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.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.)
Bonds: What Are They Doing? Are They Doing Things?? Let's Find Out!
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Re: Bonds in free fall
Re: Bonds in free fall
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.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,
This is called negative convexity.
See for example https://www.investopedia.com/terms/c/convexity.asp
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.
Re: Bonds in free fall
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 wrote: ↑Sat Jan 08, 2022 9:59 amI'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.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.)
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Re: Bonds in free fall
That makes sense, yes.Tom_T wrote: ↑Sat Jan 08, 2022 10:40 amEveryone'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 wrote: ↑Sat Jan 08, 2022 9:59 amI'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.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.)
Re: Bonds in free fall
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.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?
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.
Re: Bonds in free fall
One reason that I did a GNMA for TIPS shift in my own portfolio.Doc wrote: ↑Sat Jan 08, 2022 10:10 amNot 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.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,
This is called negative convexity.
See for example https://www.investopedia.com/terms/c/convexity.asp
A fool and his money are good for business.
Re: Bonds in free fall
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.Tom_T wrote: ↑Sat Jan 08, 2022 8:48 amBonds 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.Greg in Idaho wrote: ↑Sat Jan 08, 2022 8:20 amThis...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").
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.
Re: Bonds in free fall
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.Robot Monster wrote: ↑Sat Jan 08, 2022 10:48 amThat makes sense, yes.Tom_T wrote: ↑Sat Jan 08, 2022 10:40 amEveryone'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 wrote: ↑Sat Jan 08, 2022 9:59 amI'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.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 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?
Re: Bonds in free fall
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.
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
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".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.
Re: Bonds in free fall
Correct, meant to say prices/capital return.Robot Monster wrote: ↑Sat Jan 08, 2022 1:27 pmI'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".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.
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Re: Bonds in free fall
nonetheless, we see things like this:Tom_T wrote: ↑Sat Jan 08, 2022 8:48 amBonds 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.Greg in Idaho wrote: ↑Sat Jan 08, 2022 8:20 amThis...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").
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
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Re: Bonds in free fall
Some thoughts...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.
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.
Re: Bonds in free fall
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
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
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).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.
Re: Bonds in free fall
I would put it more strongly. That phrase is really stupid.willthrill81 wrote: ↑Sat Jan 08, 2022 3:54 pmForemost, 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
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.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.
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
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.BlueEars wrote: ↑Sat Jan 08, 2022 3:58 pmI would put it more strongly. That phrase is really stupid.willthrill81 wrote: ↑Sat Jan 08, 2022 3:54 pmForemost, 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.
The Sensible Steward
Re: Bonds in free fall
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.willthrill81 wrote: ↑Sat Jan 08, 2022 3:59 pmI'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.BlueEars wrote: ↑Sat Jan 08, 2022 3:58 pmI would put it more strongly. That phrase is really stupid.willthrill81 wrote: ↑Sat Jan 08, 2022 3:54 pmForemost, 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
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.BlueEars wrote: ↑Sat Jan 08, 2022 4:05 pmWith 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.willthrill81 wrote: ↑Sat Jan 08, 2022 3:59 pmI'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.BlueEars wrote: ↑Sat Jan 08, 2022 3:58 pmI would put it more strongly. That phrase is really stupid.willthrill81 wrote: ↑Sat Jan 08, 2022 3:54 pmForemost, 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.
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.
The Sensible Steward
Re: Bonds in free fall
Duh!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.
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.
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
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=fLCfkmaqI6kBlueEars wrote: ↑Sat Jan 08, 2022 3:58 pmI would put it more strongly. That phrase is really stupid.willthrill81 wrote: ↑Sat Jan 08, 2022 3:54 pmForemost, 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.
Re: Bonds in free fall
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.
Re: Bonds in free fall
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".happyisland wrote: ↑Sat Jan 08, 2022 4:44 pmHmmm. 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=fLCfkmaqI6kBlueEars wrote: ↑Sat Jan 08, 2022 3:58 pmI would put it more strongly. That phrase is really stupid.willthrill81 wrote: ↑Sat Jan 08, 2022 3:54 pmForemost, 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
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.BlueEars wrote: ↑Sat Jan 08, 2022 4:54 pmFirst 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".happyisland wrote: ↑Sat Jan 08, 2022 4:44 pmHmmm. 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=fLCfkmaqI6kBlueEars wrote: ↑Sat Jan 08, 2022 3:58 pmI would put it more strongly. That phrase is really stupid.willthrill81 wrote: ↑Sat Jan 08, 2022 3:54 pmForemost, 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.
Re: Bonds in free fall
Monte, I pick Door Number Three.willthrill81 wrote: ↑Sat Jan 08, 2022 3:59 pmWe 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.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.
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.
A fool and his money are good for business.
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Re: Bonds in free fall
Hopefully, you won't get a goat.nedsaid wrote: ↑Sat Jan 08, 2022 5:29 pmMonte, I pick Door Number Three.willthrill81 wrote: ↑Sat Jan 08, 2022 3:59 pmWe 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.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.
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.
The Sensible Steward
Re: Bonds in free fall
Robot Monster wrote: ↑Sat Jan 08, 2022 3:29 pmSome thoughts...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.
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!
Re: Bonds in free fall
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.
"We keep you alive to serve this ship. Row well...and live." Ben Hur...and The Taxman! hahaha (a George Harrison song)
Re: Bonds in free fall
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.Robot Monster wrote: ↑Sat Jan 08, 2022 8:52 amWait...didn't you say just six days ago that, "The Fed Funds rate going to 2% is a pipe dream."rockstar wrote: ↑Fri Jan 07, 2022 8:15 pmIf 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.prioritarian wrote: ↑Fri Jan 07, 2022 7:44 pmThe 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.
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%
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
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.Firefly80 wrote: ↑Sat Jan 08, 2022 5:41 pmRobot Monster wrote: ↑Sat Jan 08, 2022 3:29 pmSome thoughts...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.
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!
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.
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
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.rockstar wrote: ↑Sat Jan 08, 2022 6:57 pmThe 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.Robot Monster wrote: ↑Sat Jan 08, 2022 8:52 amWait...didn't you say just six days ago that, "The Fed Funds rate going to 2% is a pipe dream."rockstar wrote: ↑Fri Jan 07, 2022 8:15 pmIf 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.prioritarian wrote: ↑Fri Jan 07, 2022 7:44 pmThe 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.
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%
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.
Interview linkThe 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.
Re: Bonds in free fall
Robot Monster wrote: ↑Sat Jan 08, 2022 7:15 pmI 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.Firefly80 wrote: ↑Sat Jan 08, 2022 5:41 pmRobot Monster wrote: ↑Sat Jan 08, 2022 3:29 pmSome thoughts...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.
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!
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.
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
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.)Firefly80 wrote: ↑Sat Jan 08, 2022 8:12 pmRobot Monster wrote: ↑Sat Jan 08, 2022 7:15 pmI 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.Firefly80 wrote: ↑Sat Jan 08, 2022 5:41 pmRobot Monster wrote: ↑Sat Jan 08, 2022 3:29 pmSome thoughts...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.
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!
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.
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.
Re: Bonds in free fall
theac wrote: ↑Sat Jan 08, 2022 6:56 pmAnd 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
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.theac wrote: ↑Sat Jan 08, 2022 6:56 pmAnd 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 real enemy to fixed income has been and continues to be inflation, particularly unexpected inflation, as we saw last year.
The Sensible Steward
Re: Bonds in free fall
OK good, so I won't be buying a yacht from any profits,Firefly80 wrote: ↑Sat Jan 08, 2022 8:44 pmtheac wrote: ↑Sat Jan 08, 2022 6:56 pmAnd 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.
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.
"We keep you alive to serve this ship. Row well...and live." Ben Hur...and The Taxman! hahaha (a George Harrison song)
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Re: Bonds in free fall
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.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.
Re: Bonds in free fall
OK, so if I'm not interested in buying equities at this time, what option is there?willthrill81 wrote: ↑Sat Jan 08, 2022 9:01 pmThe 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.theac wrote: ↑Sat Jan 08, 2022 6:56 pmAnd 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 real enemy to fixed income has been and continues to be inflation, particularly unexpected inflation, as we saw last year.
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.
"We keep you alive to serve this ship. Row well...and live." Ben Hur...and The Taxman! hahaha (a George Harrison song)
- willthrill81
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Re: Bonds in free fall
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.theac wrote: ↑Sat Jan 08, 2022 9:27 pmOK, so if I'm not interested in buying equities at this time, what option is there?willthrill81 wrote: ↑Sat Jan 08, 2022 9:01 pmThe 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.theac wrote: ↑Sat Jan 08, 2022 6:56 pmAnd 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 real enemy to fixed income has been and continues to be inflation, particularly unexpected inflation, as we saw last year.
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.
The Sensible Steward
Re: Bonds in free fall
Yep, I'd say those are the two main reasons I didn't go for the Tips.willthrill81 wrote: ↑Sat Jan 08, 2022 9:35 pmAbout 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.theac wrote: ↑Sat Jan 08, 2022 9:27 pmOK, so if I'm not interested in buying equities at this time, what option is there?willthrill81 wrote: ↑Sat Jan 08, 2022 9:01 pmThe 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.theac wrote: ↑Sat Jan 08, 2022 6:56 pmAnd 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 real enemy to fixed income has been and continues to be inflation, particularly unexpected inflation, as we saw last year.
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.
Figure I'll just take my chances with Total Bond Fund and let the chips fall where they may. At least for now.
"We keep you alive to serve this ship. Row well...and live." Ben Hur...and The Taxman! hahaha (a George Harrison song)
Re: Bonds in free fall
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.Firefly80 wrote: ↑Sat Jan 08, 2022 8:12 pmRobot Monster wrote: ↑Sat Jan 08, 2022 7:15 pmI 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.Firefly80 wrote: ↑Sat Jan 08, 2022 5:41 pmRobot Monster wrote: ↑Sat Jan 08, 2022 3:29 pmSome thoughts...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.
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!
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.
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.
Re: Bonds in free fall
OK, maybe I'll start looking into Tips and reconsider them. Thankstheac wrote: ↑Sat Jan 08, 2022 9:39 pmYep, I'd say those are the two main reasons I didn't go for the Tips.willthrill81 wrote: ↑Sat Jan 08, 2022 9:35 pmAbout 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.theac wrote: ↑Sat Jan 08, 2022 9:27 pmOK, so if I'm not interested in buying equities at this time, what option is there?willthrill81 wrote: ↑Sat Jan 08, 2022 9:01 pmThe 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.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 real enemy to fixed income has been and continues to be inflation, particularly unexpected inflation, as we saw last year.
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.
Figure I'll just take my chances with Total Bond Fund and let the chips fall where they may. At least for now.
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
I agree.Greg in Idaho wrote: ↑Sat Jan 08, 2022 2:31 pmnonetheless, we see things like this:Tom_T wrote: ↑Sat Jan 08, 2022 8:48 amBonds 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.Greg in Idaho wrote: ↑Sat Jan 08, 2022 8:20 amThis...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").
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
Re: Bonds in free fall
You seem to be arguing against a straw man, and a weak one at that.willthrill81 wrote: ↑Sat Jan 08, 2022 3:54 pmForemost, 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.
"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
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.MattB wrote: ↑Sun Jan 09, 2022 1:25 amYou seem to be arguing against a straw man, and a weak one at that.willthrill81 wrote: ↑Sat Jan 08, 2022 3:54 pmForemost, 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.
"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.
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
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.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.
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Re: Bonds in free fall
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.canadianbacon wrote: ↑Sun Jan 09, 2022 10:04 amI 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.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.
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Re: Bonds in free fall
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.canadianbacon wrote: ↑Sun Jan 09, 2022 10:04 amI 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.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.
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. 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.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.
Last edited by willthrill81 on Sun Jan 09, 2022 10:13 am, edited 1 time in total.
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