Get crushed...Hold Bonds for 10 years.

[haha]

Quote:

Originally Posted by ERD50 Like haha just posted, buy low!

I am afraid that I may have been misunderstood. Because I have seen that my posts are entirely predictable, I have been trying to mix it up a little. You know, a little passing, a little running, some QB option plays along the way.
I thought that by mentioning how long bond cycles have tended to be in the US, I was signaling the utter absurdity of owning long bonds at present. Of course, in my humble opinion only, ymmv, various disclaimers, etc., etc..
My actual belief is that if/when interest rates move back up toward their long term averages, a dam will break and rates will once more start on their long term up-cycle. Unprecedented has become one of our non PC words, so I won't use it. But it does appear that current monetary and fiscal conditions, as well as central bank policies are perhaps
"highly unusual".

My first savings account paid maybe 2 1/4%. This was about 1952. Best I can remember my parents' mortgage loan was about 5%. Next signpost is almost 30 years later, when I was a young man and T-bills got as high as 18%, long term treasuries maybe 14%. My Dad and brother both bought long term zeroes at that rate. Then Volcker managed to choke the beast he was grappling with, and ushered in the bond bull market that has been the backdrop to most of our boomer lives. I very foolishly sold AAA bonds at 9% or so during the 80s, as they had appreciated so much that I thought it could not continue.


So I think that LT bonds will very likely deliver a giant drubbing to their owners, if and when the US economy significantly improves. If the economy does not improve, I believe that although the bond bear may be delayed, it will happen anyway, because our local and federal governments will actually become unable to pay their bills without speeding up borrowing. I have no idea how long Bernanke's buying of T bonds will satisfy markets, but it certainly is novel, and obviously a gimmick, so maybe not forever.

You realize that my opinions are worth only what you are paying for them, and are in no way guaranteed or even necessarily serious or reflecting my actions.

Ha

[brewer12345]

Quote:

Originally Posted by rbmrtn You too.

Bravo! A virtuoso performance! I am floored by your erudition...

[ejman]

Quote:

Originally Posted by foxfirev5 Feel free to correct me if I'm wrong but -Bear in mind that most explanations of a bond fund coming out good in the long run assume you're reinvesting the dividends. The NAV will decline in a rising rate environment and your holding value will also decline with a fixed number of shares if you are taking or living off the dividends.

It makes sense that the holding value will decline as rates rise if dividends are not reinvested. Since I'm spending the dividends, my concern is whether the actual $ dividend I receive will go down. I've seen a slight diminution in $ dividends received since I ER'd in 2002 as interest rates have declined. My expectation is that these dividend $ amounts will not vary substantially or trend slightly up as interest rates increase. I certainly welcome comments on this.

[haha]

Quote:

Originally Posted by ejman It makes sense that the holding value will decline as rates rise if dividends are not reinvested. Since I'm spending the dividends, my concern is whether the actual $ dividend I receive will go down. I've seen a slight diminution in $ dividends received since I ER'd in 2002 as interest rates have declined. My expectation is that these dividend $ amounts will not vary substantially or trend slightly up as interest rates increase. I certainly welcome comments on this.

For some number of years, often well estimated by portfolio effective duration, payments will increase, but less than asset value will decline. So on a total return basis, the investor will find him/herself in negative territory. A bond bear tends to be bad news for long term bondholders, no matter how they might frame it mentally. Just as a stock bear tends to be bad news for current stockholders, even in very stable companies that do not cut their dividends.

I read about how if your income is not falling, don't worry about falling asset values. That may be good advice for giving at least temporary emotional comfort, but IMO it is bad advice regarding portfolio management. Though often there is little that can be done about it.

Ha

[NW-Bound]

Quote:

Originally Posted by ejman It makes sense that the holding value will decline as rates rise if dividends are not reinvested. Since I'm spending the dividends, my concern is whether the actual $ dividend I receive will go down. I've seen a slight diminution in $ dividends received since I ER'd in 2002 as interest rates have declined. My expectation is that these dividend $ amounts will not vary substantially or trend slightly up as interest rates increase. I certainly welcome comments on this.

Quote:

Originally Posted by haha For some number of years, often well estimated by portfolio effective duration, payments will increase, but less than asset value will decline. So on a total return basis, the investor will find him/herself in negative territory. A bond bear tends to be bad news for long term bondholders, no matter how they might frame it mentally. Ha

+1

You beat me to it!

[FIREd]

This is a good read:

https://personal.vanguard.com/pdf/icrdir.pdf

Figure 11 illustrates how an intermediate term bond index fund fared in the late 1970's.

Quote:

Over the long term, it’s interest income—and the reinvestment of that income—that accounts for the largest portion of total returns for many bond funds. The impact of price fluctuations can be more than offset by staying invested and reinvesting income, even if the future is similar to the rising-rate environment of the late 1970s and early 1980s

[samclem]

Quote:

Originally Posted by rbmrtn Holding the actual bond to maturity should be safe.

I'm with NW-Bound. Folks who hold on to that low-yielding bond to maturity will get paid back what they were promised, but that's not "safe" if inflation is 8% and your bond interest is 3%. You're losing 5% per year plus there's the opportunity cost of not being able to re-invest in new bonds that are presumably yielding more than expected inflation (or folks wouldn't buy them).

[ejman]

Thank you Ha. Of course you are right that on a total return basis the result will be negative. But in my particular case, I just need these $ dividends from my taxable accounts to hold up reasonably well for the next 8 years until I start taking the RMD's. Once the RMD's start there should be quite a bit more income than I'm used to spending anyway unless Rewahoo's proverbial asteroid shows up.

[brewer12345]

Quote:

Originally Posted by samclem I'm with NW-Bound. Folks who hold on to that low-yielding bond to maturity will get paid back what they were promised, but that's not "safe" if inflation is 8% and your bond interest is 3%. You're losing 5% per year plus there's the opportunity cost of not being able to re-invest in new bonds that are presumably yielding more than expected inflation (or folks wouldn't buy them).

And cue the ignorant, rude response in 3...2...1...

[ejman]

Quote:

Originally Posted by FIREd This is a good read: https://personal.vanguard.com/pdf/icrdir.pdf Figure 11 illustrates how an intermediate term bond index fund fared in the late 1970's.

Thank you FIRED. Very interesting read. Looking at table 11, I see that the interest on interest portion is relatively small, capital losses in a rising rate environment are relatively minor and income growth during the increasing rate period is substantial. (But maybe I'm seeing what I want to see...)

[FIREd]

Quote:

Originally Posted by ejman But maybe I'm seeing what I want to see...

Don't we all...

[audreyh1]

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Originally Posted by marko Rising interest rates will translate to higher yields (and lower NAV), but if you're in bonds/bond funds for long term income, does it matter? I could tolerate a lower NAV and NW as long as the dividends came in (or came in even higher). What am I missing?

That's how I see it. And I'll also be adding to bonds since they will have dropped as a % of my portfolio. That is if stocks aren't hammered at the same time (since they could be).

Most of my bond funds I have owned since 2000 and seen a tremendous appreciation, so the reverse doesn't bother me that much.

BTW - I only hold intermediate and short-term bond funds.

[hlfo718]

a short or interm term bond fund is essentially a ladder with X% maturities due every year. You have two ways to catch the higher rate when you invest in a fund, the bonds that will mature in the fund and the reinvestment of dividend each month. Unless you need the income to live off, higher rate is no big deal.

[Independent]

Quote:

Originally Posted by FIREd This is a good read: https://personal.vanguard.com/pdf/icrdir.pdf Figure 11 illustrates how an intermediate term bond index fund fared in the late 1970's.

I've often wished I had a good source for an actual bond index fund for that time period. From a retiree's standpoint, the unit price of the fund is the critical result, because that's what we're selling to fund our withdrawals. I thought this might be it.

But, this one looks hypothetical to me. I'm pretty sure that I don't know what they were holding in Dec 1975, what matured in 1976, what coupons they received, and what new bonds they bought. And, I don't know the duration of the holdings on any date. I guess I'd like to know more about how this was constructed.

I also think I'd like to see the graph adjusted for CPI, as I know that's how I think about retirement income.

My belief has always been that any reasonably "long" bond fund would have had CPI-adjusted losses during part of this period, but I haven't seen the data.

[rbmrtn]

Quote:

Originally Posted by samclem I'm with NW-Bound. Folks who hold on to that low-yielding bond to maturity will get paid back what they were promised, but that's not "safe" if inflation is 8% and your bond interest is 3%. You're losing 5% per year plus there's the opportunity cost of not being able to re-invest in new bonds that are presumably yielding more than expected inflation (or folks wouldn't buy them).

agree, you get the value of the bond and are risk for loss from inflation.

[mathjak107]

Quote:

Originally Posted by brewer12345 If that silly fiction makes you happy, please continue toking away at your drug of choice. At least it is legal in all 50 states.

you have to explain this one....

if i own a bond and hold to maturity regardless if rates triple or credit risk changes i get my money back as agreed assuming they do not default...

a bond fund changes based on interest rates and credit risk. there is a big wild card in there ,credit risk.

you have no idea what you will get when you sell the fund.

only a treasury bond fund can act close to an individual bond since credit risk rarely effects it.you have to stay in the fund for the duration time frame of the fund to make it happen.

inflation is the wild card in either case. even if you stay in the bond fund for the duration if rates are rising still you are always behind the curve.

[audreyh1]

Quote:

Originally Posted by Independent I've often wished I had a good source for an actual bond index fund for that time period. From a retiree's standpoint, the unit price of the fund is the critical result, because that's what we're selling to fund our withdrawals. I thought this might be it. But, this one looks hypothetical to me. I'm pretty sure that I don't know what they were holding in Dec 1975, what matured in 1976, what coupons they received, and what new bonds they bought. And, I don't know the duration of the holdings on any date. I guess I'd like to know more about how this was constructed. I also think I'd like to see the graph adjusted for CPI, as I know that's how I think about retirement income. My belief has always been that any reasonably "long" bond fund would have had CPI-adjusted losses during part of this period, but I haven't seen the data.

Barclays Capital Aggregate Bond Index - Wikipedia, the free encyclopedia

It's an intermediate term index.

[MichaelB]

Quote:

Originally Posted by mathjak107 you have to explain this one.... if i own a bond and hold to maturity regardless if rates triple or credit risk changes i get my money back as agreed assuming they do not default... a bond fund changes based on interest rates and credit risk. there is a big wild card in there ,credit risk. you have no idea what you will get when you sell the fund. only a treasury bond fund can act close to an individual bond since credit risk rarely effects it.you have to stay in the fund for the duration time frame of the fund to make it happen. inflation is the wild card in either case. even if you stay in the bond fund for the duration if rates are rising still you are always behind the curve.

What does the fund get when the bond matures? Is it different than what you get?

[mathjak107]

the issue is bonds in a fund rarely mature. they are bought and sold all the time. that makes credit rating a big wild card as to what you will get .

while as an example my coca cola bond will pay me at maturity full value even if coca cola takes a credit rating hit. but if it is sold before maturity the markets determine what i get based on the credit rating and interest rates at the time it is sold.

[Running_Man]

Quote:

Originally Posted by brewer12345 A huge misconception. Take 100 different bonds. Put them in a bag labelled "bond fund." Are they any different than when they were not in the bag?

So you are saying if you buy a 10 year individual bond there will be no performance difference in 10 years between that and a long term bond fund? I would think in 9 years the bond fund will still have a 8-10 year duration and the individual bond will have a 1 year duration resulting in quite different investment returns.

Likewise I do not see how an annual investment in individual 10 year bonds will yield the same result as an annual investment in a 10 year bond fund. Yes after 10 years if you continue you will have an average duration of 5.5 years but your return over the next 10 years beyond that would not be the same as a bond fund with a 5.5 year average duration. And beyond that one would be able to schedule exactly what the cash flows from the individual bonds will be over the next 10 years. In the case of purchasing the individual bonds you will know, assuming the bond does not default, exactly the amount of money that would have been returned to you over the next ten years. Can you provide the cash return I will receive over the next ten years from the PIMCO long term government bond fund?