Are total bond market investors a sitting duck?

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Robot Monster
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Re: Are total bond market investors a sitting duck?

Post by Robot Monster »

MrJones wrote: Mon Oct 03, 2022 12:58 am
Robot Monster wrote: Sun Oct 02, 2022 1:35 pm 1. Investors whose investment horizon is less than the average duration of their bond fund. These are, perhaps, the sitting duck bond investors. They will be hurt if yields increase.
Is the current situation actionable for such investors? What would be a good way to limit their losses? Of courses, selling all and going to cash is the obvious answer, but that means on would have to take a potentially large capital loss.
If there's a mismatch between an investor's investment horizon and their average duration, seems the safest thing for those investors is to simply eliminate the mismatch. It's sorta like the investor who has money in a 10yr Treasury that they'll need in 5 years; the safest course would be to replace the 10yr Treasury with a 5yr Treasury.
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Re: Are total bond market investors a sitting duck?

Post by Trance »

Robot Monster wrote: Sun Oct 02, 2022 1:35 pm There are three different types of Total Bond Market investors, and each will fare differently.

1. Investors whose investment horizon is less than the average duration of their bond fund. These are, perhaps, the sitting duck bond investors. They will be hurt if yields increase.

2. Investors whose investment horizon is greater than the average duration of their bond fund. These investors cheer yields increasing.

3. Investors whose investment horizon matches than the average duration of their bond fund. These investors will be indifferent to yield changes.
This is exactly the answer. If you hold a total bond fund like BND and are more than 8.8 years from retirement, you will be happy if yields are increasing.

But if you are still 25+ years from retirement and are holding BLV or EDV (Vanguard Long Term and Extended Duration Bond ETFS respectively) you are also very happy yields are increasing.
60% VT 40% BNDW (no bonds in Roth)
Robot Monster
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Re: Are total bond market investors a sitting duck?

Post by Robot Monster »

NoRegret wrote: Sun Oct 02, 2022 11:51 pm
Robot Monster wrote: Sun Oct 02, 2022 1:35 pm There are three different types of Total Bond Market investors, and each will fare differently.

1. Investors whose investment horizon is less than the average duration of their bond fund. These are, perhaps, the sitting duck bond investors. They will be hurt if yields increase.

2. Investors whose investment horizon is greater than the average duration of their bond fund. These investors cheer yields increasing.

3. Investors whose investment horizon matches than the average duration of their bond fund. These investors will be indifferent to yield changes.
A couple things to keep in mind:
1. For linear rate increase, time of “indifference” is 2D-1. I’ve calculated 2D once, but I think 2D-1 is more accurate. Check out KevinM’s post.

2. If by TBM you mean Barclays AGG or a reasonable facsimile, know that its duration has increased from <5 in 2004 to 6.4 yrs now. In other words, unlike TLT or IEF, etc., AGG doesn’t target duration, you get whatever the index offers.
1. Yes, well, I always end up going by vineviz's calculation, but you're right, I have seen that other calculation. Northern Flicker has a good post on it. link

2. I suppose if the duration on your bond fund is slowly increasing, you would have to be a little more aggressive rebalancing into a shorter duration fund than you would otherwise.
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Taylor Larimore
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Re: Are total bond market investors a sitting duck?

Post by Taylor Larimore »

Monitors:

Delete. Duplicate post below.

Taylor
Last edited by Taylor Larimore on Mon Oct 03, 2022 6:21 pm, edited 1 time in total.
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Re: Are total bond market investors a sitting duck?

Post by Taylor Larimore »

Desertinvestor wrote: Sun Oct 02, 2022 1:26 pm I'm aware that timing bond markets is as hard as timing stock markets, but I can't help but think we are now entering a new era similar to the 1970s and bond investors are myopic as most have experienced a 40 year bull market after Paul Volker raised rates so dramatically to counter 1970s inflation. Given rates on 3 month T Bills, does it make more sense for instance for a retiree to continue to roll over 3 month T-bills until an interest rate steady state is achieved (mostly likely 5% +)? Intermediate term bond fund interest rate risk just seems too high despite the loses incurred already this year.
Desertinvestor:

Take another look at past returns for the Total Bond Market Index I selected for The Three-Fund Portfolio:

YEAR--INFLATION--BOND INDEX--S&P 500 INDEX------MSCI EAFE INDEX
1976-------4.9%--------15.6%------------23.8%--------------------3.6%
1977-------6.7-----------3.0-------------(-7.2)-------------------17.5
1978-------9.0-----------1.4---------------6.6--------------------33.1
1979------13.3-----------1.9--------------18.4-------------------10.9 (Highest Annual Inflation Rate)
1980------12.5-----------2.7--------------32.4-------------------25.4
1981-------8.9-----------6.3-------------(-4.9)------------------(-2.5)
1982-------3.8----------32.6--------------21.6------------------(-0.3) (Highest Bond Index Return)
1983-------3.8-----------8.4--------------22.6-------------------24.8
1984-------3.9----------15.2---------------6.3--------------------3.5
1985-------3.8----------22.1--------------31.7-------------------51.4
1986-------1.1----------15.2--------------18.7-------------------65.8 (Highest Stock Return)
1987-------4.4-----------2.8----------------5.2-------------------24.6
1988-------4.4-----------7.9---------------16.6-------------------27.8
1989-------4.6----------14.5---------------31.7------------------11.4
1990-------6.1-----------8.9---------------(-3.1)---------------(-22.8)
1991-------3.1----------16.0---------------30.5------------------12.4
1992-------2.9-----------7.4-----------------7.6----------------(-11.9)
1993-------2.7-----------9.7----------------10.1------------------32.6
1994-------2.7---------(-2.9)----------------1.3--------------------7.6 (Lowest Bond Index Return)
1995-------2.5----------18.5---------------37.6-------------------11.8 (Highest S&P Index Return)
1996-------3.3-----------3.6----------------23.0--------------------7.2
1997-------1.7-----------9.7----------------33.4--------------------2.6
1998-------1.6-----------8.7----------------28.6-------------------19.1
1999-------2.7---------(-0.8)---------------21.0-------------------28.3
2000-------3.4----------11.6---------------(-9.1)----------------(-15.8)
2001-------1.6-----------8.4--------------(-11.9)----------------(-19.8)
2002-------2.4----------10.3-------------(-22.1)----------------(-15.3)
2003-------1.9-----------4.1----------------28.7-------------------40.4
2004-------3.3-----------4.3----------------10.9-------------------20.9
2005-------3.4-----------2.4-----------------4.9-------------------15.8
2006-------2.5-----------4.3----------------15.8------------------26.8
2007-------4.1-----------7.0-----------------5.5------------------11.6
2008-------0.1-----------5.2--------------(-37.0)---------------(-43.1) (Lowest U.S. and International Stock Returns)
2009-------2.7-----------5.9----------------26.5------------------32.5
2010-------1.5-----------6.5----------------15.1-------------------8.2
2011-------3.0-----------7.7-----------------2.1----------------(-11.7)
2012-------1.7-----------4.3----------------16.0------------------17.9
2013-------1.5---------(-2.0)---------------32.4------------------23.3
2014-------1.6-----------6.0----------------13.7-----------------(-4.5)
2015-------0.7-----------0.5-----------------1.4-----------------(-0.4)
2016-------2.1-----------2.6----------------12.0-------------------1.5
2017-------2.1-----------3.5----------------21.8------------------25.6
2018-------2.5---------(-0.1)--------------(-4.4)---------------(-13.4)
2019-------2.3-----------8.7----------------31.5------------------22.7
2020-------1.4-----------7.7----------------18.4------------------11.3
2021-------7.0---------(-1.7)---------------25.7-------------------8.6

"Past performance does not guarantee future performance."

You will notice that after EVERY annual decline the subsequent year had a good return (2022 could be an exception).

Nothing in the stock and bond world is guaranteed. Nevertheless, Vanguard Total Bond Market Index fund has become the largest bond fund on the planet -- for good reasons.

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "The Lehman Bond Index (total bond market), in substance, is an appropriate choice for investors with an intermediate-term time horizon and seeking top quality."
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Re: Are total bond market investors a sitting duck?

Post by manuvns »

Buy iShares iBoxx $ High Yield Corporate Bond ETF (HYG) down 18-20% and 5-6% yield
Thanks!
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Re: Are total bond market investors a sitting duck?

Post by NoRegret »

vineviz wrote: Mon Oct 03, 2022 6:14 am
NoRegret wrote: Sun Oct 02, 2022 11:51 pm 2. If by TBM you mean Barclays AGG or a reasonable facsimile, know that its duration has increased from <5 in 2004 to 6.4 yrs now. In other words, unlike TLT or IEF, etc., AGG doesn’t target duration, you get whatever the index offers.
TLT and IEF do not target duration either.

The duration of ALL bonds will be higher when coupon rates are lower than when they are higher, all things equal. And because this effect is stronger for longer maturity bonds, the average duration of TLT has changed much more since 2004 than the average duration of total bond market funds have changed.
Yes you are correct. I meant to say TLT/IEF will control the type of bonds in the fund as implied by their names but with AGG you will get whatever is included in the index.
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Re: Are total bond market investors a sitting duck?

Post by patrick »

Robot Monster wrote: Sun Oct 02, 2022 1:35 pm There are three different types of Total Bond Market investors, and each will fare differently.

1. Investors whose investment horizon is less than the average duration of their bond fund. These are, perhaps, the sitting duck bond investors. They will be hurt if yields increase.

2. Investors whose investment horizon is greater than the average duration of their bond fund. These investors cheer yields increasing.

3. Investors whose investment horizon matches than the average duration of their bond fund. These investors will be indifferent to yield changes.
You forget one:

4. Investors whose investment horizon is unknown because they don't know when they will retire (not even within a 10 year range) and don't know how long retirement will last (also not even within a 10 year range).
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Re: Are total bond market investors a sitting duck?

Post by vineviz »

patrick wrote: Mon Oct 03, 2022 3:28 pm
Robot Monster wrote: Sun Oct 02, 2022 1:35 pm There are three different types of Total Bond Market investors, and each will fare differently.

1. Investors whose investment horizon is less than the average duration of their bond fund. These are, perhaps, the sitting duck bond investors. They will be hurt if yields increase.

2. Investors whose investment horizon is greater than the average duration of their bond fund. These investors cheer yields increasing.

3. Investors whose investment horizon matches than the average duration of their bond fund. These investors will be indifferent to yield changes.
You forget one:

4. Investors whose investment horizon is unknown because they don't know when they will retire (not even within a 10 year range) and don't know how long retirement will last (also not even within a 10 year range).
That’s not a distinct group: all investors have an investment horizon, even if they aren’t very good at estimating what it is.
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Re: Are total bond market investors a sitting duck?

Post by ebeb »

nisiprius wrote: Sun Oct 02, 2022 8:51 pm However, in the past I've said that Total Bond has never yet lost money over any 48-month period, and that's not true any more. $10,000 invested on 9/30/2018 would have only been worth $9,996 on 9/30/2022.
Those of us simple-minded investors who were lulled into thinking that total bonds losses would perhaps be limited to around the -2% rate max by looking at charts since 1976, have been sadly walloped over the head by the huge -15% total bonds losses this year. This makes me wonder if perhaps the common Asset Alloc of emergency funds + total bonds + total stocks should really have another category for low-risk funds which would max lose -1% for any period of 3-5 years especially for those close to retirement or retired. This low-risk fund can be used for yearly expenses for 3-5 years until the total bonds have had some chance to recover sufficiently so as not to be forced to sell at a big loss. Would this low-risk funds category be I-bonds/short-term treasuries or anything better out there to hold in addition to the emergency funds being in HYSA/tbills :confused
Last edited by ebeb on Mon Oct 03, 2022 6:43 pm, edited 1 time in total.
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Re: Are total bond market investors a sitting duck?

Post by vas »

ebeb wrote: Mon Oct 03, 2022 5:42 pm
Those of us simple-minded investors who were lulled into thinking that total bonds losses would perhaps be limited to around the -2% rate max by looking at charts since 1976, have been sadly walloped over the head by the huge -15% losses this year. This makes me wonder if perhaps the common Asset Alloc of emergency funds + total bonds + total stocks should really have another category for low-risk funds which would max lose -1% for any period of 3-5 years especially for those close to retirement or retired. This low-risk fund can be used for yearly expenses for 3-5 years until the total bonds have had some chance to recover sufficiently so as not to be forced to sell at a big loss. Would this low-risk funds category be I-bonds/short-term treasuries or anything better out there to hold in addition to the emergency funds being in HYSA/tbills :confused
I agree with this approach although its really just another way to say 'duration matching' or 'buckets'. I've started to build up a three or four year short duration bucket that includes HYSA, Ibonds, and treasuries to serve this purpose in retirement. This wasn't as appealing the last few years but this year's draw down was a nice reminder that sometimes it needed.
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Re: Are total bond market investors a sitting duck?

Post by DesertInvestor »

arcticpineapplecorp. wrote: Sun Oct 02, 2022 1:47 pm quack quack.

looks like inflation was higher than average mostly from 73-82:

Image

Taylor has posted this before. It doesn't show earlier than 1976 but look at some years in the 80s when inflation was low(er) how the total bond market did:

Image

Bond holders can be hurt but rates don't only rise.
I'm curious why with rising rates in 1970s and early 1980s why total bond market didn't do worse? Was it because rates rose less rapidly I imagine? I don't get it.
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Re: Are total bond market investors a sitting duck?

Post by vineviz »

ebeb wrote: Mon Oct 03, 2022 5:42 pm Those of us simple-minded investors who were lulled into thinking that total bonds losses would perhaps be limited to around the -2% rate max by looking at charts since 1976, have been sadly walloped over the head by the huge -15% losses this year. This makes me wonder if perhaps the common Asset Alloc of emergency funds + total bonds + total stocks should really have another category for low-risk funds which would max lose -1% for any period of 3-5 years especially for those close to retirement or retired. This low-risk fund can be used for yearly expenses for 3-5 years until the total bonds have had some chance to recover sufficiently so as not to be forced to sell at a big loss. Would this low-risk funds category be I-bonds/short-term treasuries or anything better out there to hold in addition to the emergency funds being in HYSA/tbills :confused
Holding a significant allocation to cash or cash-like assets rarely, if ever, increases retirement security and often reduces it.

It's easy to get distracted by the "huge -15% losses this year" and overlook the fact that the yield on the fund (which is where your future returns are) have roughly doubled.

I don't think many people necessarily expected a -15% drop on bond prices this year, but it's not necessarily bad news for investors who stay the course and keep their heads.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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vineviz
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Re: Are total bond market investors a sitting duck?

Post by vineviz »

DesertInvestor wrote: Mon Oct 03, 2022 6:41 pm I'm curious why with rising rates in 1970s and early 1980s why total bond market didn't do worse? Was it because rates rose less rapidly I imagine? I don't get it.
Part of the challenge is that total bond market funds didn't exists in the 1970s or early 1980s. Vanguard Total Bond Market Index (VBMFX) was the first, and it launched in 1986.

So any data we have about how they MIGHT have performed is somewhat speculative.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: Are total bond market investors a sitting duck?

Post by MadHungarian »

Like your thread title states -- we're "Total Bond Market Investors", not "Total Bond Market Speculators".

And when you go the passive index investing route, there's always going to be parts of your balanced total investing portfolio that are temporarily out-of-fashion. One of the reasons you stay in them (at the appropriate allocations!), is that it's impossible to reliably predict what the various parts of the market will do next. Those currently out-of-fashion market segments may turn out to be the least-underperforming segments going forward.

And anyway, just at the moment Total Bond Market is a better value now than it was a few years ago when everyone was praising it.
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Re: Are total bond market investors a sitting duck?

Post by Beensabu »

DesertInvestor wrote: Mon Oct 03, 2022 6:41 pm I'm curious why with rising rates in 1970s and early 1980s why total bond market didn't do worse? Was it because rates rose less rapidly I imagine? I don't get it.
Because bond yields were higher to begin with.

Check out this excellent and accessible explanation of bond convexity:

https://portfoliocharts.com/2019/05/27/ ... convexity/
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Re: Are total bond market investors a sitting duck?

Post by ApeAttack »

Triple digit golfer wrote: Sun Oct 02, 2022 5:54 pm Why didn't you post this in January before the -15% YTD return?
This is the best post of the thread.
May all your index funds gain +0.5% today.
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Re: Are total bond market investors a sitting duck?

Post by BitTooAggressive »

toddthebod wrote: Sun Oct 02, 2022 1:31 pm I'm 45, my bond fund will be fine.
You don’t know that. Interest rates could go up for a long time as the Fed unwinds its balance sheet and you could be losing in real terms against inflation.
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Re: Are total bond market investors a sitting duck?

Post by Triple digit golfer »

BitTooAggressive wrote: Tue Oct 04, 2022 6:57 am
toddthebod wrote: Sun Oct 02, 2022 1:31 pm I'm 45, my bond fund will be fine.
You don’t know that. Interest rates could go up for a long time as the Fed unwinds its balance sheet and you could be losing in real terms against inflation.
So what is the alternative? Isn't it the entire portfolio that matters? If losing against inflation was the benchmark, then nobody would hold any cash at all.
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Re: Are total bond market investors a sitting duck?

Post by BitTooAggressive »

Triple digit golfer wrote: Tue Oct 04, 2022 7:02 am
BitTooAggressive wrote: Tue Oct 04, 2022 6:57 am
toddthebod wrote: Sun Oct 02, 2022 1:31 pm I'm 45, my bond fund will be fine.
You don’t know that. Interest rates could go up for a long time as the Fed unwinds its balance sheet and you could be losing in real terms against inflation.
So what is the alternative? Isn't it the entire portfolio that matters? If losing against inflation was the benchmark, then nobody would hold any cash at all.
I did not say I had the answers. If I am 45 and plan to work for a while I don’t hold any bonds at least for retirement.

I have moved to short duration tips over a year ago but I have still lost money. It has mitigated my losses but I still have lost.

I think a well diversified stock portfolio and bond portfolio is essential. I think too many just go with something like BND and have too much duration risk in their bond portfolio, when they should have more short term bonds.
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Re: Are total bond market investors a sitting duck?

Post by toddthebod »

BitTooAggressive wrote: Tue Oct 04, 2022 6:57 am
toddthebod wrote: Sun Oct 02, 2022 1:31 pm I'm 45, my bond fund will be fine.
You don’t know that. Interest rates could go up for a long time as the Fed unwinds its balance sheet and you could be losing in real terms against inflation.
Interest rates are not going to go up continuously for 30-40 years.

Besides, the point of my comment is that my investment horizon well exceeds the duration of the fund, so any NAV losses resulting from the current interest rate changes.will disappear, and, in fact, I'll be better off with the higher yields.
Last edited by toddthebod on Tue Oct 04, 2022 7:55 am, edited 1 time in total.
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Re: Are total bond market investors a sitting duck?

Post by BitTooAggressive »

toddthebod wrote: Tue Oct 04, 2022 7:48 am
BitTooAggressive wrote: Tue Oct 04, 2022 6:57 am
toddthebod wrote: Sun Oct 02, 2022 1:31 pm I'm 45, my bond fund will be fine.
You don’t know that. Interest rates could go up for a long time as the Fed unwinds its balance sheet and you could be losing in real terms against inflation.
Interest rates are not going to go up continuously for 30-40 years.
They went down for a long time… at least the general direction.
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Re: Are total bond market investors a sitting duck?

Post by KneeReplacementTutor »

DesertInvestor wrote: Sun Oct 02, 2022 1:26 pm Intermediate term bond fund interest rate risk just seems too high despite the loses incurred already this year.
One of the reasons the risk doesn't "seem" too high to me is that I have no idea what the risk really is to begin with.

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Re: Are total bond market investors a sitting duck?

Post by nisiprius »

Disclaimers.
1) These aren't predictions of any kind. To make predictions you'd need to be able to predict the interest rate of intermediate-term bonds, which is close to impossible.
2) These are total return growth charts and include reinvestment of coupon interest (as in a bond fund with reinvested fund dividends).
3) This isn't a detailed simulation of a real bond fund, it's a simulation of a rolling ladder of bonds that has a duration of 6.6 years, about the same as that as the Vanguard Total Bond Market Index Fund.
4) This doesn't deal with inflation. (However, if you used TIPS as the bonds and did all the math in real dollars, the results would be similar).

I simulated scenarios where the interest rate is 0.5% for two years; starts rising at a rate of 3% per year; then levels off.

The one-year case is roughly where we are now.

Image

Here is the five-year case--the interest rate keeps rising at 3% per year all the way up to 15.5%. The value of the bond fund continues to decline but the decline slows and levels off. The downward pull of the continuously risking interest rate is gradually balanced the upward pull of bonds reaching their face value of maturity, and by the coupon interest from the bonds gradually increasing as new higher-interest bonds replace lower-interest bonds as they mature.

Image

This is quite a terrible scenario for bonds, and of course it's possible, but notice that the damage is contained at about -34%. In particular, the interest rate has risen 15%, and the duration is 6.6 years, but the decline is not 15% x 6.6 years = -99%! It's only -34%. The formula "decline = duration times interest increases" is only accurate for near-instantaneous changes in interest rates.

The other point to notice is that when the interest rate stops rising, the fund's total value (including reinvested interest) begins to rise immediately at the stabilized interest rate. In other words, when the interest rate levels off, the fund beings growing immediately (you do not need to wait for the low-interest bonds to be purged), and the higher the final interest rate it, the faster the growth is.
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Re: Are total bond market investors a sitting duck?

Post by ebeb »

Thanks @nisiprius this really helps to understand what can happen :D
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Re: Are total bond market investors a sitting duck?

Post by DesertInvestor »

vineviz wrote: Mon Oct 03, 2022 6:53 pm
DesertInvestor wrote: Mon Oct 03, 2022 6:41 pm I'm curious why with rising rates in 1970s and early 1980s why total bond market didn't do worse? Was it because rates rose less rapidly I imagine? I don't get it.
Part of the challenge is that total bond market funds didn't exists in the 1970s or early 1980s. Vanguard Total Bond Market Index (VBMFX) was the first, and it launched in 1986.

So any data we have about how they MIGHT have performed is somewhat speculative.
Mathematically, if rates are gong to 10%+ at that time, bond market fund would have been decimated. That is kind of my point. I think we are just getting started with rate rises. Larry Summers did a paper showing inflation is the same today as in 1970s if we use same methodology. I don't know a thing, but when services start going way up as well, I don't see current rates fixing the problem.
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Re: Are total bond market investors a sitting duck?

Post by DesertInvestor »

Triple digit golfer wrote: Tue Oct 04, 2022 7:02 am
BitTooAggressive wrote: Tue Oct 04, 2022 6:57 am
toddthebod wrote: Sun Oct 02, 2022 1:31 pm I'm 45, my bond fund will be fine.
You don’t know that. Interest rates could go up for a long time as the Fed unwinds its balance sheet and you could be losing in real terms against inflation.
So what is the alternative? Isn't it the entire portfolio that matters? If losing against inflation was the benchmark, then nobody would hold any cash at all.
The alternative is directly owning short treasuries (or brokered CDs), protecting the value of your investment and rolling them over to new short treasuries as rates rise every 3 months. Can always go back to total bond market at later date. You'll lose if rates go down, but given economic strength that is highly unlikely right now. Total bond market is up a bit today though.
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Re: Are total bond market investors a sitting duck?

Post by KlangFool »

DesertInvestor wrote: Tue Oct 04, 2022 1:19 pm

You'll lose if rates go down, but given economic strength that is highly unlikely right now. Total bond market is up a bit today though.
DesertInvestor,

In summary, you believe that you can predict the future interest rate movement. Good luck to you!

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Re: Are total bond market investors a sitting duck?

Post by GibsonL6s »

Robot Monster wrote: Sun Oct 02, 2022 1:35 pm There are three different types of Total Bond Market investors, and each will fare differently.

1. Investors whose investment horizon is less than the average duration of their bond fund. These are, perhaps, the sitting duck bond investors. They will be hurt if yields increase.

2. Investors whose investment horizon is greater than the average duration of their bond fund. These investors cheer yields increasing.

3. Investors whose investment horizon matches than the average duration of their bond fund. These investors will be indifferent to yield changes.
Not sure how this advice is true as the investors time horizon is shortening while the bond fund is constant. If I am say 7 years from retirement and the duration of BND is a constant 6.7, there is no assurance that losses one incurs will be made up when the investor wants to retire.
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Re: Are total bond market investors a sitting duck?

Post by Robot Monster »

DesertInvestor wrote: Tue Oct 04, 2022 1:19 pm The alternative is directly owning short treasuries (or brokered CDs), protecting the value of your investment and rolling them over to new short treasuries as rates rise every 3 months. Can always go back to total bond market at later date. You'll lose if rates go down, but given economic strength that is highly unlikely right now. Total bond market is up a bit today though.
Schwab has been of the opinion that "while there is room for bond yields to move higher as the Fed tightens policy, we continue to believe that the faster and more forceful the Fed is in hiking rates, the deeper the inversion of the yield curve." Schwab link
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Re: Are total bond market investors a sitting duck?

Post by vineviz »

DesertInvestor wrote: Tue Oct 04, 2022 1:12 pm Mathematically, if rates are gong to 10%+ at that time, bond market fund would have been decimated. That is kind of my point.
Very few of the bond funds that DID exist in the 1970s had performance that would fit that find of description.

Here are four representative examples:

Image
https://www.portfoliovisualizer.com/fun ... F31%2F1984

Putnam Income A (PINCX)
Franklin US Government Secs A1 (FKUSX)
Invesco Corporate Bond A (ACCBX)
Eaton Vance Income Fund of Boston A (EVIBX)

The worst drawdowns for these funds was only modestly worse than the current drawdown in bond prices.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: Are total bond market investors a sitting duck?

Post by vineviz »

GibsonL6s wrote: Tue Oct 04, 2022 1:55 pm
Robot Monster wrote: Sun Oct 02, 2022 1:35 pm There are three different types of Total Bond Market investors, and each will fare differently.

1. Investors whose investment horizon is less than the average duration of their bond fund. These are, perhaps, the sitting duck bond investors. They will be hurt if yields increase.

2. Investors whose investment horizon is greater than the average duration of their bond fund. These investors cheer yields increasing.

3. Investors whose investment horizon matches than the average duration of their bond fund. These investors will be indifferent to yield changes.
Not sure how this advice is true as the investors time horizon is shortening while the bond fund is constant. If I am say 7 years from retirement and the duration of BND is a constant 6.7, there is no assurance that losses one incurs will be made up when the investor wants to retire.
If you are 7 years from retirement then your investment horizon is MUCH longer than 7 years. More like 20-25 years, actually.

You are currently in group 2, and could move to group 3 by choosing a more appropriate (i.e. longer) bond duration.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: Are total bond market investors a sitting duck?

Post by freelanceeer1972 »

vineviz wrote: Tue Oct 04, 2022 1:59 pm
DesertInvestor wrote: Tue Oct 04, 2022 1:12 pm Mathematically, if rates are gong to 10%+ at that time, bond market fund would have been decimated. That is kind of my point.
Very few of the bond funds that DID exist in the 1970s had performance that would fit that find of description.

Here are four representative examples:

Image
https://www.portfoliovisualizer.com/fun ... F31%2F1984

Putnam Income A (PINCX)
Franklin US Government Secs A1 (FKUSX)
Invesco Corporate Bond A (ACCBX)
Eaton Vance Income Fund of Boston A (EVIBX)

The worst drawdowns for these funds was only modestly worse than the current drawdown in bond prices.
Is this because bonds within the fund are "falling off" and new ones being purchased at the newer, lower price and higher yield, which then benefit when rates start to drop (in terms of price)?
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Re: Are total bond market investors a sitting duck?

Post by Robot Monster »

GibsonL6s wrote: Tue Oct 04, 2022 1:55 pm
Robot Monster wrote: Sun Oct 02, 2022 1:35 pm There are three different types of Total Bond Market investors, and each will fare differently.

1. Investors whose investment horizon is less than the average duration of their bond fund. These are, perhaps, the sitting duck bond investors. They will be hurt if yields increase.

2. Investors whose investment horizon is greater than the average duration of their bond fund. These investors cheer yields increasing.

3. Investors whose investment horizon matches than the average duration of their bond fund. These investors will be indifferent to yield changes.
Not sure how this advice is true as the investors time horizon is shortening while the bond fund is constant. If I am say 7 years from retirement and the duration of BND is a constant 6.7, there is no assurance that losses one incurs will be made up when the investor wants to retire.
You need to rebalance between two bond funds to slowly, over time, bring your duration down.

Check out Northern Flicker's link I posted above. link
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Re: Are total bond market investors a sitting duck?

Post by vineviz »

freelanceeer1972 wrote: Tue Oct 04, 2022 2:02 pm Is this because bonds within the fund are "falling off" and new ones being purchased at the newer, lower price and higher yield, which then benefit when rates start to drop (in terms of price)?
Basically that's what happens. And it doesn't even take a drop in rates: eventually the force of the "equal-but-opposite" reaction will kick in even if rates never drop as I think nisiprius illustrated above.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: Are total bond market investors a sitting duck?

Post by DesertInvestor »

toddthebod wrote: Tue Oct 04, 2022 7:48 am
BitTooAggressive wrote: Tue Oct 04, 2022 6:57 am
toddthebod wrote: Sun Oct 02, 2022 1:31 pm I'm 45, my bond fund will be fine.
You don’t know that. Interest rates could go up for a long time as the Fed unwinds its balance sheet and you could be losing in real terms against inflation.
Interest rates are not going to go up continuously for 30-40 years.

Besides, the point of my comment is that my investment horizon well exceeds the duration of the fund, so any NAV losses resulting from the current interest rate changes.will disappear, and, in fact, I'll be better off with the higher yields.
Lets say rates go up another 2% over the next two years. Duration would not cover you as rates are slowly rising I would guess, not exactly. What is the actually way to estimate how long to break even with a bond fund in setting of rising rates over several years? When you say "6 year duration and that is all I have to hold to break even" I think that is more after a 1% rate rise with no further rises correct?
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Re: Are total bond market investors a sitting duck?

Post by toddthebod »

DesertInvestor wrote: Tue Oct 04, 2022 2:25 pm
toddthebod wrote: Tue Oct 04, 2022 7:48 am
BitTooAggressive wrote: Tue Oct 04, 2022 6:57 am
toddthebod wrote: Sun Oct 02, 2022 1:31 pm I'm 45, my bond fund will be fine.
You don’t know that. Interest rates could go up for a long time as the Fed unwinds its balance sheet and you could be losing in real terms against inflation.
Interest rates are not going to go up continuously for 30-40 years.

Besides, the point of my comment is that my investment horizon well exceeds the duration of the fund, so any NAV losses resulting from the current interest rate changes.will disappear, and, in fact, I'll be better off with the higher yields.
Lets say rates go up another 2% over the next two years. Duration would not cover you as rates are slowly rising I would guess, not exactly. What is the actually way to estimate how long to break even with a bond fund in setting of rising rates over several years? When you say "6 year duration and that is all I have to hold to break even" I think that is more after a 1% rate rise with no further rises correct?
About 90% of the bonds BND holds will have matured by the time I retire, and 100% will have matured by the expected midpoint of my retirement. As such, any changes to the NAV of the fund as a result of rate changes happening right now are completely irrelevant to me.

The general rule of thumb is that over the course of the average duration of the fund, any NAV changes will be approximately balanced by the interest rate changes.

Therefore, as others pointed out earlier in this thread, because my investment horizon is longer than the duration of the fund, I will, on balance, benefit from the increased yields going forward. I get higher coupon payments while the NAV loss fades away.
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Re: Are total bond market investors a sitting duck?

Post by DesertInvestor »

If rates are continuously rising over several years, I don't think the bond duration can be followed exactly as the break even point for the NAV. Maybe it can after each rate hike? But then if rates continue upwards, then its a longer period of time after each rise I believe.
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Re: Are total bond market investors a sitting duck?

Post by nisiprius »

vineviz wrote: Tue Oct 04, 2022 1:59 pm
DesertInvestor wrote: Tue Oct 04, 2022 1:12 pm Mathematically, if rates are gong to 10%+ at that time, bond market fund would have been decimated. That is kind of my point.
Very few of the bond funds that DID exist in the 1970s had performance that would fit that find of description.

Here are four representative examples:

Image
https://www.portfoliovisualizer.com/fun ... F31%2F1984

Putnam Income A (PINCX)
Franklin US Government Secs A1 (FKUSX)
Invesco Corporate Bond A (ACCBX)
Eaton Vance Income Fund of Boston A (EVIBX)

The worst drawdowns for these funds was only modestly worse than the current drawdown in bond prices.
Nice, thank you. I like to point at Putnam Income but I didn't know those other examples. I asssume that Franklin US Government Securities has always invested in what its name implies and therefore is an example of investment-grade bonds for sure.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
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Re: Are total bond market investors a sitting duck?

Post by vineviz »

DesertInvestor wrote: Tue Oct 04, 2022 2:39 pm If rates are continuously rising over several years, I don't think the bond duration can be followed exactly as the break even point for the NAV. Maybe it can after each rate hike? But then if rates continue upwards, then its a longer period of time after each rise I believe.
You're using the phrase "rate hike", which makes me wonder if it's clear that the yields on intermediate and long-term bonds (which make up the majority of a total bond market fund) move independently of the overnight lending rates set by the FOMC. Bond yields don't get "hiked": they are set by the market.

Also, it is true that the correspondence between duration and the point of indifference with changes in bond prices holds at any particular point in time. Even during a long period of yield increases, the equivalence holds at every particular moment.

And while the price change of bonds is not fully described by duration (convexity plays a role as well), as long as you keep your portfolio's average bond duration approximately matched to your investment horizon you can expect to get approximately the same return from your bonds regardless of what happens to yields.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: Are total bond market investors a sitting duck?

Post by toddthebod »

DesertInvestor wrote: Tue Oct 04, 2022 2:39 pm If rates are continuously rising over several years, I don't think the bond duration can be followed exactly as the break even point for the NAV. Maybe it can after each rate hike? But then if rates continue upwards, then its a longer period of time after each rise I believe.
Like I said, literally every bond in the fund will have matured over the next 20-25 years, so I don't care about NAV losses right now.
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Re: Are total bond market investors a sitting duck?

Post by DesertInvestor »

vineviz wrote: Tue Oct 04, 2022 2:59 pm
DesertInvestor wrote: Tue Oct 04, 2022 2:39 pm If rates are continuously rising over several years, I don't think the bond duration can be followed exactly as the break even point for the NAV. Maybe it can after each rate hike? But then if rates continue upwards, then its a longer period of time after each rise I believe.
You're using the phrase "rate hike", which makes me wonder if it's clear that the yields on intermediate and long-term bonds (which make up the majority of a total bond market fund) move independently of the overnight lending rates set by the FOMC. Bond yields don't get "hiked": they are set by the market.

Also, it is true that the correspondence between duration and the point of indifference with changes in bond prices holds at any particular point in time. Even during a long period of yield increases, the equivalence holds at every particular moment.

And while the price change of bonds is not fully described by duration (convexity plays a role as well), as long as you keep your portfolio's average bond duration approximately matched to your investment horizon you can expect to get approximately the same return from your bonds regardless of what happens to yields.
Its set by the market but is it not directly influenced by the federal funds rate?
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Re: Are total bond market investors a sitting duck?

Post by vineviz »

DesertInvestor wrote: Tue Oct 04, 2022 3:11 pm
vineviz wrote: Tue Oct 04, 2022 2:59 pm
DesertInvestor wrote: Tue Oct 04, 2022 2:39 pm If rates are continuously rising over several years, I don't think the bond duration can be followed exactly as the break even point for the NAV. Maybe it can after each rate hike? But then if rates continue upwards, then its a longer period of time after each rise I believe.
You're using the phrase "rate hike", which makes me wonder if it's clear that the yields on intermediate and long-term bonds (which make up the majority of a total bond market fund) move independently of the overnight lending rates set by the FOMC. Bond yields don't get "hiked": they are set by the market.

Also, it is true that the correspondence between duration and the point of indifference with changes in bond prices holds at any particular point in time. Even during a long period of yield increases, the equivalence holds at every particular moment.

And while the price change of bonds is not fully described by duration (convexity plays a role as well), as long as you keep your portfolio's average bond duration approximately matched to your investment horizon you can expect to get approximately the same return from your bonds regardless of what happens to yields.
Its set by the market but is it not directly influenced by the federal funds rate?
No. Definitely not directly influenced, and not even indirectly influence to any discernible degree.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: Are total bond market investors a sitting duck?

Post by DesertInvestor »

Bonds are more confusing than stocks!

why is total bond market down 13%? Seems directly correlated on the surface. bonds move opposite rates. Rates influence new treasury yields which lowers the value of existing bonds right?
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Re: Are total bond market investors a sitting duck?

Post by Triple digit golfer »

DesertInvestor wrote: Tue Oct 04, 2022 1:19 pm
Triple digit golfer wrote: Tue Oct 04, 2022 7:02 am
BitTooAggressive wrote: Tue Oct 04, 2022 6:57 am
toddthebod wrote: Sun Oct 02, 2022 1:31 pm I'm 45, my bond fund will be fine.
You don’t know that. Interest rates could go up for a long time as the Fed unwinds its balance sheet and you could be losing in real terms against inflation.
So what is the alternative? Isn't it the entire portfolio that matters? If losing against inflation was the benchmark, then nobody would hold any cash at all.
The alternative is directly owning short treasuries (or brokered CDs), protecting the value of your investment and rolling them over to new short treasuries as rates rise every 3 months. Can always go back to total bond market at later date. You'll lose if rates go down, but given economic strength that is highly unlikely right now. Total bond market is up a bit today though.
If you're so good at predicting these things, why didn't you make your initial post sometime in the middle of 2020 before Total Bond NAV declined upwards of 20% over the last two years?
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Re: Are total bond market investors a sitting duck?

Post by vineviz »

DesertInvestor wrote: Tue Oct 04, 2022 3:17 pm Bonds are more confusing than stocks!

why is total bond market down 13%? Seems directly correlated on the surface. bonds move opposite rates. Rates influence new treasury yields which lowers the value of existing bonds right?
You can't always infer causation from correlation, and that is true in this case. Especially when you have a dataset of one observation.

The Federal funds rates does not influence Treasury yields except at the very shortest end of the yield curve.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: Are total bond market investors a sitting duck?

Post by cbs2002 »

DesertInvestor wrote: Tue Oct 04, 2022 1:19 pm The alternative is directly owning short treasuries (or brokered CDs), protecting the value of your investment
OK, so you now have three months of certainty. But I also have certainty by holding BND, because I won't be touching that money for a decade.
DesertInvestor wrote: Tue Oct 04, 2022 1:19 pm and rolling them over to new short treasuries as rates rise every 3 months.
You are certain rates will rise every three months?
DesertInvestor wrote: Tue Oct 04, 2022 1:19 pm Can always go back to total bond market at later date.
What date should we all do this?
DesertInvestor wrote: Tue Oct 04, 2022 1:19 pm You'll lose if rates go down, but given economic strength that is highly unlikely right now.
Lots of things are highly unlikely. I can't predict when each of them will or won't happen, though. What I can predict is the nominal rebound of BND.
DesertInvestor wrote: Tue Oct 04, 2022 1:19 pm Total bond market is up a bit today though.
Irrelevant, BND has an 8 year duration and acts completely differently than a single 3-month Treasury.

If you want to chase short-term yield and time the bond market, go for it. Posters in this thread and so many others have explained numerous times how BND will perform if held to or past duration. Grabbing three months of short-term yield does next to nothing to mitigate long-term fixed income risk.
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Re: Are total bond market investors a sitting duck?

Post by Firefly80 »

nisiprius wrote: Tue Oct 04, 2022 11:26 am Disclaimers.
1) These aren't predictions of any kind. To make predictions you'd need to be able to predict the interest rate of intermediate-term bonds, which is close to impossible.
2) These are total return growth charts and include reinvestment of coupon interest (as in a bond fund with reinvested fund dividends).
3) This isn't a detailed simulation of a real bond fund, it's a simulation of a rolling ladder of bonds that has a duration of 6.6 years, about the same as that as the Vanguard Total Bond Market Index Fund.
4) This doesn't deal with inflation. (However, if you used TIPS as the bonds and did all the math in real dollars, the results would be similar).

I simulated scenarios where the interest rate is 0.5% for two years; starts rising at a rate of 3% per year; then levels off.

The one-year case is roughly where we are now.

Image

Here is the five-year case--the interest rate keeps rising at 3% per year all the way up to 15.5%. The value of the bond fund continues to decline but the decline slows and levels off. The downward pull of the continuously risking interest rate is gradually balanced the upward pull of bonds reaching their face value of maturity, and by the coupon interest from the bonds gradually increasing as new higher-interest bonds replace lower-interest bonds as they mature.

Image

This is quite a terrible scenario for bonds, and of course it's possible, but notice that the damage is contained at about -34%. In particular, the interest rate has risen 15%, and the duration is 6.6 years, but the decline is not 15% x 6.6 years = -99%! It's only -34%. The formula "decline = duration times interest increases" is only accurate for near-instantaneous changes in interest rates.

The other point to notice is that when the interest rate stops rising, the fund's total value (including reinvested interest) begins to rise immediately at the stabilized interest rate. In other words, when the interest rate levels off, the fund beings growing immediately (you do not need to wait for the low-interest bonds to be purged), and the higher the final interest rate it, the faster the growth is.
I think the biggest takeaway from this is if you're going to invest in bond funds, prepare to hold it 2X duration to have any chance of getting the return you were promised. For this case of 6.6 Years duration that would be over 13 Years!
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Re: Are total bond market investors a sitting duck?

Post by BigJohn »

DesertInvestor wrote: Tue Oct 04, 2022 1:12 pm
vineviz wrote: Mon Oct 03, 2022 6:53 pm
DesertInvestor wrote: Mon Oct 03, 2022 6:41 pm I'm curious why with rising rates in 1970s and early 1980s why total bond market didn't do worse? Was it because rates rose less rapidly I imagine? I don't get it.
Part of the challenge is that total bond market funds didn't exists in the 1970s or early 1980s. Vanguard Total Bond Market Index (VBMFX) was the first, and it launched in 1986.

So any data we have about how they MIGHT have performed is somewhat speculative.
Mathematically, if rates are gong to 10%+ at that time, bond market fund would have been decimated. That is kind of my point. I think we are just getting started with rate rises. Larry Summers did a paper showing inflation is the same today as in 1970s if we use same methodology. I don't know a thing, but when services start going way up as well, I don't see current rates fixing the problem.
Maybe a matter of semantics but you look at Nisi's model results above I certainly wouldn't use the word decimated. In the 15% interest rate case the max drawdown is -34% but it is guaranteed to start recovering once interest rates stabilize (they don't have to start to decline). While obviously not a great scenario, it's nothing like stocks being decimated with a much larger draw down and no guarantee of recovery time.

Bonds are not risk free assets, just less risky and more predictable than stocks. And while staying short term might seem like a safe haven if you just look as price declines, from a total return perspective you'll probably lose ground.
"The greatest enemy of a good plan is the dream of a perfect plan" - Carl Von Clausewitz
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Re: Are total bond market investors a sitting duck?

Post by toddthebod »

Firefly80 wrote: Tue Oct 04, 2022 5:44 pm
nisiprius wrote: Tue Oct 04, 2022 11:26 am Disclaimers.
1) These aren't predictions of any kind. To make predictions you'd need to be able to predict the interest rate of intermediate-term bonds, which is close to impossible.
2) These are total return growth charts and include reinvestment of coupon interest (as in a bond fund with reinvested fund dividends).
3) This isn't a detailed simulation of a real bond fund, it's a simulation of a rolling ladder of bonds that has a duration of 6.6 years, about the same as that as the Vanguard Total Bond Market Index Fund.
4) This doesn't deal with inflation. (However, if you used TIPS as the bonds and did all the math in real dollars, the results would be similar).

I simulated scenarios where the interest rate is 0.5% for two years; starts rising at a rate of 3% per year; then levels off.

The one-year case is roughly where we are now.

Image

Here is the five-year case--the interest rate keeps rising at 3% per year all the way up to 15.5%. The value of the bond fund continues to decline but the decline slows and levels off. The downward pull of the continuously risking interest rate is gradually balanced the upward pull of bonds reaching their face value of maturity, and by the coupon interest from the bonds gradually increasing as new higher-interest bonds replace lower-interest bonds as they mature.

Image

This is quite a terrible scenario for bonds, and of course it's possible, but notice that the damage is contained at about -34%. In particular, the interest rate has risen 15%, and the duration is 6.6 years, but the decline is not 15% x 6.6 years = -99%! It's only -34%. The formula "decline = duration times interest increases" is only accurate for near-instantaneous changes in interest rates.

The other point to notice is that when the interest rate stops rising, the fund's total value (including reinvested interest) begins to rise immediately at the stabilized interest rate. In other words, when the interest rate levels off, the fund beings growing immediately (you do not need to wait for the low-interest bonds to be purged), and the higher the final interest rate it, the faster the growth is.
I think the biggest takeaway from this is if you're going to invest in bond funds, prepare to hold it 2X duration to have any chance of getting the return you were promised. For this case of 6.6 Years duration that would be over 13 Years!
I'm curious how you did your math. You initially invested in a 6.6 year duration fund with a yield of 0.5%. You end up "indifferent" somewhere between years 8 and 9, about 6.6 years after the big price drop. By year 15 (twice the duration after the price drop), you've earned about a 1.8% annual return, way ahead of what "you were promised."

In the second example, you've earned your 0.5%/year somewhere between years 10 and 11, less than 4 years after the rates stopped going up, and you are way, way, way ahead only a few months later.

The point of this is to (a) match your fund duration with your investment horizon, and (b) if you've got a longer time horizon, pray for rate increases and ignore the short term price decline.
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