Bond Market Anxiety

[eytonxav]

For those that might be concerned about an impending bond market collapse, this article offers some perspective on why not to panic too soon:
4 Charts To Help Bond Investors Sleep Well | ETF.com

 

[ETFs_Rule]

Bonds are never going to be as volatile as stocks, even on their worst day. A total bond market index fund only has about as much volatility as a 3 - 7 year bond index fund. And it's a laddered portfolio. If rates go up, so will the yields of new bonds replacing old ones every month. Stay the course.

 

[mathjak107]

you will always be behind the curve in rising rates as only a small portion of the fund gets turned over into higher paying bonds. the average return will always be lower than current and possibly at negative real returns. .

once credit ratings come in to play even that equation gets thrown uo in to the air as far as what happens.


my opinion is the days of sitting in a bond fund and letting 35 years of falling rates make everything ok are going to be over.

there are far better choices even in bond funds than having a potentially long term weight on any growth from a total bond fund dragging things down.

at this point even a cd has performed better than most bond funds this year.

as soon as my bond funds hit zero return they are gone. they are almost at that point now with fidelity total bond up is 1.23% and corporate bond fund up .37%

vanguard total bond is up only .32% ytd.

the bond markets are already starting their rise , they have nothing to do with what the fed does on the short end if and when the fed moves.

 

[ETFs_Rule]

you will always be behind the curve in rising rates as only a small portion of the fund gets turned over into higher paying bonds.

BND is about as volatile as IEI (3 - 7 year bond index fund).
Do you actually think bonds will underperform CD's over time?
Interest rates would have to go up fast. The Fed isn't gonna allow that.

 

[mathjak107]

yes i do think going forward bond funds you already own will lag cd rates . at best you will get the coupon rate if you are lucky and rates do not rise to far . but lets face it with the historical norm at 6-7% owning bond funds already and seeing a rise back will leave you quite far behind.

bonds in these funds are already turning over daily but as you see the funds are still behind for existing owners.

it can take 6-7 years to just get your coupon rate back in bnd if rates rise 1% since their effective duration is 7 years . that is where the slow rise in rates over time in the fund offset the drop in nav but that rate may still be way below current when you claw back. that assumes that credit ratings don't take a hit .

the question is why bother owning the wrong asset class at the wrong time if you do not have to ?

on the other hand i would much prefer a fund like main stays unconstrained bond fund as a choice where they can even short bonds if they see fit instead of a total bond fund that just drops in nav. they have beaten BND in every time frame going out 15 years and continue to do so today . they are up 1.76% ytd.

that will be my plan once we hit zero return on my bond funds. by the way , while it shows a load it can be bought no load at fidelity.

 

[mathjak107]

what you have to remember about fund duration is you will not get currant rate by staying in the fund long enough , only the rate you signed on for so to speak.

if you bought the fund for a 5% yield and the fund had an effective duration of 5 than if rates rose to 6% nav would drop by 5%.

but you would get an extra 1% a year in interest as bonds were replaced ,assuming 100% turnover . that would negate the 5% fall in nav giving you back your 5% yield. but that 5% yield is in a 6% world so you are still behind.

if rates keep rising you never even see the yield you signed on for , forget current yield.

 

[eytonxav]

Relative to rates rising, there is always the question of when. Remember, there has been doom and gloom expounded in the media for years regarding the collapse of the bond market due to raising rates. Additionally, if rates do go up, that does not necessarily mean they will go straight up without some further visits to the downside, and when it comes to rapidly rising rates, the stock market isn't going to like it much either.

Nevertheless, fixed income diversification is not a bad idea at any time in my opinion vs having all fixed income in treasuries.

 

[mathjak107]

it isn't a question of if rates go up , they already have and are as I type..

bond rates have little to do with the feds short term moves. investors have already starting demanding higher rates which is why real returns on total market funds as well as most bond funds are negative now.


we are one notch away from nominal returns going negative.

 

[eytonxav]

First of all, I didn't refer to it as a question of if, I said when, and further more we have been through this rising long term rates deflection in the not to distant past and the world didn't come to an end, see chart. And yes, the fed does not control long term rates and everyone has been clamoring to see higher rates for years, so this is not a new phenomena.
http://finance.yahoo.com/echarts?s=%5ETNX+Interactive#{"range":"5y"}

 

[mathjak107]

it really has nothing to do with the world ending. but it may have a lot to do with the way we were investing the last 35 years ending.

the point is that rates are going up , they already started and HAVE LITTLE TO DO WITH IF AND WHEN THE FED MAKES THEIR MOVE ON THE SHORT END.

it has everything to do with staying a lot more vigilant than the past and to have some better ideas in your head as to where you want to keep that bond money you do not want in equities.


it would be a shame to let it die on the vine.


some choice would be:


unconstrained bond funds , floating rate funds , bond funds linked to commodity indexes if rates and inflation go up , TIPS FUNDS if rates and inflation rise , reit income funds may also do better.


there are quite a few choices in bond funds when rates rise.

 

[Dash man]

Relative to rates rising, there is always the question of when. Remember, there has been doom and gloom expounded in the media for years regarding the collapse of the bond market due to raising rates. Additionally, if rates do go up, that does not necessarily mean they will go straight up without some further visits to the downside, and when it comes to rapidly rising rates, the stock market isn't going to like it much either.



Nevertheless, fixed income diversification is not a bad idea at any time in my opinion vs having all fixed income in treasuries.

People brushed off warnings of a real estate bubble as "doom and gloom," but a lot of people got hurt. People made fun of warnings of the tech bubble in the stock market calling it "doom and gloom," but people got hurt. Even back in the 30s people ignored warnings of a guy named Hitler as "doom and gloom," but people got hurt. The world doesn't have to come to an end for a lot of people to get hurt. Bonds gave seen a bull market for decades and people have forgotten no investment is perfectly safe. It's more than interest rate risk with global debt reaching unprecedented levels. Liquidity risk is also real as a sell off of bond funds would find there aren't enough buyers of the underlying bonds causing prices to plummet. The world wouldn't come to an end, but the finances of people will get hurt. Just because it doesn't happen within the short sighted timeline view of most people doesn't mean it won't happen.

 

[haha]

People brushed off warnings of a real estate bubble as "doom and gloom," but a lot of people got hurt. People made fun of warnings of the tech bubble in the stock market calling it "doom and gloom," but people got hurt. Even back in the 30s people ignored warnings of a guy named Hitler as "doom and gloom," but people got hurt. The world doesn't have to come to an end for a lot of people to get hurt. Bonds gave seen a bull market for decades and people have forgotten no investment is perfectly safe. It's more than interest rate risk with global debt reaching unprecedented levels. Liquidity risk is also real as a sell off of bond funds would find there aren't enough buyers of the underlying bonds causing prices to plummet. The world wouldn't come to an end, but the finances of people will get hurt. Just because it doesn't happen within the short sighted timeline view of most people doesn't mean it won't happen.

This is all true. My question however is if you keep durations say less than 4-5 years and avoid unnecessary credit risk, and spend only interest, not capital gains, does this matter enough to choose to take on the rate forecasting risk?

Ha

 

[mathjak107]

it sure does as a loss is a loss -period. interest rates are not like the stock market that cycles regularly . we may never cycle this low again in our lifetime.

if principal is not a factor why not just buy an annuity ?

 

[eytonxav]

People brushed off warnings of a real estate bubble as "doom and gloom," but a lot of people got hurt. People made fun of warnings of the tech bubble in the stock market calling it "doom and gloom," but people got hurt. Even back in the 30s people ignored warnings of a guy named Hitler as "doom and gloom," but people got hurt. The world doesn't have to come to an end for a lot of people to get hurt. Bonds gave seen a bull market for decades and people have forgotten no investment is perfectly safe. It's more than interest rate risk with global debt reaching unprecedented levels. Liquidity risk is also real as a sell off of bond funds would find there aren't enough buyers of the underlying bonds causing prices to plummet. The world wouldn't come to an end, but the finances of people will get hurt. Just because it doesn't happen within the short sighted timeline view of most people doesn't mean it won't happen.

As I indicated above, diversification in fixed income sleeve is a good idea. So what are you advocating, sell every bond in your port?

 

[mathjak107]

personally i would bring allocations on conventional bond funds from 50% to maybe 20% and divy the rest up in income funds that do better when rates rise.

what i wouldn't do is just sit with 50% in conventional bond funds.

best bet may be 50% equities 50% cash instead. you would likely lose more trying to keep the bonds then you would give up holding cash. we already just about lost 6 months of interest on the bonds , next is principal from this point.

 

[audreyh1]

I don't sweat it because I bought most of my bond funds 10 and 15 years ago when rates were much higher than today.

I don't care to go to cash and wait.

I just rebalance when things go out of whack.

 

[mathjak107]

i own mine years too but each year is a new story. i could see if this was years ago and rates on bonds were 5 or 6% . they have room to go up or down. but at zero real return bonds have no real upside and a whole lot of down side pulling your portfolio down needlessly.

i think a a lot of money is going to be spent chasing a ghost running on what used to be . .

i think folks who remain sitting in conventional bond funds will end up like those who failed to pay attention when the fed did everything but drop leaflets from helicopters warning folks not to stay in cash instruments as investments .. well those who stayed paid the price of not paying attention to the world around them.

this will now likely be the reverse . cash will likely not have the losses bonds will and be the better deal . cash getting 1% beats bonds getting 2% and losing 5% in principal.

other types of bond funds as i mentioned can be better places to put money.

but time will tell .

 

[daylatedollarshort]

We try to do fixed income ladders and get a rolling average of rates, with everything held to maturity. We're pretty happy with rates going up. It means a higher rolling average going forward, while our retirement budget and spending habits are based on the current low rate environment.

I'm also hoping rates go up because we refinanced when mortgaged rates bottomed out and have the mortgage balance in investments. I'm hoping to benefit from the spread.

 

[audreyh1]

I'll stick to rebalancing.

Rebalancing means I wasn't adding that much to bonds while they were enjoying capital gains. And after they suffer capital losses, I'll be buying more.

They are there for ballast against stock market volatility in the very long term, and they will continue to play that role. I don't worry about the performance of the individual components in my portfolio. I just stick to the AA.

 

[REWahoo]

I don't worry about the performance of the individual components in my portfolio. I just stick to the AA.

But...but...you're missing out on all the cardio benefits gained while running around and wringing your hands!

 

[audreyh1]

But...but...you're missing out on all the cardio benefits gained while running around and wringing your hands!

Well - that is true!

I'm not sure how many calories constant worry really burns.....

 

[Mulligan]

i own mine years too but each year is a new story. i could see if this was years ago and rates on bonds were 5 or 6% . they have room to go up or down. but at zero real return bonds have no real upside and a whole lot of down side pulling your portfolio down needlessly.

i think a a lot of money is going to be spent chasing a ghost running on what used to be . .

i think folks who remain sitting in conventional bond funds will end up like those who failed to pay attention when the fed did everything but drop leaflets from helicopters warning folks not to stay in cash instruments as investments .. well those who stayed paid the price of not paying attention to the world around them.

this will now likely be the reverse . cash will likely not have the losses bonds will and be the better deal . cash getting 1% beats bonds getting 2% and losing 5% in principal.

other types of bond funds as i mentioned can be better places to put money.

but time will tell .

I think most people here probably know the consequences of bonds. But I have several social friends who will get the shock of their lives if a big upturn would occur. They only look at the total returns the bond funds have given and have no understanding of bond prices, capital gains, and true effective yield. Anytime I try to explain their faces just glaze over and do not listen.
But I don't think everything will collapse on government rate hikes for people selectively looking for yield. Historically speaking there is a nice spread between treasuries and some utility preferred stocks.
January 1, 2004, the 10 year was yielding 4.15% and one of mine was $51.80 yielding 6.25%. Today it is priced at 52.80 yielding 6.13%. It will bounce around a bit but nothing earth shattering. Now if the 10 year would go to 7-8% it will drop like a rock. But thats the chances one takes, and I am not losing sleep over it. Over time and at my age I will take my chances on that yield. Also paying 15% tax on the dividend instead of 25% for income is also an advantage for me.
However there are no free lunches in any investment decision so you tailor it to your own needs and then let it play out. Or at least until you cant stand the pain any longer.


Sent from my iPad using Tapatalk

 

[eytonxav]

personally i would bring allocations on conventional bond funds from 50% to maybe 20% and divy the rest up in income funds that do better when rates rise.

what i wouldn't do is just sit with 50% in conventional bond funds.

best bet may be 50% equities 50% cash instead. you would likely lose more trying to keep the bonds then you would give up holding cash. we already just about lost 6 months of interest on the bonds , next is principal from this point.

What is your definition of a conventional bond fund, and are you presuming everyone here is only invested in what you are red flagging? I try to stay diversified by being in a diversified bond fund, multi sector, high yield, floating rate, unconstrained, and strategic bond funds. Also have bond components in Wellington and Wellesley. That said, that only amounts to about 26% of my fixed income sleeve, and I have no intention of selling or reducing that due to raising rate concerns, as they do provide ballast when everything else goes to hell.

My suggestion is to keep duration short to intermediate, don't go too low in quality, stay diversified and rebalance, but I do not see any reason to abandon bonds entirely.

 

[mathjak107]

conventional= typical total bond , bond index , corporate bond fund , etc. just about any intermediate term bond fund with an effective duration of about 7 years.

but as i mentioned above there are quite a few bond funds that i would consider.

number 1 on my list is main stay's unconstrained bond fund which can hedge by going short.

fidelity floating rate high yield is another

if inflation picks up with rates TIP FUNDS , reit income funds , commodity linked bond funds are some more. even a strategic income fund would be better than sitting in some bond index.

 

[eytonxav]

Ok, perhaps you presumed folks here are only using conventional int term bond funds, have a very high bond allocation and that they might not understand the impact of duration and raising rates. Like Mulligan indicated, I suspect most here are well aware of how raising rates can affect price and will stay the course/rebalance or will make or have made adjustments based on their risk tolerance.

So are you still considering adding bond funds to your port or have you made the adjustments you mention? As for me, I haven't changed anything in my bond port in quite some time.