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 »

Tom_T wrote: Sat Jan 08, 2022 9:28 am I don't really mind holding some cash as part of my fixed allocation right now. I'd like to see how things shake out. This isn't like stocks -- it's not like having cash is going to cost me a 25% rise in bonds. In the meantime, I've maxxed out i Bonds for 2021 and 2022, and will continue to add to them each year. And I have some stable value in my 401K. (I'm 63, so my situation is certainly different than someone in the accumulation stage.)
I'm 10% cash, and am honestly unsure if that is the best move. Jeremy Siegel expects the curve to invert, and for stocks to do well this year, so it's very possible I won't be able to deploy my cash into any kind of bond/stock downturn. Siegel expects inflation to rage on, so even though he thinks the Fed Funds rate will reach 2%, that still might translate into negative real rates of perhaps -3% or -4% on cash.
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Re: Bonds in free fall

Post by Doc »

Greg in Idaho wrote: Sat Jan 08, 2022 8:20 am This...some BH Bond Pundits will say that bonds are contracts so you know exactly what you are getting when you buy bonds,
Not true for Mortgage Backed Securities. The terms for Treasuries and corporates are set by the lender which is us investors. While for MBS the rate may be set by the lender but the term of note is controlled by the borrower to a large extent. If mortgage rates rise the homeowner is less likely to sell and buy a new home. So the "normal" term of the now low interest loan gets extended and we the lenders suffer. The opposite is also true if rates fall. Then the homeowner refinances at a lower rate again disadvantaging the lenders.

This is called negative convexity.

See for example https://www.investopedia.com/terms/c/convexity.asp
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Tom_T
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Re: Bonds in free fall

Post by Tom_T »

Robot Monster wrote: Sat Jan 08, 2022 9:59 am
Tom_T wrote: Sat Jan 08, 2022 9:28 am I don't really mind holding some cash as part of my fixed allocation right now. I'd like to see how things shake out. This isn't like stocks -- it's not like having cash is going to cost me a 25% rise in bonds. In the meantime, I've maxxed out i Bonds for 2021 and 2022, and will continue to add to them each year. And I have some stable value in my 401K. (I'm 63, so my situation is certainly different than someone in the accumulation stage.)
I'm 10% cash, and am honestly unsure if that is the best move. Jeremy Siegel expects the curve to invert, and for stocks to do well this year, so it's very possible I won't be able to deploy my cash into any kind of bond/stock downturn. Siegel expects inflation to rage on, so even though he thinks the Fed Funds rate will reach 2%, that still might translate into negative real rates of perhaps -3% or -4% on cash.
Everyone's been citing real rates of return lately, and I have an issue/question. Inflation may be 6%, but there is no question that it was not nearly that for most of my expenses last year. Gas/groceries, yes, but a good 2/3 of my expenses were in line with prior years. So I'm having trouble thinking "I'm losing x% real", because that's not really true for my expenses. I don't know if I'm thinking about this the wrong way, but it seems to make sense for me to consider my personal inflation rate, no?
Robot Monster
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Re: Bonds in free fall

Post by Robot Monster »

Tom_T wrote: Sat Jan 08, 2022 10:40 am
Robot Monster wrote: Sat Jan 08, 2022 9:59 am
Tom_T wrote: Sat Jan 08, 2022 9:28 am I don't really mind holding some cash as part of my fixed allocation right now. I'd like to see how things shake out. This isn't like stocks -- it's not like having cash is going to cost me a 25% rise in bonds. In the meantime, I've maxxed out i Bonds for 2021 and 2022, and will continue to add to them each year. And I have some stable value in my 401K. (I'm 63, so my situation is certainly different than someone in the accumulation stage.)
I'm 10% cash, and am honestly unsure if that is the best move. Jeremy Siegel expects the curve to invert, and for stocks to do well this year, so it's very possible I won't be able to deploy my cash into any kind of bond/stock downturn. Siegel expects inflation to rage on, so even though he thinks the Fed Funds rate will reach 2%, that still might translate into negative real rates of perhaps -3% or -4% on cash.
Everyone's been citing real rates of return lately, and I have an issue/question. Inflation may be 6%, but there is no question that it was not nearly that for most of my expenses last year. Gas/groceries, yes, but a good 2/3 of my expenses were in line with prior years. So I'm having trouble thinking "I'm losing x% real", because that's not really true for my expenses. I don't know if I'm thinking about this the wrong way, but it seems to make sense for me to consider my personal inflation rate, no?
That makes sense, yes.
dbr
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Re: Bonds in free fall

Post by dbr »

Tom_T wrote: Sat Jan 08, 2022 10:40 am
Everyone's been citing real rates of return lately, and I have an issue/question. Inflation may be 6%, but there is no question that it was not nearly that for most of my expenses last year. Gas/groceries, yes, but a good 2/3 of my expenses were in line with prior years. So I'm having trouble thinking "I'm losing x% real", because that's not really true for my expenses. I don't know if I'm thinking about this the wrong way, but it seems to make sense for me to consider my personal inflation rate, no?
You could if your return on investments is directly linked to your spending. For the most part it doesn't work that way. If you are running a model to see if you can support future spending and your assessment about personal inflation is that it is less than CPI inflation, then you would want to inflate your spending at a correct rate in your model for the future.

Otherwise real return is a logical pro forma for recognizing the value of the money equivalent of your portfolio.

Another way to look at it is that real return is a possible way to value a portfolio but there is no particular criterion for what that return needs to be until you lay out a specific objective for your wealth. That also means that there is no inherent significance to return, real or otherwise, being negative as such.
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nedsaid
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Re: Bonds in free fall

Post by nedsaid »

Doc wrote: Sat Jan 08, 2022 10:10 am
Greg in Idaho wrote: Sat Jan 08, 2022 8:20 am This...some BH Bond Pundits will say that bonds are contracts so you know exactly what you are getting when you buy bonds,
Not true for Mortgage Backed Securities. The terms for Treasuries and corporates are set by the lender which is us investors. While for MBS the rate may be set by the lender but the term of note is controlled by the borrower to a large extent. If mortgage rates rise the homeowner is less likely to sell and buy a new home. So the "normal" term of the now low interest loan gets extended and we the lenders suffer. The opposite is also true if rates fall. Then the homeowner refinances at a lower rate again disadvantaging the lenders.

This is called negative convexity.

See for example https://www.investopedia.com/terms/c/convexity.asp
One reason that I did a GNMA for TIPS shift in my own portfolio.
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Re: Bonds in free fall

Post by DB2 »

Tom_T wrote: Sat Jan 08, 2022 8:48 am
Greg in Idaho wrote: Sat Jan 08, 2022 8:20 am
MattB wrote: Sat Jan 08, 2022 1:31 am
I don't understand why "nobody knows nothing" should only apply to the equity side of investing.
This...some BH Bond Pundits will say that bonds are contracts so you know exactly what you are getting when you buy bonds, and that the deals on on offer today are not attractive (ignoring that we know nothing about what happens tomorrow and the day after, while generalizing that "bonds suck").
Bonds may be contracts but bond funds are unpredictable - especially something like Total Bond Market. Nobody can reliably determine what will happen to TBM if certain rates rise. There was a very good post a while back about how TBM is essentially impossible to predict because nobody knows what bonds the fund managers are buying and selling, and at what prices/rates, every day. We've had several occasions in the past where rates rose over a period of time, and TBM's total return was still positive even though the "formula" would have said otherwise.
Agreed. Since the 80s, we've been in a disinflationary environment with a bond bull market that has peaked. We've seen the gradually reduction in yields which will be negative for at least the next 10 years in inflationary terms. TBM is going to have another tough year (for a bond fund) as the rate increases are being priced in as we speak.

With that said, I don't believe the Fed has the ability to let rates go up too much...because of the astronomical amount of debt out there at every level (govt, state, corporate, consumer, etc.) and the Fed NEEDS to keep asset prices elevated. We saw what happened in the fall of 2018 in a growing economy, no Covid or inflationary pressures, when the Fed tried to "normalize" rates with QT. A 50% stock market crash will cause a major crisis and severe recession. They are ultimately going to have to let inflation run hot....the 2020s don't look pretty.
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Re: Bonds in free fall

Post by BlueEars »

Robot Monster wrote: Sat Jan 08, 2022 10:48 am
Tom_T wrote: Sat Jan 08, 2022 10:40 am
Robot Monster wrote: Sat Jan 08, 2022 9:59 am
Tom_T wrote: Sat Jan 08, 2022 9:28 am I don't really mind holding some cash as part of my fixed allocation right now. I'd like to see how things shake out. This isn't like stocks -- it's not like having cash is going to cost me a 25% rise in bonds. In the meantime, I've maxxed out i Bonds for 2021 and 2022, and will continue to add to them each year. And I have some stable value in my 401K. (I'm 63, so my situation is certainly different than someone in the accumulation stage.)
I'm 10% cash, and am honestly unsure if that is the best move. Jeremy Siegel expects the curve to invert, and for stocks to do well this year, so it's very possible I won't be able to deploy my cash into any kind of bond/stock downturn. Siegel expects inflation to rage on, so even though he thinks the Fed Funds rate will reach 2%, that still might translate into negative real rates of perhaps -3% or -4% on cash.
Everyone's been citing real rates of return lately, and I have an issue/question. Inflation may be 6%, but there is no question that it was not nearly that for most of my expenses last year. Gas/groceries, yes, but a good 2/3 of my expenses were in line with prior years. So I'm having trouble thinking "I'm losing x% real", because that's not really true for my expenses. I don't know if I'm thinking about this the wrong way, but it seems to make sense for me to consider my personal inflation rate, no?
That makes sense, yes.
Hmmm... I looked up the inflation rate excluding food and energy. The numbers just go through Oct 2021 but are 4.6% for 12 months versus 6.2% for the headline CPI in October. Then there is how you spend money. We get hit by more permanent inflation when we go traveling. And we want to buy a new car which will (my guess) be inflated numbers if bought this year. So yes, I think the current headline inflation should not exactly be used in one's real return computations. Maybe reduce that inflation number by 1.5% or so? It is still a high number compared to recent years.

I will be interested in other's thoughts on this. What is permanent inflation that should go into the return computation? Should we be using the CPI excluding food and energy since these only eventually work their way into goods and services over time?
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Re: Bonds in free fall

Post by Firefly80 »

The implications of the Fed rolling off/selling their trillions in holdings will have devastating effects on the Bond Market and 10 Year Yield which I think might be worse than effects from the Interest rate hike.

Prices will be depressed for a very long time as the Fed gradually draws down their purchases maybe over a Decade. This will the opposite of the bond bull market that began is the 80's, maybe a very long Bond Bear Market. Over time it's gonna be losing purchasing power every year even if inflation normalizes a bit.

It really is unprecedented just how zero interest rates were unheard of in the past.
Last edited by Firefly80 on Sat Jan 08, 2022 1:38 pm, edited 1 time in total.
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Re: Bonds in free fall

Post by Robot Monster »

Firefly80 wrote: Sat Jan 08, 2022 12:37 pm The implications of the Fed rolling off/selling their trillions in holdings will have devastating effects on the Bond Market and 10 Year Yield which I think might be worse than effects from the Interest rate hike.

Yield will be depressed for a very long time as the Fed gradually draws down their purchases maybe over a Decade. This will the opposite of the bond bull market that began is the 80's, maybe a very long Bond Bear Market. Over time it's gonna be losing purchasing power every year even if inflation normalizes a bit.

It really is unprecedented just how zero interest rates were unheard of in the past.
I'm confused as to what you're saying. In your first paragraph it seems you expect a great rise in the 10yr yield. (What else would the devastating effect be?) But in your second paragraph you say, "yields will be depressed for a very long time".
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Re: Bonds in free fall

Post by Firefly80 »

Robot Monster wrote: Sat Jan 08, 2022 1:27 pm
Firefly80 wrote: Sat Jan 08, 2022 12:37 pm The implications of the Fed rolling off/selling their trillions in holdings will have devastating effects on the Bond Market and 10 Year Yield which I think might be worse than effects from the Interest rate hike.

Yield will be depressed for a very long time as the Fed gradually draws down their purchases maybe over a Decade. This will the opposite of the bond bull market that began is the 80's, maybe a very long Bond Bear Market. Over time it's gonna be losing purchasing power every year even if inflation normalizes a bit.

It really is unprecedented just how zero interest rates were unheard of in the past.
I'm confused as to what you're saying. In your first paragraph it seems you expect a great rise in the 10yr yield. (What else would the devastating effect be?) But in your second paragraph you say, "yields will be depressed for a very long time".
Correct, meant to say prices/capital return.
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Re: Bonds in free fall

Post by Greg in Idaho »

Tom_T wrote: Sat Jan 08, 2022 8:48 am
Greg in Idaho wrote: Sat Jan 08, 2022 8:20 am
MattB wrote: Sat Jan 08, 2022 1:31 am
I don't understand why "nobody knows nothing" should only apply to the equity side of investing.
This...some BH Bond Pundits will say that bonds are contracts so you know exactly what you are getting when you buy bonds, and that the deals on on offer today are not attractive (ignoring that we know nothing about what happens tomorrow and the day after, while generalizing that "bonds suck").
Bonds may be contracts but bond funds are unpredictable - especially something like Total Bond Market. Nobody can reliably determine what will happen to TBM if certain rates rise. There was a very good post a while back about how TBM is essentially impossible to predict because nobody knows what bonds the fund managers are buying and selling, and at what prices/rates, every day. We've had several occasions in the past where rates rose over a period of time, and TBM's total return was still positive even though the "formula" would have said otherwise.
nonetheless, we see things like this:

viewtopic.php?f=10&t=350013&p=6041063#p6041063

...and the ensuing posts seem to show, at best, lots of talking past each other...but also, I think, a fair amount of bond investing hubris
Robot Monster
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Re: Bonds in free fall

Post by Robot Monster »

Firefly80 wrote: Sat Jan 08, 2022 12:37 pm The implications of the Fed rolling off/selling their trillions in holdings will have devastating effects on the Bond Market and 10 Year Yield which I think might be worse than effects from the Interest rate hike.

Prices will be depressed for a very long time as the Fed gradually draws down their purchases maybe over a Decade. This will the opposite of the bond bull market that began is the 80's, maybe a very long Bond Bear Market. Over time it's gonna be losing purchasing power every year even if inflation normalizes a bit.

It really is unprecedented just how zero interest rates were unheard of in the past.
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.
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Re: Bonds in free fall

Post by Tom_T »

Remember that we had double-digit inflation in 1980-81. There was a good reason for rates to be high. If current inflation is transitory, is there really a reason to expect ever-increasing rates? The million-dollar question is, where is inflation going, and the answer is, we don't know.
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Re: Bonds in free fall

Post by willthrill81 »

MattB wrote: Sat Jan 08, 2022 1:31 amI don't understand why "nobody knows nothing" should only apply to the equity side of investing.
Foremost, many don't understand what that phrase actually means, which is that nobody knows exactly what's going to happen. It's not literally true. If it was, there would be no purpose in this forum.
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Re: Bonds in free fall

Post by BlueEars »

Tom_T wrote: Sat Jan 08, 2022 3:44 pm Remember that we had double-digit inflation in 1980-81. There was a good reason for rates to be high. If current inflation is transitory, is there really a reason to expect ever-increasing rates? The million-dollar question is, where is inflation going, and the answer is, we don't know.
Certainly some aspects of inflation are transitory. Like having to pay full MSRP + a few $K to get a new car that is popular. That is a supply/Covid issue and should go away sometime this year (I hope).
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Re: Bonds in free fall

Post by BlueEars »

willthrill81 wrote: Sat Jan 08, 2022 3:54 pm
MattB wrote: Sat Jan 08, 2022 1:31 amI don't understand why "nobody knows nothing" should only apply to the equity side of investing.
Foremost, many don't understand what that phrase actually means, which is that nobody knows exactly what's going to happen. It's not literally true. If it was, there would be no purpose in this forum.
I would put it more strongly. That phrase is really stupid. :happy
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Re: Bonds in free fall

Post by willthrill81 »

Tom_T wrote: Sat Jan 08, 2022 3:44 pm Remember that we had double-digit inflation in 1980-81. There was a good reason for rates to be high. If current inflation is transitory, is there really a reason to expect ever-increasing rates? The million-dollar question is, where is inflation going, and the answer is, we don't know.
We were told a year ago that the inflation would be transitory, and that was completely wrong. At least one poster here said that the Fed would surely increase rates if inflation topped 6%, and despite it passing that mark, they didn't do anything at all for quite a while.

Some, including me, are wondering if the problem was (1) the inflation we've seen over the last year or so was truly unexpected by the market, (2) the market is just plain bad at forecasting near-term inflation, (3) what people have been inferring the market to be 'saying' has been twisted significantly by the trillions of dollars of Treasuries bought by the Fed, or (4) some combination of the others. While I don't claim to know the answer, #3 and #4 seem most plausible to me.
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Re: Bonds in free fall

Post by willthrill81 »

BlueEars wrote: Sat Jan 08, 2022 3:58 pm
willthrill81 wrote: Sat Jan 08, 2022 3:54 pm
MattB wrote: Sat Jan 08, 2022 1:31 amI don't understand why "nobody knows nothing" should only apply to the equity side of investing.
Foremost, many don't understand what that phrase actually means, which is that nobody knows exactly what's going to happen. It's not literally true. If it was, there would be no purpose in this forum.
I would put it more strongly. That phrase is really stupid. :happy
I'm inclined to agree, though there are some folks in the investing space who really do think that they know precisely what the future will be.
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Re: Bonds in free fall

Post by BlueEars »

willthrill81 wrote: Sat Jan 08, 2022 3:59 pm
BlueEars wrote: Sat Jan 08, 2022 3:58 pm
willthrill81 wrote: Sat Jan 08, 2022 3:54 pm
MattB wrote: Sat Jan 08, 2022 1:31 amI don't understand why "nobody knows nothing" should only apply to the equity side of investing.
Foremost, many don't understand what that phrase actually means, which is that nobody knows exactly what's going to happen. It's not literally true. If it was, there would be no purpose in this forum.
I would put it more strongly. That phrase is really stupid. :happy
I'm inclined to agree, though there are some folks in the investing space who really do think that they know precisely what the future will be.
With an engineering background, I had to learn that precision is not possible in investing. Maybe one can calculate bond yields via a formula but the future? The most imprecise things in life are often the most interesting. I'm thinking about emotions, love, politics, and also investing.
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Re: Bonds in free fall

Post by willthrill81 »

BlueEars wrote: Sat Jan 08, 2022 4:05 pm
willthrill81 wrote: Sat Jan 08, 2022 3:59 pm
BlueEars wrote: Sat Jan 08, 2022 3:58 pm
willthrill81 wrote: Sat Jan 08, 2022 3:54 pm
MattB wrote: Sat Jan 08, 2022 1:31 amI don't understand why "nobody knows nothing" should only apply to the equity side of investing.
Foremost, many don't understand what that phrase actually means, which is that nobody knows exactly what's going to happen. It's not literally true. If it was, there would be no purpose in this forum.
I would put it more strongly. That phrase is really stupid. :happy
I'm inclined to agree, though there are some folks in the investing space who really do think that they know precisely what the future will be.
With an engineering background, I had to learn that precision is not possible in investing. Maybe one can calculate bond yields via a formula but the future? The most imprecise things in life are often the most interesting. I'm thinking about emotions, love, politics, and also investing.
Bonds are a great illustration of both the value and the drawback of the 'nobody knows nothing' statement. In an overwhelming proportion of historic periods, starting yields of 10 year Treasuries have been within +/- 1% of their subsequent 10 year return and usually in a much narrower band than that. So the person who says that current yields tell us 'nothing' about their future returns has very consistently been completely wrong, and we should ignore such folks as being ignorant of reality. But those who say that the subsequent 10 year return of 10 year Treasuries will precisely be X are also completely wrong and should also be ignored for the same reason as the others.

We know quite a bit about the future, but we don't know enough to make predictions that are both accurate and precise. The best we can we do is create confidence intervals (e.g., to the extent the future resembles the past, there is a 90% likelihood of returns over X period falling between Y and Z), and something these intervals are very wide.
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Re: Bonds in free fall

Post by Doc »

BlueEars wrote: Sat Jan 08, 2022 4:05 pm With an engineering background, I had to learn that precision is not possible in investing. Maybe one can calculate bond yields via a formula but the future? The most imprecise things in life are often the most interesting. I'm thinking about emotions, love, politics, and also investing.
Duh! :D

See below:

A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science. :thumbsup
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.
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Re: Bonds in free fall

Post by happyisland »

BlueEars wrote: Sat Jan 08, 2022 3:58 pm
willthrill81 wrote: Sat Jan 08, 2022 3:54 pm
MattB wrote: Sat Jan 08, 2022 1:31 amI don't understand why "nobody knows nothing" should only apply to the equity side of investing.
Foremost, many don't understand what that phrase actually means, which is that nobody knows exactly what's going to happen. It's not literally true. If it was, there would be no purpose in this forum.
I would put it more strongly. That phrase is really stupid. :happy
Hmmm. If you think the phrase is 'really stupid' it's possible you're misinterpreting it. Here's a 45 second video where Bogle himself spells it out: https://www.youtube.com/watch?v=fLCfkmaqI6k
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Re: Bonds in free fall

Post by Tom_T »

I'd like to say that I really appreciate this discussion. I know every year has its issues, but I think we can all agree that the past two years have been especially "interesting" in the world of investing. At minimum I've learned to consider other points of view on topics I never really thought twice about. This is really a great forum.
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Re: Bonds in free fall

Post by BlueEars »

happyisland wrote: Sat Jan 08, 2022 4:44 pm
BlueEars wrote: Sat Jan 08, 2022 3:58 pm
willthrill81 wrote: Sat Jan 08, 2022 3:54 pm
MattB wrote: Sat Jan 08, 2022 1:31 amI don't understand why "nobody knows nothing" should only apply to the equity side of investing.
Foremost, many don't understand what that phrase actually means, which is that nobody knows exactly what's going to happen. It's not literally true. If it was, there would be no purpose in this forum.
I would put it more strongly. That phrase is really stupid. :happy
Hmmm. If you think the phrase is 'really stupid' it's possible you're misinterpreting it. Here's a 45 second video where Bogle himself spells it out: https://www.youtube.com/watch?v=fLCfkmaqI6k
First let me say that that phrase is really stupid BUT not the people repeating it. When I viewed the Bogle video what I got out of it is "nobody knows the future". I would totally agree with that. The phrase "nobody knows nothing" is really a misleading way of getting to "nobody knows the future".
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Re: Bonds in free fall

Post by happyisland »

BlueEars wrote: Sat Jan 08, 2022 4:54 pm
happyisland wrote: Sat Jan 08, 2022 4:44 pm
BlueEars wrote: Sat Jan 08, 2022 3:58 pm
willthrill81 wrote: Sat Jan 08, 2022 3:54 pm
MattB wrote: Sat Jan 08, 2022 1:31 amI don't understand why "nobody knows nothing" should only apply to the equity side of investing.
Foremost, many don't understand what that phrase actually means, which is that nobody knows exactly what's going to happen. It's not literally true. If it was, there would be no purpose in this forum.
I would put it more strongly. That phrase is really stupid. :happy
Hmmm. If you think the phrase is 'really stupid' it's possible you're misinterpreting it. Here's a 45 second video where Bogle himself spells it out: https://www.youtube.com/watch?v=fLCfkmaqI6k
First let me say that that phrase is really stupid BUT not the people repeating it. When I viewed the Bogle video what I got out of it is "nobody knows the future". I would totally agree with that. The phrase "nobody knows nothing" is really a misleading way of getting to "nobody knows the future".
I personally take it as a pithy, if ungrammatical, reminder to never think that I can outsmart the market. In that sense I think it is actually pretty genius, and something that took me many years of investing to truly understand. You'd be surprised how many people on this very forum still believe that they know something actionable about asset pricing that the market does not. :happy
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Re: Bonds in free fall

Post by nedsaid »

willthrill81 wrote: Sat Jan 08, 2022 3:59 pm
Tom_T wrote: Sat Jan 08, 2022 3:44 pm Remember that we had double-digit inflation in 1980-81. There was a good reason for rates to be high. If current inflation is transitory, is there really a reason to expect ever-increasing rates? The million-dollar question is, where is inflation going, and the answer is, we don't know.
We were told a year ago that the inflation would be transitory, and that was completely wrong. At least one poster here said that the Fed would surely increase rates if inflation topped 6%, and despite it passing that mark, they didn't do anything at all for quite a while.

Some, including me, are wondering if the problem was (1) the inflation we've seen over the last year or so was truly unexpected by the market, (2) the market is just plain bad at forecasting near-term inflation, (3) what people have been inferring the market to be 'saying' has been twisted significantly by the trillions of dollars of Treasuries bought by the Fed, or (4) some combination of the others. While I don't claim to know the answer, #3 and #4 seem most plausible to me.
Monte, I pick Door Number Three.
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Re: Bonds in free fall

Post by willthrill81 »

nedsaid wrote: Sat Jan 08, 2022 5:29 pm
willthrill81 wrote: Sat Jan 08, 2022 3:59 pm
Tom_T wrote: Sat Jan 08, 2022 3:44 pm Remember that we had double-digit inflation in 1980-81. There was a good reason for rates to be high. If current inflation is transitory, is there really a reason to expect ever-increasing rates? The million-dollar question is, where is inflation going, and the answer is, we don't know.
We were told a year ago that the inflation would be transitory, and that was completely wrong. At least one poster here said that the Fed would surely increase rates if inflation topped 6%, and despite it passing that mark, they didn't do anything at all for quite a while.

Some, including me, are wondering if the problem was (1) the inflation we've seen over the last year or so was truly unexpected by the market, (2) the market is just plain bad at forecasting near-term inflation, (3) what people have been inferring the market to be 'saying' has been twisted significantly by the trillions of dollars of Treasuries bought by the Fed, or (4) some combination of the others. While I don't claim to know the answer, #3 and #4 seem most plausible to me.
Monte, I pick Door Number Three.
Hopefully, you won't get a goat. :P
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Re: Bonds in free fall

Post by Firefly80 »

Robot Monster wrote: Sat Jan 08, 2022 3:29 pm
Firefly80 wrote: Sat Jan 08, 2022 12:37 pm The implications of the Fed rolling off/selling their trillions in holdings will have devastating effects on the Bond Market and 10 Year Yield which I think might be worse than effects from the Interest rate hike.

Prices will be depressed for a very long time as the Fed gradually draws down their purchases maybe over a Decade. This will the opposite of the bond bull market that began is the 80's, maybe a very long Bond Bear Market. Over time it's gonna be losing purchasing power every year even if inflation normalizes a bit.

It really is unprecedented just how zero interest rates were unheard of in the past.
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!
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Re: Bonds in free fall

Post by theac »

Firefly80 wrote: Sat Jan 08, 2022 5:41 pm
Higher yields will be good for bond holders in the future but it's not good for bondholders now!
And on that note, with an approx 80% holding in Total Bond Market at Vanguard
(fairly hefty dollar amount but separate from I-Bonds and cash held elsewhere),
if I have no need for this money, and it will just be going to my heirs eventually,
can I just let it sit FOR THE LONG TERM, beyond it's "maturity date" and not worry about it since interest rates will rise and eventually "level things out" in time?

It's taken quite a drop just recently, and it has done so in the past too,
but has eventually recovered.

So let's say this does turn out to be the big bear market in bonds,
as has been predicted for many years now, but that just never seemed to materialize...

well, if this IS IT, "and this time is different,"
in the long term, is there really any harm in my just letting it sit where it is?
Last edited by theac on Sat Jan 08, 2022 7:00 pm, edited 2 times in total.
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Re: Bonds in free fall

Post by rockstar »

Robot Monster wrote: Sat Jan 08, 2022 8:52 am
rockstar wrote: Fri Jan 07, 2022 8:15 pm
prioritarian wrote: Fri Jan 07, 2022 7:44 pm
rockstar wrote: Fri Jan 07, 2022 7:05 pm Bond yields are going to the moon. Maybe one day I can buy a double digit bond and forget about equities. One can dream.
The ten year was at 3.2% a little over three years ago. Frankly, I will be surprised if we see a 3-handle in the next two years.
If the Fed Funds rate goes to 2%, then 3% for the ten year seems doable. I wouldn't be surprised if we see the 10 year over 2% by March.
Wait...didn't you say just six days ago that, "The Fed Funds rate going to 2% is a pipe dream."

Anyway, even if we see a 2% on the Fed Funds, we could end up with a flat, or inverted curve. Jeremy Siegel is predicting 2% on the Fed Funds, but says, "I don't think the long bond is going to move up that much. I think we may even have an inverted yield curve by the end of the year or early in 2023." He goes on to talk about the long bond staying at 2%. Starting at 1:28 in YouTube video

During 2004-2006 the Fed Funds rate rose 4%, but the 10yr hardly budged, the curve merely flattened. These are the historical numbers (which I pulled from another post):

06/01/04
1 Month Treasury: 0.97%
10yr Treasury: 4.71%

07/31/06
1 Month Treasury: 5.02%
10yr Treasury: 4.99%
The Fed is talking about doing 3 rate increases. That should get us to 0.75%. And I did say if if to goes to 2%, then 3% doesn't seem unreasonable.

As for inverting, the Fed has been buying the entire curve, so when they stop buying and start letting their balance sheet run off, the entire curve should go up. I don't see how it's going to invert unless you have a massive equity sell off, where enough dollars are flowing into the entire curve to offset the lack of the Fed buying and running off its balance sheet.
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Re: Bonds in free fall

Post by Robot Monster »

Firefly80 wrote: Sat Jan 08, 2022 5:41 pm
Robot Monster wrote: Sat Jan 08, 2022 3:29 pm
Firefly80 wrote: Sat Jan 08, 2022 12:37 pm The implications of the Fed rolling off/selling their trillions in holdings will have devastating effects on the Bond Market and 10 Year Yield which I think might be worse than effects from the Interest rate hike.

Prices will be depressed for a very long time as the Fed gradually draws down their purchases maybe over a Decade. This will the opposite of the bond bull market that began is the 80's, maybe a very long Bond Bear Market. Over time it's gonna be losing purchasing power every year even if inflation normalizes a bit.

It really is unprecedented just how zero interest rates were unheard of in the past.
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...
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Re: Bonds in free fall

Post by Robot Monster »

rockstar wrote: Sat Jan 08, 2022 6:57 pm
Robot Monster wrote: Sat Jan 08, 2022 8:52 am
rockstar wrote: Fri Jan 07, 2022 8:15 pm
prioritarian wrote: Fri Jan 07, 2022 7:44 pm
rockstar wrote: Fri Jan 07, 2022 7:05 pm Bond yields are going to the moon. Maybe one day I can buy a double digit bond and forget about equities. One can dream.
The ten year was at 3.2% a little over three years ago. Frankly, I will be surprised if we see a 3-handle in the next two years.
If the Fed Funds rate goes to 2%, then 3% for the ten year seems doable. I wouldn't be surprised if we see the 10 year over 2% by March.
Wait...didn't you say just six days ago that, "The Fed Funds rate going to 2% is a pipe dream."

Anyway, even if we see a 2% on the Fed Funds, we could end up with a flat, or inverted curve. Jeremy Siegel is predicting 2% on the Fed Funds, but says, "I don't think the long bond is going to move up that much. I think we may even have an inverted yield curve by the end of the year or early in 2023." He goes on to talk about the long bond staying at 2%. Starting at 1:28 in YouTube video

During 2004-2006 the Fed Funds rate rose 4%, but the 10yr hardly budged, the curve merely flattened. These are the historical numbers (which I pulled from another post):

06/01/04
1 Month Treasury: 0.97%
10yr Treasury: 4.71%

07/31/06
1 Month Treasury: 5.02%
10yr Treasury: 4.99%
The Fed is talking about doing 3 rate increases. That should get us to 0.75%. And I did say if if to goes to 2%, then 3% doesn't seem unreasonable.

As for inverting, the Fed has been buying the entire curve, so when they stop buying and start letting their balance sheet run off, the entire curve should go up. I don't see how it's going to invert unless you have a massive equity sell off, where enough dollars are flowing into the entire curve to offset the lack of the Fed buying and running off its balance sheet.
I found an interview with Siegel from last year where he talks about an inverted curve. Can't say I fully grasp it, but here it is below. But, I actually feel like I've fallen down the rabbit hole of looking at this type of thing, because it doesn't seem actionable. At least not to me. It's above my pay grade! I'm not going to time the bond market.
The Fed may be forced to invert the curve, which means short rates above long rates. As we discussed last year, there is a dramatic demand for long bonds as a risk hedge asset.. It's a great cushion for short-term volatility. We might see the long bond next year at 2.5% to 3%, and we might see the short rate at 4%.

Inverted term structures may be more common in the future because the demand for long bonds has been very, very strong. Despite inflation, that demand has crept up. But the hedge demand for those bonds – in the lingo of the finance, the “negative beta” of those bonds – is huge.
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Re: Bonds in free fall

Post by Firefly80 »

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
Firefly80 wrote: Sat Jan 08, 2022 12:37 pm The implications of the Fed rolling off/selling their trillions in holdings will have devastating effects on the Bond Market and 10 Year Yield which I think might be worse than effects from the Interest rate hike.

Prices will be depressed for a very long time as the Fed gradually draws down their purchases maybe over a Decade. This will the opposite of the bond bull market that began is the 80's, maybe a very long Bond Bear Market. Over time it's gonna be losing purchasing power every year even if inflation normalizes a bit.

It really is unprecedented just how zero interest rates were unheard of in the past.
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 with Fed reduction in Bond assets, it's double whammy.

It all comes down to your Time Horizon. The Bond Bull Market lasted for ~30 years. How long the Bond Bear Market lasts no one knows so you may be right it may not be actionable but it can be used to set your expectations.
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Re: Bonds in free fall

Post by Robot Monster »

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
Firefly80 wrote: Sat Jan 08, 2022 12:37 pm The implications of the Fed rolling off/selling their trillions in holdings will have devastating effects on the Bond Market and 10 Year Yield which I think might be worse than effects from the Interest rate hike.

Prices will be depressed for a very long time as the Fed gradually draws down their purchases maybe over a Decade. This will the opposite of the bond bull market that began is the 80's, maybe a very long Bond Bear Market. Over time it's gonna be losing purchasing power every year even if inflation normalizes a bit.

It really is unprecedented just how zero interest rates were unheard of in the past.
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.)
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Re: Bonds in free fall

Post by Firefly80 »

theac wrote: Sat Jan 08, 2022 6:56 pm
Firefly80 wrote: Sat Jan 08, 2022 5:41 pm
Higher yields will be good for bond holders in the future but it's not good for bondholders now!
And on that note, with an approx 80% holding in Total Bond Market at Vanguard
(fairly hefty dollar amount but separate from I-Bonds and cash held elsewhere),
if I have no need for this money, and it will just be going to my heirs eventually,
can I just let it sit FOR THE LONG TERM, beyond it's "maturity date" and not worry about it since interest rates will rise and eventually "level things out" in time?

It's taken quite a drop just recently, and it has done so in the past too,
but has eventually recovered.

So let's say this does turn out to be the big bear market in bonds,
as has been predicted for many years now, but that just never seemed to materialize...

well, if this IS IT, "and this time is different,"
in the long term, is there really any harm in my just letting it sit where it is?

The Bonds in a bond fund like TBM will keep rolling over so yeah this is not the end of bonds unless the US defaults on it's debt then all bets are off.
The income from the bonds over a long time will definitely offset any capital losses so nominally it might recover. But the time is takes to recover on a real basis will be even longer. How long is anyone's guess.
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Re: Bonds in free fall

Post by willthrill81 »

theac wrote: Sat Jan 08, 2022 6:56 pm
Firefly80 wrote: Sat Jan 08, 2022 5:41 pm
Higher yields will be good for bond holders in the future but it's not good for bondholders now!
And on that note, with an approx 80% holding in Total Bond Market at Vanguard
(fairly hefty dollar amount but separate from I-Bonds and cash held elsewhere),
if I have no need for this money, and it will just be going to my heirs eventually,
can I just let it sit FOR THE LONG TERM, beyond it's "maturity date" and not worry about it since interest rates will rise and eventually "level things out" in time?

It's taken quite a drop just recently, and it has done so in the past too,
but has eventually recovered.

So let's say this does turn out to be the big bear market in bonds,
as has been predicted for many years now, but that just never seemed to materialize...

well, if this IS IT, "and this time is different,"
in the long term, is there really any harm in my just letting it sit where it is?
The threat to bonds is not rising interest rates. As nisiprius has shown, it won't take that long for bondholders to benefit from higher rates.

The real enemy to fixed income has been and continues to be inflation, particularly unexpected inflation, as we saw last year.
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theac
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Re: Bonds in free fall

Post by theac »

Firefly80 wrote: Sat Jan 08, 2022 8:44 pm
theac wrote: Sat Jan 08, 2022 6:56 pm
Firefly80 wrote: Sat Jan 08, 2022 5:41 pm
Higher yields will be good for bond holders in the future but it's not good for bondholders now!
And on that note, with an approx 80% holding in Total Bond Market at Vanguard
(fairly hefty dollar amount but separate from I-Bonds and cash held elsewhere),
if I have no need for this money, and it will just be going to my heirs eventually,
can I just let it sit FOR THE LONG TERM, beyond it's "maturity date" and not worry about it since interest rates will rise and eventually "level things out" in time?

It's taken quite a drop just recently, and it has done so in the past too,
but has eventually recovered.

So let's say this does turn out to be the big bear market in bonds,
as has been predicted for many years now, but that just never seemed to materialize...

well, if this IS IT, "and this time is different,"
in the long term, is there really any harm in my just letting it sit where it is?

The Bonds in a bond fund like TBM will keep rolling over so yeah this is not the end of bonds unless the US defaults on it's debt then all bets are off.
The income from the bonds over a long time will definitely offset any capital losses so nominally it might recover. But the time is takes to recover on a real basis will be even longer. How long is anyone's guess.
OK good, so I won't be buying a yacht from any profits,
but I won't be living under a bridge from any losses either. :)

I can live with that so thanks for confirming it should work itself out.

As for the inflation factor, not much I can do about that,
just goes with the territory I guess.
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Re: Bonds in free fall

Post by stocknoob4111 »

Tom_T wrote: Sat Jan 08, 2022 10:40 am]
Everyone's been citing real rates of return lately, and I have an issue/question. Inflation may be 6%, but there is no question that it was not nearly that for most of my expenses last year. Gas/groceries, yes, but a good 2/3 of my expenses were in line with prior years.
I am a renter, my rent, my largest expense, went up 11% on my lease renewal.. so everyone's personal inflation is different. Rents/Housing especially are experiencing extreme inflation.
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Re: Bonds in free fall

Post by theac »

willthrill81 wrote: Sat Jan 08, 2022 9:01 pm
theac wrote: Sat Jan 08, 2022 6:56 pm
Firefly80 wrote: Sat Jan 08, 2022 5:41 pm
Higher yields will be good for bond holders in the future but it's not good for bondholders now!
And on that note, with an approx 80% holding in Total Bond Market at Vanguard
(fairly hefty dollar amount but separate from I-Bonds and cash held elsewhere),
if I have no need for this money, and it will just be going to my heirs eventually,
can I just let it sit FOR THE LONG TERM, beyond it's "maturity date" and not worry about it since interest rates will rise and eventually "level things out" in time?

It's taken quite a drop just recently, and it has done so in the past too,
but has eventually recovered.

So let's say this does turn out to be the big bear market in bonds,
as has been predicted for many years now, but that just never seemed to materialize...

well, if this IS IT, "and this time is different,"
in the long term, is there really any harm in my just letting it sit where it is?
The threat to bonds is not rising interest rates. As nisiprius has shown, it won't take that long for bondholders to benefit from higher rates.

The real enemy to fixed income has been and continues to be inflation, particularly unexpected inflation, as we saw last year.
OK, so if I'm not interested in buying equities at this time, what option is there?
I already max out on I-Bonds every year, which isn't much, but it adds up.

I've considered a Tips fund in the past but the reviews never sounded very good so dropped that idea.

Maybe I should have mentioned all of my Vanguard account is in a ROTH.
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Re: Bonds in free fall

Post by willthrill81 »

theac wrote: Sat Jan 08, 2022 9:27 pm
willthrill81 wrote: Sat Jan 08, 2022 9:01 pm
theac wrote: Sat Jan 08, 2022 6:56 pm
Firefly80 wrote: Sat Jan 08, 2022 5:41 pm
Higher yields will be good for bond holders in the future but it's not good for bondholders now!
And on that note, with an approx 80% holding in Total Bond Market at Vanguard
(fairly hefty dollar amount but separate from I-Bonds and cash held elsewhere),
if I have no need for this money, and it will just be going to my heirs eventually,
can I just let it sit FOR THE LONG TERM, beyond it's "maturity date" and not worry about it since interest rates will rise and eventually "level things out" in time?

It's taken quite a drop just recently, and it has done so in the past too,
but has eventually recovered.

So let's say this does turn out to be the big bear market in bonds,
as has been predicted for many years now, but that just never seemed to materialize...

well, if this IS IT, "and this time is different,"
in the long term, is there really any harm in my just letting it sit where it is?
The threat to bonds is not rising interest rates. As nisiprius has shown, it won't take that long for bondholders to benefit from higher rates.

The real enemy to fixed income has been and continues to be inflation, particularly unexpected inflation, as we saw last year.
OK, so if I'm not interested in buying equities at this time, what option is there?
I already max out on I-Bonds every year, which isn't much, but it adds up.

I've considered a Tips fund in the past but the reviews never sounded very good so dropped that idea.

Maybe I should have mentioned all of my Vanguard account is in a ROTH.
About the only reason that a long-term investor wouldn't like TIPS is if (1) they don't understand how they work or (2) they understand how they work but have a hard emotional time buying an investment that's guaranteed to lose out to inflation but which you still have to pay taxes on. But just because nominal bonds don't come with an express statement that they will lose out to inflation does not mean that they won't; in truth, they are completely exposed to inflation. TBM's real return in 2021 was -8%. That makes the -1% real yield of 10 year TIPS look downright fantastic.
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Re: Bonds in free fall

Post by theac »

willthrill81 wrote: Sat Jan 08, 2022 9:35 pm
theac wrote: Sat Jan 08, 2022 9:27 pm
willthrill81 wrote: Sat Jan 08, 2022 9:01 pm
theac wrote: Sat Jan 08, 2022 6:56 pm
Firefly80 wrote: Sat Jan 08, 2022 5:41 pm
Higher yields will be good for bond holders in the future but it's not good for bondholders now!
And on that note, with an approx 80% holding in Total Bond Market at Vanguard
(fairly hefty dollar amount but separate from I-Bonds and cash held elsewhere),
if I have no need for this money, and it will just be going to my heirs eventually,
can I just let it sit FOR THE LONG TERM, beyond it's "maturity date" and not worry about it since interest rates will rise and eventually "level things out" in time?

It's taken quite a drop just recently, and it has done so in the past too,
but has eventually recovered.

So let's say this does turn out to be the big bear market in bonds,
as has been predicted for many years now, but that just never seemed to materialize...

well, if this IS IT, "and this time is different,"
in the long term, is there really any harm in my just letting it sit where it is?
The threat to bonds is not rising interest rates. As nisiprius has shown, it won't take that long for bondholders to benefit from higher rates.

The real enemy to fixed income has been and continues to be inflation, particularly unexpected inflation, as we saw last year.
OK, so if I'm not interested in buying equities at this time, what option is there?
I already max out on I-Bonds every year, which isn't much, but it adds up.

I've considered a Tips fund in the past but the reviews never sounded very good so dropped that idea.

Maybe I should have mentioned all of my Vanguard account is in a ROTH.
About the only reason that a long-term investor wouldn't like TIPS is if (1) they don't understand how they work or (2) they understand how they work but have a hard emotional time buying an investment that's guaranteed to lose out to inflation but which you still have to pay taxes on. But just because nominal bonds don't come with an express statement that they will lose out to inflation does not mean that they won't; in truth, they are completely exposed to inflation. TBM's real return in 2021 was -8%. That makes the -1% real yield of 10 year TIPS look downright fantastic.
Yep, I'd say those are the two main reasons I didn't go for the Tips.

Figure I'll just take my chances with Total Bond Fund and let the chips fall where they may. At least for now.
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Re: Bonds in free fall

Post by rockstar »

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
Firefly80 wrote: Sat Jan 08, 2022 12:37 pm The implications of the Fed rolling off/selling their trillions in holdings will have devastating effects on the Bond Market and 10 Year Yield which I think might be worse than effects from the Interest rate hike.

Prices will be depressed for a very long time as the Fed gradually draws down their purchases maybe over a Decade. This will the opposite of the bond bull market that began is the 80's, maybe a very long Bond Bear Market. Over time it's gonna be losing purchasing power every year even if inflation normalizes a bit.

It really is unprecedented just how zero interest rates were unheard of in the past.
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 with Fed reduction in Bond assets, it's double whammy.

It all comes down to your Time Horizon. The Bond Bull Market lasted for ~30 years. How long the Bond Bear Market lasts no one knows so you may be right it may not be actionable but it can be used to set your expectations.
Sure. It's actionable if you buy actual bonds, rather than bond funds. I should be able to lock in TIPS with yields above zero. This happened in 2018. I get a second chance at pulling this trigger if we repeat.
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Re: Bonds in free fall

Post by theac »

theac wrote: Sat Jan 08, 2022 9:39 pm
willthrill81 wrote: Sat Jan 08, 2022 9:35 pm
theac wrote: Sat Jan 08, 2022 9:27 pm
willthrill81 wrote: Sat Jan 08, 2022 9:01 pm
theac wrote: Sat Jan 08, 2022 6:56 pm

And on that note, with an approx 80% holding in Total Bond Market at Vanguard
(fairly hefty dollar amount but separate from I-Bonds and cash held elsewhere),
if I have no need for this money, and it will just be going to my heirs eventually,
can I just let it sit FOR THE LONG TERM, beyond it's "maturity date" and not worry about it since interest rates will rise and eventually "level things out" in time?

It's taken quite a drop just recently, and it has done so in the past too,
but has eventually recovered.

So let's say this does turn out to be the big bear market in bonds,
as has been predicted for many years now, but that just never seemed to materialize...

well, if this IS IT, "and this time is different,"
in the long term, is there really any harm in my just letting it sit where it is?
The threat to bonds is not rising interest rates. As nisiprius has shown, it won't take that long for bondholders to benefit from higher rates.

The real enemy to fixed income has been and continues to be inflation, particularly unexpected inflation, as we saw last year.
OK, so if I'm not interested in buying equities at this time, what option is there?
I already max out on I-Bonds every year, which isn't much, but it adds up.

I've considered a Tips fund in the past but the reviews never sounded very good so dropped that idea.

Maybe I should have mentioned all of my Vanguard account is in a ROTH.
About the only reason that a long-term investor wouldn't like TIPS is if (1) they don't understand how they work or (2) they understand how they work but have a hard emotional time buying an investment that's guaranteed to lose out to inflation but which you still have to pay taxes on. But just because nominal bonds don't come with an express statement that they will lose out to inflation does not mean that they won't; in truth, they are completely exposed to inflation. TBM's real return in 2021 was -8%. That makes the -1% real yield of 10 year TIPS look downright fantastic.
Yep, I'd say those are the two main reasons I didn't go for the Tips.

Figure I'll just take my chances with Total Bond Fund and let the chips fall where they may. At least for now.
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?
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Re: Bonds in free fall

Post by MattB »

Greg in Idaho wrote: Sat Jan 08, 2022 2:31 pm
Tom_T wrote: Sat Jan 08, 2022 8:48 am
Greg in Idaho wrote: Sat Jan 08, 2022 8:20 am
MattB wrote: Sat Jan 08, 2022 1:31 am
I don't understand why "nobody knows nothing" should only apply to the equity side of investing.
This...some BH Bond Pundits will say that bonds are contracts so you know exactly what you are getting when you buy bonds, and that the deals on on offer today are not attractive (ignoring that we know nothing about what happens tomorrow and the day after, while generalizing that "bonds suck").
Bonds may be contracts but bond funds are unpredictable - especially something like Total Bond Market. Nobody can reliably determine what will happen to TBM if certain rates rise. There was a very good post a while back about how TBM is essentially impossible to predict because nobody knows what bonds the fund managers are buying and selling, and at what prices/rates, every day. We've had several occasions in the past where rates rose over a period of time, and TBM's total return was still positive even though the "formula" would have said otherwise.
nonetheless, we see things like this:

viewtopic.php?f=10&t=350013&p=6041063#p6041063

...and the ensuing posts seem to show, at best, lots of talking past each other...but also, I think, a fair amount of bond investing hubris
I agree.
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Re: Bonds in free fall

Post by MattB »

willthrill81 wrote: Sat Jan 08, 2022 3:54 pm
MattB wrote: Sat Jan 08, 2022 1:31 amI don't understand why "nobody knows nothing" should only apply to the equity side of investing.
Foremost, many don't understand what that phrase actually means, which is that nobody knows exactly what's going to happen. It's not literally true. If it was, there would be no purpose in this forum.
You seem to be arguing against a straw man, and a weak one at that.

"Nobody knows nothing" is, in large part, a reminder that people shouldn't try to time the market. Things seem overvalued? Don't sell everything because a bull market could run for another ten years. Etc.

I just find it interesting that market timing is so frequently bashed here on the forum, on the equity side, yet the majority of the bond threads I've read lately advocate for market timing on the bond side, as if we know what's going to happen there.
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Re: Bonds in free fall

Post by willthrill81 »

MattB wrote: Sun Jan 09, 2022 1:25 am
willthrill81 wrote: Sat Jan 08, 2022 3:54 pm
MattB wrote: Sat Jan 08, 2022 1:31 amI don't understand why "nobody knows nothing" should only apply to the equity side of investing.
Foremost, many don't understand what that phrase actually means, which is that nobody knows exactly what's going to happen. It's not literally true. If it was, there would be no purpose in this forum.
You seem to be arguing against a straw man, and a weak one at that.

"Nobody knows nothing" is, in large part, a reminder that people shouldn't try to time the market. Things seem overvalued? Don't sell everything because a bull market could run for another ten years. Etc.

I just find it interesting that market timing is so frequently bashed here on the forum, on the equity side, yet the majority of the bond threads I've read lately advocate for market timing on the bond side, as if we know what's going to happen there.
No straw man at all. You'd be surprised how many people try to take the statement very literally. I've been around here for five years and have seen this repeatedly. It's good to know that you do not make that error.

The statement does not necessarily apply to market timing. Many erroneously believe that all market timing is based on a prediction of the future, but that's false. It can rather be based on something like fairly broad expectancies derived from extensive historical analysis that are believed to continue to exist going forward.

The future is always unknown. That's the essence of the 'nobody...' statement, and, IMHO, a much more accurate, though less catchy, phrase.
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Re: Bonds in free fall

Post by canadianbacon »

Tom_T wrote: Sat Jan 08, 2022 10:40 am Everyone's been citing real rates of return lately, and I have an issue/question. Inflation may be 6%, but there is no question that it was not nearly that for most of my expenses last year. Gas/groceries, yes, but a good 2/3 of my expenses were in line with prior years.
I spent the same on food in 2021 that I did in 2020 ($100 less actually). It definitely hits different people different ways. I would imagine if we get sustained 6% inflation it will be harder to avoid.
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Re: Bonds in free fall

Post by TheTimeLord »

canadianbacon wrote: Sun Jan 09, 2022 10:04 am
Tom_T wrote: Sat Jan 08, 2022 10:40 am Everyone's been citing real rates of return lately, and I have an issue/question. Inflation may be 6%, but there is no question that it was not nearly that for most of my expenses last year. Gas/groceries, yes, but a good 2/3 of my expenses were in line with prior years.
I spent the same on food in 2021 that I did in 2020 ($100 less actually). It definitely hits different people different ways. I would imagine if we get sustained 6% inflation it will be harder to avoid.
FWIW, I didn't notice any food inflation until Q4, then it was noticeable button meaningful in my case. It was also present in electricity rates and as I shop for a new car. Although I think the car thing varies considerably by make and model.
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Re: Bonds in free fall

Post by willthrill81 »

canadianbacon wrote: Sun Jan 09, 2022 10:04 am
Tom_T wrote: Sat Jan 08, 2022 10:40 am Everyone's been citing real rates of return lately, and I have an issue/question. Inflation may be 6%, but there is no question that it was not nearly that for most of my expenses last year. Gas/groceries, yes, but a good 2/3 of my expenses were in line with prior years.
I spent the same on food in 2021 that I did in 2020 ($100 less actually). It definitely hits different people different ways. I would imagine if we get sustained 6% inflation it will be harder to avoid.
Yes, higher inflation can potentially be sidestepped through careful purchasing in the short-term, but even over the mid-term, it's very difficult to avoid it. For instance, higher prices for some food items may not affect your own spending at all, but it will impact others' spending, thereby impacting the wages they demand, their employers' costs for those wages, their employers' needed revenues and margins to cover those wages, and other prices in the marketplace. It's all interconnected, and you can't pull on one string without it ultimately impacting all the others to some extent.
TheTimeLord wrote: Sun Jan 09, 2022 10:10 am FWIW, I didn't notice any food inflation until Q4, then it was noticeable button meaningful in my case. It was also present in electricity rates and as I shop for a new car. Although I think the car thing varies considerably by make and model.
It was the same for us. We didn't notice any inflation for food until the last couple of months. My eyes nearly popped a couple of days ago when our local Fred Meyer's prices for California Pizza Kitchen frozen pizzas were $10.49 each. :shock: By comparison, we can get two medium hot pizzas from Domino's for $12. Other food categories have been impacted as well, including milk, for which we are rather price intolerant.
Last edited by willthrill81 on Sun Jan 09, 2022 10:13 am, edited 1 time in total.
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