money for this year to VUSXX (Treasury MM fund) last week before taking the RMD. Perhaps moving some more as a temporary measure is not a bad idea.
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Re: Bonds in free fall

Post by 000 »

willthrill81 wrote: Sun Jan 09, 2022 7:55 pm
000 wrote: Sun Jan 09, 2022 7:43 pm
willthrill81 wrote: Sun Jan 09, 2022 7:31 pm Rates going down with inflation nearly 7%?
Sure, why not? They aren't going to defeat 7% inflation by raising rates a little bit and they may be unable to raise them a lot so maybe they just won't bother. Or an external event could cause deflationary crash.
Then my earlier recommendation for TIPS would be a great one. 8-)
TIPS get adjusted downwards for deflation.

Real and nominal yield movements can also diverge, i.e. during liquidity event.
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Re: Bonds in free fall

Post by willthrill81 »

000 wrote: Sun Jan 09, 2022 8:06 pm
willthrill81 wrote: Sun Jan 09, 2022 7:55 pm
000 wrote: Sun Jan 09, 2022 7:43 pm
willthrill81 wrote: Sun Jan 09, 2022 7:31 pm Rates going down with inflation nearly 7%?
Sure, why not? They aren't going to defeat 7% inflation by raising rates a little bit and they may be unable to raise them a lot so maybe they just won't bother. Or an external event could cause deflationary crash.
Then my earlier recommendation for TIPS would be a great one. 8-)
TIPS get adjusted downwards for deflation.

Real and nominal yield movements can also diverge, i.e. during liquidity event.
I was thinking more about 7% inflation not being quelled than deflation, which seems extremely unlikely to me. If the GFC couldn't cause meaningful deflation, I don't see current events doing it, but those pesky black swans have a habit of showing up when you least expect them.
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Re: Bonds in free fall

Post by novolog »

if i had to guess bonds will not crack a positive real return for the next 5 years. maybe 10 years.
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Re: Bonds in free fall

Post by theac »

Robot Monster wrote: Sun Jan 09, 2022 10:12 am
theac wrote: Sat Jan 08, 2022 9:52 pm OK, maybe I'll start looking into Tips and reconsider them. Thanks

If I did decide to go with the Tips, how would you handle that?
Gradually do exchanges, or just do them all at once and be done with it?

And what if inflation were to drop off in the near future, like a year or two?
At that point would Tips still be the better choice?
From further up you mention you are "approx 80% holding in Total Bond Market at Vanguard". My parents are also heavily invested in nominals. There's a 10yr TIPS auction this month, and I'm discussing the idea with them of investing a big chunk of their money in it. They happen to be in cash. The Fed is now maybe looking to raise rates to combat inflation, but it's an unknown how high they'll go, and what inflation will be. Jeremy Siegel does not expect yields on cash or bonds to go above inflation and he predicts "cumulative inflation of 20% to 25%. I'm not talking about one year. I'm talking about a period of three to four years. It could be 7%, 7%, 7%, or 5%, 5%, 5%, 5%." article link

Basically, we don't know what kind of negative real yields cash or nominal bonds might experience. If my parents buy the 10yr TIPS they'd know what real yield they're going to get. They would eliminate that risk. We don't know how out of control inflation will get, and no one can say for sure what the Fed will do. TIPS protect you against this uncertainty. TIPS allow you to not worry about the Fed.

I think of TIPS like fire insurance. Imagine there's a fire raging in your neighborhood. You don't know if it's gonna head your way, so you buy insurance in case it does. The insurance doesn't necessarily pay off. The fire could go the opposite direction. Likewise, inflation could come down next year, and the investment in TIPS doesn't pay off, but this will be no different from any other time insurance doesn't pay off. Most of the time insurance doesn't pay off, but that doesn't mean it didn't make sense to have it.

Speaking personally, my own portfolio is roughly 65% TIPS, 25% stocks, 10% cash. My portfolio is heavily influenced by Vineviz (see below).
Speaking very generally, it usually makes sense to hold some TIPS when your portfolio is is less than 70% stocks.

If your portfolio is less than 50% stocks it could make sense to have most of your bonds as TIPS.

A very rough rule of thumb, in table form:

Code: Select all

Stocks	LTT	TIPS	STIG
100%	0%	0%	0%
90%	10%	0%	0%
80%	20%	0%	0%
70%	20%	10%	0%
60%	20%	20%	0%
50%	20%	30%	0%
40%	10%	40%	10%
30%	0%	50%	20%
LTT = Long-term Treasuries
TIPS = Broad TIPS fund (or Series I Savings Bonds or individual TIPS ladder)
STIG = Short-term investment grade corporate bond fund
link to original post

Whether to go all at once into TIPS, or slowly, I think all at once. You wouldn't add fire insurance incrementally, after all.
Thanks. I just read all the posts between your above reply up to the present moment, and although I don't fully understand TIPS, nor IN THE PAST have felt comfortable with them, just to play it safe and to diversify my Total Bond Fund holding, will start with the minimum $50k req'd to open VAIPX Adm shares
(but I'm considering $100k, haven't decided yet).

Now if I-Bonds didn't have the $10k annual limit, I would have definitely been buying a lot more of them over the years rather than buying into this TIPS fund, because I really do like I-Bonds and have been comfortable with them for years. But that was never an option.

I don't own any Vanguard ETFs and thought I might go with one now, but I see they only have one for short-term on TIPS, so will have to stick with VAIPX.

Thanks to all for the info on TIPS you've posted.
Seems like a good time to switch some of the Total Bond to VAIPX. :happy

P.S. In comparing the 2 funds,
just looking at this seems to say VAIPX is a good bet, right?
(I'm showing pre-tax returns since this is all held in a ROTH)

Average annual performance—quarter end
...................VAIPX Adm........VBTLX Adm
YTD..............5.68%.............-1.67%

YTD as-of date......12/31/2021........12/31/2021
1-year..................5.68%................-1.67%
3-year..................8.24%.................4.82%
5-year..................5.18%.................3.58%
10-year................2.98%.................2.86%

1-, 3-, 5-, 10-year as-of date....12/31/2021.............12/31/2021
Since inception........................4.19%...................4.08%

Inception date.....................06/10/2005.............11/12/2001

SEC yield 30 day....................–1.70% A,G...............1.60% A

SEC yield as-of date...............01/06/2022.............01/06/2022
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Re: Bonds in free fall

Post by Firefly80 »

Robot Monster wrote: Sat Jan 08, 2022 8:20 pm
Firefly80 wrote: Sat Jan 08, 2022 8:12 pm
Robot Monster wrote: Sat Jan 08, 2022 7:15 pm
Firefly80 wrote: Sat Jan 08, 2022 5:41 pm
Robot Monster wrote: Sat Jan 08, 2022 3:29 pm

Some thoughts...

Remember that the yield on the 10yr Treasury in the early 80s was very, very high. The average yield on the 10yr for 1980 was 11.43%, for 1981 was even higher at 13.92%. So, even if the Fed sold off its entire bond portfolio, I'm unsure it would lead us back to a rate anything that high.

If bond yields actual grinded high enough to offer a real yield, that would have implications for the stock market too, wouldn't it? Just for the simple reason TINA might be hurt, and this market has benefited greatly from TINA, no? Especially tech stocks?

There would also be implications for the national debt. If this country actually had to pay a real interest rates on all that debt, that might be unpalatable.

There could be a temporary spike in rates to deal with inflation, but that's quite different than the Fed wanting to raise rates as an ongoing thing, I think.

Anyway, if rates did rise from today's level and end up somewhat high, let's say the 10yr at 3%, that would be good for bondholders in the long run, if they hold their bonds longer than duration.

Yes, as another poster indicated the Yields were very high in the 80's because we were coming off very high Inflation. That's the only reason Fed raises rates is to fight inflation whether reactively or preemptively. And it's the same reason for them to roll off their Bond portfolio, is to combat Inflation by increasing borrowing costs. Controlling inflation is part of the fed's Dual mandate.

While it seems like the Fed is propping up stock prices and that seems true to some extent their priority is Inflation and Employment. The yields may even reach levels where it's competing with stocks. That will definitely reduce the Equity Risk Premium.

The question is do extended lower Stock prices translate into higher Unemployment? Stock market and general Economy are not as correlated as we might believe.

Higher yields will be good for bond holders in the future but it's not good for bondholders now!
I think it's very possible for yields to go up, depending on what happens--what happens with inflation, and how the Fed reacts. I think it is conceivable it could hurt stocks. Trouble is there is just no telling the future, so it just ends up not being actionable, I think.

But actually my post was responding to the idea about how high rates might go in the future. We don't know, but it is conceivable they could be contained because of the factors I mentioned above, and for other reasons like overseas buyers, aging population, etc.

Should bondholders care about the "now"? Though it will be upsetting to see bonds go down in value, isn't the grand scheme of things what matters most? I own Vanguard TIPS fund. The key is to hold for longer than the duration of the fund. Good post by Nisiprius:
nisiprius wrote: Thu Jun 10, 2021 8:49 am This assumes real interest rates rise from 0% to 2% over a period of two years. For this calculation I tweaked the bond maturities to get a slightly longer duration, 8 years, to roughly match the 7.4-year duration of the Vanguard VIPS fund, VAIPX.

Image

This is not a greed-inspiring picture, but it's not terrifying. We are seeing a -13% drawdown...

That's what I was trying to point out in the other thread. That plot considers a interest rate rise over a two year period in isolation. What we will be getting is a Interest Rate rise along Fed reduction in Bond assets, it's double whammy.
The graph shows what will happen if bond yields rise 2%. This could be caused by multiple factors, including a reduction of assets by the Fed. (Maybe the confusion is his term interest rates, but he means the yield on bonds--he's not referring to the Fed Funds rate.)

The Fed Funds rate is loosely related to the 10Y yield. I agree multiple factors can cause the yield to rise including reduction of assets. That's what so alarming is the rate at which it's rising which is unprecedented.

https://twitter.com/biancoresearch/stat ... 52513?s=20

After looking at this thread here, it just re-affirms what I was thinking. The fed does seem to own a significant portions of the bond market.
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Re: Bonds in free fall

Post by MattB »

willthrill81 wrote: Sun Jan 09, 2022 3:31 pm
Triple digit golfer wrote: Sun Jan 09, 2022 3:29 pm How can one time the market without predicting which direction the market will go?
By playing the odds. Does a card counter know what card will be dealt next?
This must be a joke?

Correct me if I'm wrong, but you claim to be able to time the market without predicting the future but "by playing the odds." Do those odds include both what direction the market will move and when. And if so, can you please share where you got your crystal ball.
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Re: Bonds in free fall

Post by MattB »

xraygoggles wrote: Sun Jan 09, 2022 4:49 pm This is a great thread which nicely explains what happened last week:

https://twitter.com/biancoresearch/stat ... 52513?s=20
This is excellent, thank you for posting.
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Re: Bonds in free fall

Post by willthrill81 »

MattB wrote: Sun Jan 09, 2022 9:49 pm
willthrill81 wrote: Sun Jan 09, 2022 3:31 pm
Triple digit golfer wrote: Sun Jan 09, 2022 3:29 pm How can one time the market without predicting which direction the market will go?
By playing the odds. Does a card counter know what card will be dealt next?
This must be a joke?

Correct me if I'm wrong, but you claim to be able to time the market without predicting the future but "by playing the odds." Do those odds include both what direction the market will move and when. And if so, can you please share where you got your crystal ball.
At this point, this seems to be trolling. Northern Flicker explained the situation aptly here, and I expounded even further in a response to Triple Digit Golfer. If that's not enough, I can't help you further. Have a good evening.
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Re: Bonds in free fall

Post by MattB »

willthrill81 wrote: Sun Jan 09, 2022 9:56 pm
MattB wrote: Sun Jan 09, 2022 9:49 pm
willthrill81 wrote: Sun Jan 09, 2022 3:31 pm
Triple digit golfer wrote: Sun Jan 09, 2022 3:29 pm How can one time the market without predicting which direction the market will go?
By playing the odds. Does a card counter know what card will be dealt next?
This must be a joke?

Correct me if I'm wrong, but you claim to be able to time the market without predicting the future but "by playing the odds." Do those odds include both what direction the market will move and when. And if so, can you please share where you got your crystal ball.
At this point, this seems to be trolling. Northern Flicker explained the situation aptly here, and I expounded even further in a response to Triple Digit Golfer. If that's not enough, I can't help you further. Have a good evening.
Not trolling at all.

You claimed to be able to market time, which is more or less a cardinal sin on this forum, and to be able to do it without predicting the future no less. Then you refuse to explain how you can do it, ask deflecting questions, point to other's posts, etc.

If you can market time without predicting the future, please explain how.

If you can't, own the fact that you claimed to be able to do something that is impossible.

That's the least you can do for the broad public.
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Re: Bonds in free fall

Post by GP813 »

Nobody knows what's going to happen with the bond market, it does not exist in a vacuum and is subject to other real world events which can change in an instant.
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Re: Bonds in free fall

Post by Doc »

000 wrote: Sun Jan 09, 2022 7:29 pm
Doc wrote: Sun Jan 09, 2022 7:12 pm
willthrill81 wrote: Sun Jan 09, 2022 6:42 pm I would hesitate to trade fixed income for stocks unless you wish to make a permanent AA change. Rather, it would make more sense to me to buy I bonds and TIPS. If inflation is higher than the current TIPS breakeven rate, then TIPS will beat nominal Treasuries.
Agree with the no AA change. But why not go into T-bills for 3 to 6 months while the market normalizes?
What if rates end up going down? Then do you capitulate and buy duration, or keep waiting?
Why buy duration and take on capital loss risk when rates finally due rise. I'm not making enough money on Treasuries now to make any difference in my spending habits.
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Re: Bonds in free fall

Post by Doc »

BlueEars wrote: Sun Jan 09, 2022 7:57 pm
Doc wrote: Sun Jan 09, 2022 7:12 pm
willthrill81 wrote: Sun Jan 09, 2022 6:42 pm I would hesitate to trade fixed income for stocks unless you wish to make a permanent AA change. Rather, it would make more sense to me to buy I bonds and TIPS. If inflation is higher than the current TIPS breakeven rate, then TIPS will beat nominal Treasuries.
Agree with the no AA change. But why not go into T-bills for 3 to 6 months while the market normalizes?
Maybe this is a good idea for some fraction of my bond fund money currently in short term investment grade. If people here are confused about the Treasury operations and the effect on breakeven rates, then that signals a distrust of the bond market. Other large bond investors understand the dynamics a lot better then the individuals here I would think.
The money I have in my T-bill ladder is the same money that I would normally have in a 7-3 Treasury ladder. That ladder today would have practically zero between the rungs. Rolling down the yield curve is a non starter with a flat yield curve.

Right about the other large bond investors. And the yield on Treasuries is basically driven by those same investors. Noise from/about the FED notwithstanding.
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Re: Bonds in free fall

Post by Robot Monster »

theac wrote: Sun Jan 09, 2022 8:49 pm Thanks to all for the info on TIPS you've posted.
Seems like a good time to switch some of the Total Bond to VAIPX. :happy

P.S. In comparing the 2 funds,
just looking at this seems to say VAIPX is a good bet, right?
(I'm showing pre-tax returns since this is all held in a ROTH)

Average annual performance—quarter end
...................VAIPX Adm........VBTLX Adm
YTD..............5.68%.............-1.67%

YTD as-of date......12/31/2021........12/31/2021
1-year..................5.68%................-1.67%
3-year..................8.24%.................4.82%
5-year..................5.18%.................3.58%
10-year................2.98%.................2.86%

1-, 3-, 5-, 10-year as-of date....12/31/2021.............12/31/2021
Since inception........................4.19%...................4.08%

Inception date.....................06/10/2005.............11/12/2001

SEC yield 30 day....................–1.70% A,G...............1.60% A

SEC yield as-of date...............01/06/2022.............01/06/2022
Glad you found my post helpful!

The historical performance doesn't figure too much into my thinking. I look at it for what to expect in terms of volatility, but it didn't help me make the decision on TIPS vs nominals. I constructed two portfolios for comparison in Portfolio Visualizer for you to see. Two 20/80 portfolios, with one having bonds split between the TIPS fund and Total Bond, the other just having Total Bond.
Portfolio Visualizer link
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Re: Bonds in free fall

Post by theac »

Robot Monster wrote: Mon Jan 10, 2022 9:15 am
Glad you found my post helpful!

The historical performance doesn't figure too much into my thinking. I look at it for what to expect in terms of volatility, but it didn't help me make the decision on TIPS vs nominals. I constructed two portfolios for comparison in Portfolio Visualizer for you to see. Two 20/80 portfolios, with one having bonds split between the TIPS fund and Total Bond, the other just having Total Bond.
Portfolio Visualizer link
Wow, that is a pretty cool little tool! :happy

Thanks for going thru the trouble of doing that.
You guys are definitely operating on a totally different level than I am,
I've never even used one of those tools.

Looks like it is better to diversify my bonds by adding those TIPS.
And I just put in my order for $100k exchange from Total Bond, so all set.
Thanks
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Re: Bonds in free fall

Post by Firefly80 »

Robot Monster wrote: Mon Jan 10, 2022 9:15 am
Glad you found my post helpful!

The historical performance doesn't figure too much into my thinking. I look at it for what to expect in terms of volatility, but it didn't help me make the decision on TIPS vs nominals. I constructed two portfolios for comparison in Portfolio Visualizer for you to see. Two 20/80 portfolios, with one having bonds split between the TIPS fund and Total Bond, the other just having Total Bond.
Portfolio Visualizer link

So it looks like TIPS are a lot more volatile than the Total Bond Market, hence the higher return. Also the Total Bond Market is not really "Total" because it offers no exposure to TIPS!
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Re: Bonds in free fall

Post by Tony-S »

willthrill81 wrote: Sun Jan 09, 2022 6:42 pm
Tony-S wrote: Sun Jan 09, 2022 6:40 pm
willthrill81 wrote: Sun Jan 09, 2022 6:27 pm As I've been concerned about for some time now, that means that the TIPS break-even rates, which are usually taken to be fairly close indicators of the bond market's expected inflation, are overly conservative right now, possibly significantly. This means that nominal bondholders are more likely than not to continue to see significant real losses for some time.
So, what’s the move to make right now? Move TBM money to dividend or value funds?
I would hesitate to trade fixed income for stocks unless you wish to make a permanent AA change. Rather, it would make more sense to me to buy I bonds and TIPS. If inflation is higher than the current TIPS breakeven rate, then TIPS will beat nominal Treasuries.
Would you still maintain a position in Total Bond? If so, what percentage? Or just do a complete swap from Total Bond to a TIPS fund?
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Re: Bonds in free fall

Post by dbr »

Tony-S wrote: Mon Jan 10, 2022 2:26 pm
willthrill81 wrote: Sun Jan 09, 2022 6:42 pm
Tony-S wrote: Sun Jan 09, 2022 6:40 pm
willthrill81 wrote: Sun Jan 09, 2022 6:27 pm As I've been concerned about for some time now, that means that the TIPS break-even rates, which are usually taken to be fairly close indicators of the bond market's expected inflation, are overly conservative right now, possibly significantly. This means that nominal bondholders are more likely than not to continue to see significant real losses for some time.
So, what’s the move to make right now? Move TBM money to dividend or value funds?
I would hesitate to trade fixed income for stocks unless you wish to make a permanent AA change. Rather, it would make more sense to me to buy I bonds and TIPS. If inflation is higher than the current TIPS breakeven rate, then TIPS will beat nominal Treasuries.
Would you still maintain a position in Total Bond? If so, what percentage? Or just do a complete swap from Total Bond to a TIPS fund?
If you think it is useful for you to have much of your fixed income allocation in TIPS then you would do that as soon as you realize what makes sense and you would stay there forever. To try to choose between TIPS and nominal bonds based on figuring out what is beating what is not a good idea.
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Re: Bonds in free fall

Post by Doc »

dbr wrote: Mon Jan 10, 2022 2:29 pm To try to choose between TIPS and nominal bonds based on figuring out what is beating what is not a good idea.
Right.

Using TIPS as a nominal Treasury is a non-starter.

Image
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Re: Bonds in free fall

Post by willthrill81 »

Tony-S wrote: Mon Jan 10, 2022 2:26 pm
willthrill81 wrote: Sun Jan 09, 2022 6:42 pm
Tony-S wrote: Sun Jan 09, 2022 6:40 pm
willthrill81 wrote: Sun Jan 09, 2022 6:27 pm As I've been concerned about for some time now, that means that the TIPS break-even rates, which are usually taken to be fairly close indicators of the bond market's expected inflation, are overly conservative right now, possibly significantly. This means that nominal bondholders are more likely than not to continue to see significant real losses for some time.
So, what’s the move to make right now? Move TBM money to dividend or value funds?
I would hesitate to trade fixed income for stocks unless you wish to make a permanent AA change. Rather, it would make more sense to me to buy I bonds and TIPS. If inflation is higher than the current TIPS breakeven rate, then TIPS will beat nominal Treasuries.
Would you still maintain a position in Total Bond? If so, what percentage? Or just do a complete swap from Total Bond to a TIPS fund?
Long ago, I would have moved completely out of TBM and all nominals in favor of I bonds and TIPS. I was advocating this long before inflation started ticking up. There's little to no expected premium for taking on the risk of nominal bonds.
dbr wrote: Mon Jan 10, 2022 2:29 pm If you think it is useful for you to have much of your fixed income allocation in TIPS then you would do that as soon as you realize what makes sense and you would stay there forever. To try to choose between TIPS and nominal bonds based on figuring out what is beating what is not a good idea.
Agreed.
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Re: Bonds in free fall

Post by 000 »

Doc wrote: Mon Jan 10, 2022 9:01 am Why buy duration and take on capital loss risk when rates finally due rise. I'm not making enough money on Treasuries now to make any difference in my spending habits.
Maybe rates actually go down and you're now buying T bills at a negative yield.
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Re: Bonds in free fall

Post by vineviz »

willthrill81 wrote: Sun Jan 09, 2022 5:03 pm
This confirmed what I have long suspected: the Fed's buying of Treasuries, both nominal and TIPS, has not been proportionate to their relative sizes. The Fed has bought more TIPS in the last two years than the Treasury issued over that time, meaning that TIPS yields are "no longer a market signal about inflation expectations."
FWIW, it turns out that the so-called breakeven inflation rate was ALWAYS a noisy and biased proxy for inflation exceptions.

See: https://www.frbsf.org/economic-research ... 017-11.pdf for some detailed discussion on necessary adjustments.
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Re: Bonds in free fall

Post by Doc »

willthrill81 wrote: Mon Jan 10, 2022 3:35 pm Long ago, I would have moved completely out of TBM and all nominals in favor of I bonds and TIPS. I was advocating this long before inflation started ticking up. There's little to no expected premium for taking on the risk of nominal bonds.
You are ignoring how TIPS behaved in the 2008 stock market crash. If you are not going to rebalance into equites in such a scenario then your analysis makes more sense.

See: First 20% of bonds in long-term Treasuries viewtopic.php?p=4684892#p4684892
Last edited by Doc on Mon Jan 10, 2022 3:48 pm, edited 1 time in total.
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Re: Bonds in free fall

Post by willthrill81 »

Doc wrote: Mon Jan 10, 2022 3:44 pm
willthrill81 wrote: Mon Jan 10, 2022 3:35 pm Long ago, I would have moved completely out of TBM and all nominals in favor of I bonds and TIPS. I was advocating this long before inflation started ticking up. There's little to no expected premium for taking on the risk of nominal bonds.
You are ignoring how TIPS behaved in the 2008 stock market crash. If you are not going to rebalance into equites in such a scenario then your analysis makes more sense.
I'm not ignoring it. How any instrument behaved during the GFC shouldn't permanently alter one's investment strategy IMHO.
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Re: Bonds in free fall

Post by willthrill81 »

vineviz wrote: Mon Jan 10, 2022 3:42 pm
willthrill81 wrote: Sun Jan 09, 2022 5:03 pm
This confirmed what I have long suspected: the Fed's buying of Treasuries, both nominal and TIPS, has not been proportionate to their relative sizes. The Fed has bought more TIPS in the last two years than the Treasury issued over that time, meaning that TIPS yields are "no longer a market signal about inflation expectations."
FWIW, it turns out that the so-called breakeven inflation rate was ALWAYS a noisy and biased proxy for inflation exceptions.

See: https://www.frbsf.org/economic-research ... 017-11.pdf for some detailed discussion on necessary adjustments.
That's certainly true, but it seems more likely than not to me that TIPS' yields are significantly lower than they would be if the Fed hadn't bought so many. That means that the bond market apart from the Fed is likely anticipating higher inflation than what is suggested by TIPS break-even yields and also means that TIPS may be underpriced right now. But I don't know what the future will bring. YMMV.
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Re: Bonds in free fall

Post by Doc »

willthrill81 wrote: Mon Jan 10, 2022 3:47 pm
Doc wrote: Mon Jan 10, 2022 3:44 pm
willthrill81 wrote: Mon Jan 10, 2022 3:35 pm Long ago, I would have moved completely out of TBM and all nominals in favor of I bonds and TIPS. I was advocating this long before inflation started ticking up. There's little to no expected premium for taking on the risk of nominal bonds.
You are ignoring how TIPS behaved in the 2008 stock market crash. If you are not going to rebalance into equites in such a scenario then your analysis makes more sense.
I'm not ignoring it. How any instrument behaved during the GFC shouldn't permanently alter one's investment strategy IMHO.
It doesn't alter my strategy at all. It's part of my strategy. IMEO :D
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Re: Bonds in free fall

Post by Robot Monster »

Doc wrote: Mon Jan 10, 2022 3:50 pm
willthrill81 wrote: Mon Jan 10, 2022 3:47 pm
Doc wrote: Mon Jan 10, 2022 3:44 pm
willthrill81 wrote: Mon Jan 10, 2022 3:35 pm Long ago, I would have moved completely out of TBM and all nominals in favor of I bonds and TIPS. I was advocating this long before inflation started ticking up. There's little to no expected premium for taking on the risk of nominal bonds.
You are ignoring how TIPS behaved in the 2008 stock market crash. If you are not going to rebalance into equites in such a scenario then your analysis makes more sense.
I'm not ignoring it. How any instrument behaved during the GFC shouldn't permanently alter one's investment strategy IMHO.
It doesn't alter my strategy at all. It's part of my strategy. IMEO :D
Am I missing something? Seems like TIPS would have provided a very nice rebalancing opportunity. Portfolio Visualizer link
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Re: Bonds in free fall

Post by 000 »

Anyone else loading up on nominals? :greedy
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Re: Bonds in free fall

Post by Doc »

000 wrote: Mon Jan 10, 2022 4:08 pm Anyone else loading up on nominals? :greedy
I'm not loading up on nominals. I just stopped buying TIPs after 2008.

Given today's bond market anyone "loading up" on fixed income of any type is hardly greedy. :D

(For those of you that want an expense matching portfolio in retirement TIPS likely have a place.)
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Re: Bonds in free fall

Post by Doc »

Robot Monster wrote: Mon Jan 10, 2022 4:05 pm
Doc wrote: Mon Jan 10, 2022 3:50 pm
willthrill81 wrote: Mon Jan 10, 2022 3:47 pm
Doc wrote: Mon Jan 10, 2022 3:44 pm
willthrill81 wrote: Mon Jan 10, 2022 3:35 pm Long ago, I would have moved completely out of TBM and all nominals in favor of I bonds and TIPS. I was advocating this long before inflation started ticking up. There's little to no expected premium for taking on the risk of nominal bonds.
You are ignoring how TIPS behaved in the 2008 stock market crash. If you are not going to rebalance into equites in such a scenario then your analysis makes more sense.
I'm not ignoring it. How any instrument behaved during the GFC shouldn't permanently alter one's investment strategy IMHO.
It doesn't alter my strategy at all. It's part of my strategy. IMEO :D
Am I missing something? Seems like TIPS would have provided a very nice rebalancing opportunity. Portfolio Visualizer link
Yeh, you're missing something. Comparing TIPs with a Total Bond portfolio is a non starter.
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Re: Bonds in free fall

Post by Robot Monster »

Doc wrote: Mon Jan 10, 2022 4:18 pm
Robot Monster wrote: Mon Jan 10, 2022 4:05 pm
Doc wrote: Mon Jan 10, 2022 3:50 pm
willthrill81 wrote: Mon Jan 10, 2022 3:47 pm
Doc wrote: Mon Jan 10, 2022 3:44 pm

You are ignoring how TIPS behaved in the 2008 stock market crash. If you are not going to rebalance into equites in such a scenario then your analysis makes more sense.
I'm not ignoring it. How any instrument behaved during the GFC shouldn't permanently alter one's investment strategy IMHO.
It doesn't alter my strategy at all. It's part of my strategy. IMEO :D
Am I missing something? Seems like TIPS would have provided a very nice rebalancing opportunity. Portfolio Visualizer link
Yeh, you're missing something. Comparing TIPs with a Total Bond portfolio is a non starter.
I just don't understand why rebalancing from Total Bond should be considered acceptable, but rebalancing from TIPS wouldn't, given the similarity of performance between the two in a 60/40 portfolio. Yes, TIPS did worse, but not so much worse you still wouldn't do very well rebalancing from it.
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