Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Heading for a bond bubble?
Old 02-04-2010, 08:11 PM   #1
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
brewer12345's Avatar
 
Join Date: Mar 2003
Posts: 16,391
Heading for a bond bubble?

I have seen a shocking tendency toward the excesses of the credit bubble happening already. There has been massive issuance of both investment grade and junk bonds, bonds issued expressly to fund sponsor dividends, PIK/toggle issuance, etc. But what eally makes it start to look iffy is something really simple. I have started getting "server too busy" messages from the TRACE service website at Corporate Market At-A-Glance A year ago when you could not give good quality corporates away and I was buying 5 year stuff at double digit yields, the website was really fast and easy.
__________________

__________________
"There are three kinds of men. The one that learns by reading. The few who learn by observation. The rest have to pee on the electric fence for themselves."



- Will Rogers
brewer12345 is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 02-04-2010, 08:13 PM   #2
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
haha's Avatar
 
Join Date: Apr 2003
Location: Hooverville
Posts: 22,384
Intersting observation Brewer, and also a interesting site.

Ha
__________________

__________________
"As a general rule, the more dangerous or inappropriate a conversation, the more interesting it is."-Scott Adams
haha is offline   Reply With Quote
Old 02-04-2010, 08:18 PM   #3
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
brewer12345's Avatar
 
Join Date: Mar 2003
Posts: 16,391
I use the site to get market pricing on the individual issues I still own. Have sold much of it, but still hanging onto a few bits for a while.
__________________
"There are three kinds of men. The one that learns by reading. The few who learn by observation. The rest have to pee on the electric fence for themselves."



- Will Rogers
brewer12345 is offline   Reply With Quote
Old 02-04-2010, 10:15 PM   #4
Thinks s/he gets paid by the post
 
Join Date: Jul 2003
Location: Pasadena CA
Posts: 2,695
Is (VBMFX) VG total US bond fund still OK or is that likely to go negative as well? Quite a diversity of bonds and pays 4%.

Always looking for somewhere to hide.
__________________
T.S. Eliot:
Old men ought to be explorers
yakers is offline   Reply With Quote
Old 02-04-2010, 11:22 PM   #5
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jul 2003
Location: Kansas City
Posts: 7,408
Time to refresh my memory - tell me again if I have say a 5 yr duration average on the bond side of my portfolio - and the worm turns within a year.

?? each 1% increase drops my NAV 5%?? I've forgotten the old rule of thumb - handgrenade wise.

heh heh heh - Sooo if it happens I try to watch my SEC yield and not cry when looking at dimished portfolio value due to dropping bond prices?
__________________
unclemick is offline   Reply With Quote
Old 02-04-2010, 11:55 PM   #6
Moderator Emeritus
 
Join Date: May 2007
Posts: 11,043
Quote:
Originally Posted by unclemick View Post
Time to refresh my memory - tell me again if I have say a 5 yr duration average on the bond side of my portfolio - and the worm turns within a year.

?? each 1% increase drops my NAV 5%?? I've forgotten the old rule of thumb - handgrenade wise.

heh heh heh - Sooo if it happens I try to watch my SEC yield and not cry when looking at dimished portfolio value due to dropping bond prices?
VG Target Retirement 2015, full auto, isn't it? You're not getting any younger UM, and worrying is not good for your health soooooo full speed ahead and laissez les bons temps rouler...

But hand grenade wise, you're right. For each 1% increase in interest rates, the NAV should go down approximately by the value of the average duration, i.e. if the average duration is 5 years, the NAV should go down by 5%.
__________________
FIREd is online now   Reply With Quote
Old 02-05-2010, 03:40 AM   #7
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
clifp's Avatar
 
Join Date: Oct 2006
Posts: 7,450
Lots of data points to the herd moving into fixed income, I am guessing the correction will only help the trend. One of several articles I've seen on the subject key take away
"Flows into bond funds were two or three standard deviations above their long-term averages"

Also anecdotal evidence like new folks on the forum advocating 100% fixed income are always good contrary indicator. I am bailing out of high yield. I think I'll keep my Vanguard GNNA and probably the individual issues I've bought although not sure about them.
__________________
clifp is offline   Reply With Quote
Old 02-05-2010, 07:06 AM   #8
Moderator
ziggy29's Avatar
 
Join Date: Oct 2005
Location: Texas
Posts: 15,612
There's always a bubble somewhere. Sometimes the bubbles are based on greed and other times on fear.
__________________
"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)

RIP to Reemy, my avatar dog (2003 - 9/16/2017)
ziggy29 is offline   Reply With Quote
Old 02-05-2010, 10:52 AM   #9
Recycles dryer sheets
BOBOT's Avatar
 
Join Date: Aug 2006
Posts: 415
I found this Vanguard article interesting. Apparently a long- term b&h'r can do as well or better in a rising interest environment. Back to the nap.
__________________
I still don't get it...
BOBOT is offline   Reply With Quote
Old 02-05-2010, 11:26 AM   #10
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Gone4Good's Avatar
 
Join Date: Sep 2005
Posts: 5,381
If there is a bond bubble it is in the treasury market. Credit spreads are still wide to historic averages (but maybe not as wide as they should be given 10% unemployment and near armageddon just one year ago).
__________________
Gone4Good is offline   Reply With Quote
Old 02-05-2010, 12:03 PM   #11
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
brewer12345's Avatar
 
Join Date: Mar 2003
Posts: 16,391
I don't think we are at a bubble yet, just that the crowd has rushed into corporates on a massive scale pretty much without regard to any thoughts about downside risk. In the investment grade space, I think things are not cheap but they are not wildly over bid. In the junk space, I think things are rapidly getting aggressive, but we are not at full out stupidity yet. The main difference in junk is the much lower leverage levels that deals are being done at. 4 and 5 times leverage is a whole lot more sane than 9 to 12 times. But I am leery of how far this goes, since the uneducated buyers will probably remain frightened of equities for another year and will keep shoving money blindly into bond funds.
__________________
"There are three kinds of men. The one that learns by reading. The few who learn by observation. The rest have to pee on the electric fence for themselves."



- Will Rogers
brewer12345 is offline   Reply With Quote
Old 02-05-2010, 04:08 PM   #12
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jul 2003
Location: Kansas City
Posts: 7,408
Still pretty much full auto bond wise with Target 2015. The problem being football that I watch is pretty much over after Sunday.

Sooo - even though I should ignore market fluctuations and not peek.

Hormones.

heh heh heh -
__________________
unclemick is offline   Reply With Quote
Old 02-05-2010, 04:22 PM   #13
Thinks s/he gets paid by the post
walkinwood's Avatar
 
Join Date: Jul 2006
Location: Denver
Posts: 2,676
Quote:
Originally Posted by BOBOT View Post
I found this Vanguard article interesting. Apparently a long- term b&h'r can do as well or better in a rising interest environment. Back to the nap.
Thanks for posting a link to the article.

It obviously works for the accumulation phase.

For the withdrawal phase, you'll have to be sure that you worst case scenario doesn't force you to sell shares of the bond fund too soon. Worth thinking about and figuring out how much of the bond portfolio to put in long term bonds. A few of the AA books I've read have said that the risk of long term bonds are not worth the added return.
__________________
walkinwood is offline   Reply With Quote
Old 02-05-2010, 04:34 PM   #14
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Gone4Good's Avatar
 
Join Date: Sep 2005
Posts: 5,381
Quote:
Originally Posted by walkinwood View Post
A few of the AA books I've read have said that the risk of long term bonds are not worth the added return.
I assume that long bonds fair pretty poorly on standard measures of risk adjusted return, like the Sharpe Ratio. And as a stand alone asset class they may not be worth the trouble. But if you look at 2008-2009, treasury bonds were the only asset class that provided any diversification benefit whatsoever. And long bonds had enough juice in them to make a real difference. I'd like to see an analysis of the diversification benefits of long treasury bonds in a stock heavy portfolio that incorporates experiences from the past couple of years.
__________________
Gone4Good is offline   Reply With Quote
Old 02-05-2010, 05:12 PM   #15
Moderator Emeritus
 
Join Date: May 2007
Posts: 11,043
Quote:
Originally Posted by walkinwood View Post
Thanks for posting a link to the article.

It obviously works for the accumulation phase.

For the withdrawal phase, you'll have to be sure that you worst case scenario doesn't force you to sell shares of the bond fund too soon. Worth thinking about and figuring out how much of the bond portfolio to put in long term bonds. A few of the AA books I've read have said that the risk of long term bonds are not worth the added return.
I think that Swedroe is one of those people who have shown that, on a risk-adjusted basis, extending the maturities of bonds to the very long term is not worth it. But he also says that, long term bonds can play a very important role for those seeking a more stable source of income such as retirees.
__________________
FIREd is online now   Reply With Quote
Old 02-06-2010, 08:39 AM   #16
Full time employment: Posting here.
cardude's Avatar
 
Join Date: Feb 2006
Posts: 599
I am still attempting to set up my preferred AA, and I had been trying to build up a bond position over the past year but pretty much chickened out other than the initial investment, and so my "bond" AA is still almost all sitting in cash.

With the bond fund I was looking at (VFICX) yielding only about 4% and my cash getting about 1.5%, I just can't make the jump.

What should the spread be over cash be to trigger me to put a decent amount of cash into this fund? Is there a rule of thumb?
__________________
cardude is offline   Reply With Quote
Old 02-06-2010, 04:55 PM   #17
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
TromboneAl's Avatar
 
Join Date: Jun 2006
Posts: 11,197
Quote:
But what eally makes it start to look iffy is something really simple. I have started getting "server too busy" messages
This could easily be result of a technical problem unrelated to the number of people accessing the site.
__________________
Al
TromboneAl is offline   Reply With Quote
Old 02-06-2010, 05:07 PM   #18
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Nov 2007
Posts: 7,526
Quote:
Originally Posted by cardude View Post
With the bond fund I was looking at (VFICX) yielding only about 4% and my cash getting about 1.5%, I just can't make the jump.

What should the spread be over cash be to trigger me to put a decent amount of cash into this fund? Is there a rule of thumb?
Assuming cash = deposit account or money market, it has a duration of zero (ie principal doesn't fluctuate with changes in the interest rate). Compare the boost in yield that you would get by going to VFSTX, the Short Term Investment Grade fund, currently yielding 2.34%. 84 basis points more return, but a duration of 2.3 years. So if rates go up 1%, you would lose roughly 2.3% in principal value. That would take 3 years of +84 bp yield to pay for. Risk-reward, is it worth it? Hard question to answer. VFICX has an even longer duration, hence even more risk (albeit with more yield).
__________________
Retired in 2013 at age 33. Keeping busy reading, blogging, relaxing, gaming, and enjoying the outdoors with my wife and 3 kids (5, 11, and 12).
FUEGO is offline   Reply With Quote
Old 02-08-2010, 09:36 AM   #19
Full time employment: Posting here.
cardude's Avatar
 
Join Date: Feb 2006
Posts: 599
Quote:
Compare the boost in yield that you would get by going to VFSTX, the Short Term Investment Grade fund, currently yielding 2.34%. 84 basis points more return, but a duration of 2.3 years. So if rates go up 1%, you would lose roughly 2.3% in principal value. That would take 3 years of +84 bp yield to pay for. Risk-reward, is it worth it?
OK, cool. That's what I was looking for. Thanks.

I don't think the extra risk is worth it right now after looking at your example, FWIW.
__________________
cardude is offline   Reply With Quote
Old 02-08-2010, 03:48 PM   #20
Moderator
ziggy29's Avatar
 
Join Date: Oct 2005
Location: Texas
Posts: 15,612
And the more stocks go back into the tank, the more the bond bubble may reinflate...
__________________

__________________
"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)

RIP to Reemy, my avatar dog (2003 - 9/16/2017)
ziggy29 is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Heading to New Orleans dm Life after FIRE 15 01-26-2010 03:04 PM
Heading to Italy donheff Travel Information 5 10-31-2009 08:13 AM
Heading for Vegas Friday! thefed Other topics 38 06-17-2009 10:03 PM
Heading out to Jazzfest in NOLA Rich_by_the_Bay Travel Information 27 05-19-2009 09:25 PM
Heading to Manmouth Cave Kentucky OAG Travel Information 2 10-22-2007 04:28 PM

 

 
All times are GMT -6. The time now is 03:17 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.