Fear of bonds

[Which Roger]

Bond yields have been manipulated down by the government (which means bonds are at all time high prices). Why would you want to buy something at an all time high price?

Stocks are also at an all-time high price, give or take a couple percent. Gotta buy something!

 

[Which Roger]

We had a flurry of similar threads last summer. Current treasury interest rates are about the same (actually slightly lower), than they were then. I stayed the course back then and am staying the course now.

 

[Alan]

I haven't changed my bond allocation, still at a little over 50%. No particular bond funds, whatever Wellesley, Wellington and Target 2010 invest in.

 

[nun]

It's more complicated than that. You can choose to hold indiv long bond to maturity, but in rising rate environment the real principle value (actual purchasing power) will be prob be lessened by accompanying inflation. Although there are some bond funds with 'hold to maturity' style, most LT bond funds have significant turnover. They will have at least some capital losses under rising rate conditions as funds managers sell off some older issues to buy newer higher yielding bonds. The extra interest from those newer bonds would help offset at least some of the capital losses. In past rising rate periods, folks have usu done OK (not great) in good quality LT bond funds IF they held for # yrs approximating the fund's effective duration.
FWIW, I favor short duration bonds/funds right now as I expect rates to rise & have no idea how tapering by the Fed (& Europe, Japan, etc.) will affect the bond markets. Coming months/yrs could go smoothly....or get rather ugly

That's my thinking too.

ER has prompted me to move into stable value and cash to support my immediate spending. My bonds are intermediate term mostly in Wellesley. I plan to reinvest dividends for 10 or 20 years so I'm not overly concerned about what might happen over the next 5 years.

 

[Dash man]

I just heard a pundit on a business channel saying to hurry to buy bonds because rates are headed further down. If ever I've heard a reason to sell that was it!!

 

[veremchuka]

Vanguard Short Term Investment Grade and Intermediate Term Investment Grade only and that is in my rollover IRA. I have a good chunk in the Stable Value fund I left in my 401k.

I wouldn't own munis because I am not in a high tax bracket but more importantly I think many cities and states are really in very bad condition and face serious financial issues.

Bonds are for stability. People that worry about the nav on bond funds dropping 4-7% should consider the potential for losses in equities that will dwarf that if they move money out of bond funds into equities. Dividend paying stocks are not a substitute for fixed income just because they have a comparable or better yields. Sure the yield stinks in bond funds but if equities drop 15, 20 or 25% you use those bond holdings to buy more equities. To me the nav loss in a holding that doesn't yield much to start with is nothing compared to what you can lose in equities and then maybe not have adequate fixed income holdings for rebalancing.

My AA has been fluctuating from 60/40 to 42/58 currently. I'd like to see the S&P 500 to drop to maybe 1800-1820. I'd exchange some of the SV into the S&P 500 fund and sit tight until it hits 1850-1860, it's just a short term trade. I did this a couple of months ago and made a boatload of money (about 2.5 years worth of SV returns in 3 months) vs having that money in the SV fund. yes it's dirty stinking market timing but it's a fun thing I can afford to do and I don't use more than 15% of the total portfolio.

 

[Dash man]

Bonds are for stability. People that worry about the nav on bond funds dropping 4-7% should consider the potential for losses in equities that will dwarf that if they move money out of bond funds into equities. Dividend paying stocks are not a substitute for fixed income just because they have a comparable or better yields. Sure the yield stinks in bond funds but if equities drop 15, 20 or 25% you use those bond holdings to buy more equities. To me the nav loss in a holding that doesn't yield much to start with is nothing compared to what you can lose in equities and then maybe not have adequate fixed income holdings for rebalancing.

Most people's experience with bonds has been in the last 35 years where we have been in a bond bull market, with rates only headed down on the long term. Bonds may not be so stable in the future as our country and others reach record levels of debt in addition to the central banks repression of rates. When the bond bubble bursts it will not be pretty. It may not happen for 1 or even 10 years, but it will happen eventually and potentially very quickly. The stock market will also take a hit, but is more likely to recover than bonds, since bond rates are unlikely to get as low as they are now for a very long time. Keep your eyes on Japan.

 

[Alan]

Most people's experience with bonds has been in the last 35 years where we have been in a bond bull market, with rates only headed down on the long term. Bonds may not be so stable in the future as our country and others reach record levels of debt in addition to the central banks repression of rates. When the bond bubble bursts it will not be pretty. It may not happen for 1 or even 10 years, but it will happen eventually and potentially very quickly. The stock market will also take a hit, but is more likely to recover than bonds, since bond rates are unlikely to get as low as they are now for a very long time. Keep your eyes on Japan.

Any historical evidence of how bad a bond bubble burst might be? The Vanguard portfolio analyzer shows that the worst year since 1926 for an AA of 20/80 is -10%, and that was in 1931. Worst year for 100% bonds was -8% in 1969.

 

[MichaelB]

A sharp increase in interest rates would mean the economy is growing a lot faster than it is now, and that wouldn't be bad news at all.

My asset allocation, for stocks and bonds, is "steady as she goes". No reason to change.

 

[nun]

Most people's experience with bonds has been in the last 35 years where we have been in a bond bull market, with rates only headed down on the long term. Bonds may not be so stable in the future as our country and others reach record levels of debt in addition to the central banks repression of rates. When the bond bubble bursts it will not be pretty. It may not happen for 1 or even 10 years, but it will happen eventually and potentially very quickly. The stock market will also take a hit, but is more likely to recover than bonds, since bond rates are unlikely to get as low as they are now for a very long time. Keep your eyes on Japan.

Well I just don't like having all my eggs in one basket and I can't predict the future. So I'll stick with diversity and keep stocks, bonds, cash, real estate, SS, annuities and pensions in my retirement portfolio.

 

[Dash man]

Any historical evidence of how bad a bond bubble burst might be? The Vanguard portfolio analyzer shows that the worst year since 1926 for an AA of 20/80 is -10%, and that was in 1931. Worst year for 100% bonds was -8% in 1969.

I believe we're in uncharted ground with the debt levels we have, the unfunded future entitlements and the governments repression of interest rates. In 1931 we were still on the gold standard, so it's hard to compare to today's situation.

 

[Alan]

I believe we're in uncharted ground with the debt levels we have, the unfunded future entitlements and the governments repression of interest rates. In 1931 we were still on the gold standard, so it's hard to compare to today's situation.

1931 was not the worst year for 100% bonds. that was in 1969 and was still only an 8% drop.

 

[REWahoo]

Quote from Vanguard's Gregory Davis, head of Vanguard's Fixed Income Group, a team that oversees $750 billion in fixed income assets:

Many people get hung up on the possibility that interest rates are going to rise, which would cause bond prices to fall, but the market has already priced in that possibility. The question becomes: Will rates rise more than what's been priced in? And that's a much more difficult question to answer.

But it's worth remembering that rising rates are not necessarily a bad thing if you have a long time horizon and the average maturity of your bond fund is shorter than your time horizon [the time until you'll need the money].

https://personal.vanguard.com/us/in...032014?link=topStories&linkLocation=Position1

 

[Travelwanted]

Quote from Vanguard's Gregory Davis, head of Vanguard's Fixed Income Group, a team that oversees $750 billion in fixed income assets:

https://personal.vanguard.com/us/in...032014?link=topStories&linkLocation=Position1

Great quote...great source.

Thanks to all for the great thoughts. Indeed we are in interesting times.

 

[ERhoosier]

I believe we're in uncharted ground with the debt levels we have, the unfunded future entitlements and the governments repression of interest rates. ...

Agreed. With most all developed nations pursuing simultaneous artificial 'easy money' fiscal policies (e.g. US's QE infinity, Japan's Abe'nomics, ECB supports, etc.), it's not hard to imagine some miscalculation causing an overshoot in interest rates beyond typical range for current GDP growth. Even a 2% rise in rates could mean -17% annual return on 10yr Treasury holding (2.7% interest - 20% principle loss).

BTW-Anyone know what bond surrogate the Vanguard Portfolio Analyzer uses? Other Vanguard tools use Total Bond Index, which is intermediate term (ave duration 5.5yrs).
https://personal.vanguard.com/us/funds/snapshot?FundId=0928&FundIntExt=INT

 

[brewer12345]

Agreed. With most all developed nations pursuing simultaneous artificial 'easy money' fiscal policies (e.g. US's QE infinity, Japan's Abe'nomics, ECB supports, etc.), it's not hard to imagine some miscalculation causing an overshoot in interest rates beyond typical range for current GDP growth. Even a 2% rise in rates could mean -17% annual return on 10yr Treasury holding (2.7% interest - 20% principle loss).

BTW-Anyone know what bond surrogate the Vanguard Portfolio Analyzer uses? Other Vanguard tools use Total Bond Index, which is intermediate term (ave duration 5.5yrs).
https://personal.vanguard.com/us/funds/snapshot?FundId=0928&FundIntExt=INT

I would love to be seduced by all the soothing voices about the path of interest rates and how it will all come out OK in the end. What stops me from slipping into a coma is a review of the last time the US was in debt to the tune of 100+% of GDP after a series of ill-considered wars that blew a lot of gubmint dough. It was far easier and more palatable for the people in charge to inflate away the debt problem than to actually cut expenses, raise revenue, etc. That is also coincidentally the period where the prototypical retiree gets my mental nickname of "Mr. Cornhole" (i.e. the mid/late 60s vintage retiree). I don't plan on being the chump.

 

[CaliforniaMan]

I believe we're in uncharted ground with the debt levels we have, the unfunded future entitlements and the governments repression of interest rates. In 1931 we were still on the gold standard, so it's hard to compare to today's situation.

I remember conversations with colleagues in the late 1970s, early 80s, about the same thing. Things have never been like this before, we are now in uncharted territories. I believe now what I believed back then. Yes, of course we are. We have always been in uncharted territory it was never like it is now. This has been true since markets began.

Every decade since then the same discussion. But times are always uncertain, always uncharted, technology advances, companies rise and fall, there are booms and busts debts and restructuring. We just think it is more special now, because now is more special for us!

That is why we invest in index funds and have a asset allocation to try to hedge that uncertainty. We didn't know the future back in the 1970s or the 1980s and we don't know it now. It is uncertain. How can it be more or less uncertain? It could be 1929, 1939, 1941, 2001, seemed less uncertain until all of a sudden it was very uncertain.

I think we fool ourselves when we think we live in more uncertain or less uncertain times. We live in uncertain times period.

Is having part of your AA in bonds a more fearful proposition now than before because interest rates are so low? Depends what stocks do tomorrow. Get back to me in 10 years. For now I just keep my AA and predict that the sun will rise tomorrow.

 

[ESRwannabe]

Much of the world has had a below replacement level birth rate for a few decades. In the not too distant future we will start to see population decline. So I wouldn't be surprised to see bonds as a descent investment long term. My assumption is that population decline will lead to stagnation or even deflation.

 

[Fermion]

Much of the world has had a below replacement level birth rate for a few decades. In the not too distant future we will start to see population decline. So I wouldn't be surprised to see bonds as a descent investment long term. My assumption is that population decline will lead to stagnation or even deflation.

If you believe we are destined for deflation then you can do quite well by avoiding bonds and just keeping your money in a mattress.

It looks like a long term bond fund yields about 1% more than a 5 year CD (which does not have principal risk)

A bond fund *could* lose 8% or so in a year. Is the reward of 1% worth the risk of 8% loss?

 

[brewer12345]

If you believe we are destined for deflation then you can do quite well by avoiding bonds and just keeping your money in a mattress.

If you believe we are headed for prolonged deflation, better to stock up on shotshells and MREs.

 

[mathjak107]

i like bonds for one reason , controlling volatility in my portfolio. if i am comfortable with the swings in my portfolio it would take a bigger allocation to cash than bonds to keep things in that range.

that means if i used cash instead of bonds to fly fighter cover during rising rates my cash allocations would have to be far larger to keep me in range.

bonds allow me to keep a higher equity allocation and it is that higher allocation that has far more gain potential then the bonds might drop.

according to morgan stanley Historically, when 10-year bond yields fall below 3% for an extended period of time, stocks and bond yields tend to go in opposite directions (meaning stocks and bonds rise in tandem). That's more or less been the status quo during the past few years of sub-3% 10-year yields.


Read more: http://www.businessinsider.com/correlation-between-stocks-and-bonds-2013-5#ixzz2xcfgo2FB

 

[Dash man]

Japan has been experiencing deflation for over twenty years, and has only survived as they have because the Japanese people have been buying their own bonds with their savings. Their savings is nearly gone. The debt/GDP ratio is 240%, more than double their GDP. The U.S. has a 106% ratio with the UK, Portugal, Italy, France and Canada not far behind. These are all much larger economies than Greece and spending growth continues to outpace inflation. In Japan., their biggest problem is their population is getting much older and their workforce s shrinking. This will keep them from growing their economy and will be unable to inflate their way out of debt. Other western countries are facing a similar population aging issue. Meanwhile spending continues to soar in most industrialized countries. Nobody saw the housing bubble until it was too late. People thought rising housing prices would just be the norm. In the 90s people thought the stock market would just keep going up. What will happen when people stop buying bonds because the risk isn't worth the reward or countries with significant economies default? I'm staying away from bonds because I just don't see the return worth the risk.

 

[mathjak107]

that would be true only if you lived there and invested strictly in Japanese stocks, if you invested elsewhere you would have done well.

 

[Dash man]

that would be true only if you lived there and invested strictly in Japanese stocks, if you invested elsewhere you would have done well.

I'm not quite sure what you were referring to, but I'll try to elaborate. Today's global economy will be affected a great deal by the collapse of an economy the size of Japan. The Japanese will try to inflate their way out of their predicament. They will also devalue the Yen to increase their exports. Their main trading partners, including the US, China and South Korea will see their exports decrease, causing losses of jobs, lower tax revenue and will fight back by devaluing their currencies. There will be increased government spending trying to stimulate the economy, further increasing debt. Eventually debt payments become too large a portion of the national budget. Options like austerity will be considered, or we will have to inflate our way out of debt. Either way will severely hurt the economy. Growing an economy requires either increased productivity or growth of the work force. Like Japan, we have an aging population, so we'd have to have significant increases in productivity to grow the economy faster than the inflation we would need to lessen the debt load. On top of all this, China owns a significant amount of our debt and will not want us to devalue the dollar, because that will hurt their investments and their exports to us.
We are most definitely headed for interesting times.

 

[imoldernu]

Think the Yellen statement will make a difference?