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Old 02-27-2018, 09:46 AM   #81
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While it's good to read that kind of article to understand different viewpoints, that one hasn't been very prescient. It was written in 2013 and if the author pulled out of the market then he's lost out on a lot of gains.

I hope he means he exited the bond market only, and not the market as a whole, but it's ambiguous at best. To be fair he does say (several times in various ways):
Ooooh! Good catch! 2013 LOL! And the bond market has done just fine during the intervening years until this year.

The thing is, folks have been expecting interest rates to jump any moment now for more than five years!

Now, FINALLY, they really are moving up and there doesn’t seem to be much structural stuff to hold them back unless the economy slows, or inflation starts dropping again.

As a 50/5O AA person (the fixed income portion contains cash, short-term bond funds, and intermediate term bond funds) I know I can’t predict the short term movements in interest rates. So if bond funds decline relative to other assets I’ll be adding to them when I rebalance.

Since I have already held my bond funds for a long time, during ups and downs, and I will be holding bond funds forever, I don’t worry about it.
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Old 02-27-2018, 09:54 AM   #82
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I really struggle to see how this guy's "non-forecast" is all that informative. All bond and equity markets go up and also come down. No one knows, as this guy states, when or by how much.

So what is the relevance of this five year old blog post or the more recent one about the equity market?
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Old 02-27-2018, 10:03 AM   #83
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Just accessed my TreasuryDirect account, for the first time since 2011, to pick up a one year Bill at 2.02%. For high income tax states, rates on Bills seem better than most CD offerings right now.

Wierd security for TDirect. They listed about ten questions, told you to answer the three that you had chosen and fill in answers. My memory is still ok, but this, after 7 years, I could not do.
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Old 02-27-2018, 10:10 AM   #84
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Just accessed my TreasuryDirect account, for the first time since 2011, to pick up a one year Bill at 2.02%. For high income tax states, rates on Bills seem better than most CD offerings right now.

Wierd security for TDirect. They listed about ten questions, told you to answer the three that you had chosen and fill in answers. My memory is still ok, but this, after 7 years, I could not do.
I think you can still get 12 month CDs for 2%, and I ďpredictĒ they will be higher soon.
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Old 02-27-2018, 10:13 AM   #85
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I think you can still get 12 month CDs for 2%, and I ďpredictĒ they will be higher soon.
NASA Credit Union is at 2.25 percent for 12 months. Live Oak is at 2.1 percent with a lower minimum. Lots at 2.05 percent.
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Old 02-27-2018, 10:14 AM   #86
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I continue to invest periodically in munis. Specifically VWIUX. Honestly, Iím not sure how wise or stupid this is. Seems nobody likes bonds and within the bond category folks really donít like munis. I do like the tax free dividends they provide. But I realize they are a drag on my overall portfolio at least until the SHTF. Which hopefully doesnít happen. But even in a fantastic up market like we are experiencing, Iíve come to appreciate the role of bonds.

Still, if anyone wants to comment on how dumb investing in munis is, Iím just dumb enough to want to hear it.

Muir
I have a chunk of muni bonds in my fixed income because I see that they move somewhat independently of other fixed income classes I own, and tend to do well when the SHTF.

Some years they are hated. Some years they are loved......

Itís just another asset class that goes in and out of favor. Like everything else.
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Old 02-27-2018, 11:14 AM   #87
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Originally Posted by audreyh1 View Post
...
As a 50/5O AA person (the fixed income portion contains cash, short-term bond funds, and intermediate term bond funds) I know I can’t predict the short term movements in interest rates. So if bond funds decline relative to other assets I’ll be adding to them when I rebalance.

...
Audrey, what do you get for your bond portfolio's duration?

Mine includes ibonds (duration=0), short term bonds (duration=2.6), and intermediate term bonds (duration=5.5). The arithmetic average duration is 3.7 years.

I tried to put together a table of intermediate bond fund returns assuming a rate increase of 0.75% (3 Fed raises) per year. My numbers didn't quite match the previous known years. I realize that corporate rates might not go in synch with Treasuries and especially short term Treasuries where the Fed controls the rates. In other words, the yield curve does not have to shift in parallel and the corporate yield curve can differ from the Treasury one. I also have no way of estimating the bond fund's roll return component.

But that exercise helped me to see some of the variables that are unknowns.

One of my known weaknesses is to be looking at each component of the portfolio instead of the whole. Must be testosterone poisoning.
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Old 02-27-2018, 11:22 AM   #88
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Maybe I should get an Ally raise your rate 2 yr CD, it pays 2% and has a 60 day penalty, plus you get to raise your rate once during the 2 years if rates go up.

Whoops, I see I could even get a 12 month CD there for 2%
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Old 02-27-2018, 11:27 AM   #89
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Just accessed my TreasuryDirect account, for the first time since 2011, to pick up a one year Bill at 2.02%. For high income tax states, rates on Bills seem better than most CD offerings right now.

Wierd security for TDirect. They listed about ten questions, told you to answer the three that you had chosen and fill in answers. My memory is still ok, but this, after 7 years, I could not do.
I just bought the 12 month T Bill thru Vanguard and it was at 2.04% today. I'm using my new cash in my IRA to buy T Bills as interest rates keep rising.
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Old 02-27-2018, 11:40 AM   #90
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Audrey, what do you get for your bond portfolio's duration?

Mine includes ibonds (duration=0), short term bonds (duration=2.6), and intermediate term bonds (duration=5.5). The arithmetic average duration is 3.7 years.

I tried to put together a table of intermediate bond fund returns assuming a rate increase of 0.75% (3 Fed raises) per year. My numbers didn't quite match the previous known years. I realize that corporate rates might not go in synch with Treasuries and especially short term Treasuries where the Fed controls the rates. In other words, the yield curve does not have to shift in parallel and the corporate yield curve can differ from the Treasury one. I also have no way of estimating the bond fund's roll return component.

But that exercise helped me to see some of the variables that are unknowns.

One of my known weaknesses is to be looking at each component of the portfolio instead of the whole. Must be testosterone poisoning.
Well it looks like Morningstar doesn’t compute it for me - darn. Of the 50% bonds I’m at 7.5% cash (that includes iBonds and some CDs with less than 12 months remaining), 7.5% short-term bond fund around 2.5 yr, 35% intermediate bond funds with duration probably a bit under 5 years in all. Rough guess <3.9 year duration?

OK - did calculate it from M* data - currently 3.92 years average duration.
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Old 02-27-2018, 12:09 PM   #91
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Maybe I should get an Ally raise your rate 2 yr CD, it pays 2% and has a 60 day penalty, plus you get to raise your rate once during the 2 years if rates go up.
Wells Fargo is at 2.5% for 2 year. Available through your broker.
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Old 02-27-2018, 12:33 PM   #92
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Wells Fargo is at 2.5% for 2 year. Available through your broker.
Thus your option for early withdrawal is selling it on the secondary market.
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Old 02-27-2018, 12:52 PM   #93
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Thus your option for early withdrawal is selling it on the secondary market.
Most folks who are buying CDs buy them with the intent to hold to maturity. So with 2.5% vs. 2%, there is little reason to opt for a rate so much lower. In the case of Ally, you are sacrificing that 25% difference for the opportunity to raise your rate once during the 2 years. For that to work to your benefit, their 2 year CD rate would need to get above 2.5% fairly quickly.

One year CDs are going for 2% today, so again, to take a 2 year Ally for 2% isn't anything special.

If you believe the 60 day penalty, is worth it for the ability to withdraw early, on top of the lower rate, more power to you.
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Old 02-27-2018, 01:30 PM   #94
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Most folks who are buying CDs buy them with the intent to hold to maturity. So with 2.5% vs. 2%, there is little reason to opt for a rate so much lower. In the case of Ally, you are sacrificing that 25% difference for the opportunity to raise your rate once during the 2 years. For that to work to your benefit, their 2 year CD rate would need to get above 2.5% fairly quickly.

One year CDs are going for 2% today, so again, to take a 2 year Ally for 2% isn't anything special.

If you believe the 60 day penalty, is worth it for the ability to withdraw early, on top of the lower rate, more power to you.
It's not just the raise your rate option. Some direct CDs have low early withdrawal penalties such as the 60 days interest on the Ally CD mentioned above.

Plenty of people take early withdrawal penalties into account when making CD duration decisions. I don't think you can assume necessarily folks asking here are going to hold to maturity. It certainly should be taken into consideration.
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Old 02-27-2018, 04:45 PM   #95
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My take on interest rates:

Short term rates will rise and the yield curve will continue to flatten and eventually invert signalling a recession. It's not a matter of if, but when. There is far too much debt out there for long term rates to move up meaningfully. Banks margins are being squeezed by a flattening yield curve and large defaults in commercial loans. The regional banks are will be impacted the most. It's a matter of time before banks start selling off. There are far too many stores, malls, and chain restaurants in this country. The retail sector is going to go through more pain than anticipated and as the year progresses will become more apparent. Remember, the market is driven by fund flows (supply and demand) in the near term and can behave very irrationally near market tops. This was the case in late 1999 and also 2007. Many sectors are already in a deep bear market - retail, REITS, energy, and some industrial stocks. If you hold individual bonds and notes to maturity, you can ride out this interest rate cycle. If you own bond funds, you are exposed to market risk and will suffer capital losses.

I sold all my perpetual preferred stocks and long duration notes off in December since they were trading at a high premium and the capital gain covers the next two years of dividend income from those securities for the next two years. I hold a lot of cash now and corporate notes with maturities from 2019 though 2028. I plan to hold those through maturity and they will provide my income stream. High investment grade notes (A and up) and bonds are grossly overpriced and have started to correct.

Any short term interest spike will cause a sell-off of bond and preferred stock funds into a fairly illiquid bond market which will cause some significant price swings in individual note and bond issues. That is the best time to buy notes, bonds and preferred stocks - when the passive funds are liquidating.
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Old 02-27-2018, 04:59 PM   #96
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Agreed on all points Freedom.
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Old 02-27-2018, 05:03 PM   #97
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There is far too much debt out there for long term rates to move up meaningfully.
I'm not so sure about this. It seems that if too many people are in debt that would mean rates go higher if demand for loans is high? Creditors should be able to get paid more in this scenario? High quality debtors like the US government issuing more bonds (and the Fed rolling over increasingly less) could squeeze out commercial debtors, for example, raising interest rates farther for them (increasing spread as well).

But I can see how that ultimately slows the economy, due to expensive credit, and in turn that would help bring interest rates down again as demand drops.
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Old 02-27-2018, 05:17 PM   #98
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My take on interest rates:

Short term rates will rise and the yield curve will continue to flatten and eventually invert signalling a recession. It's not a matter of if, but when. There is far too much debt out there for long term rates to move up meaningfully. Banks margins are being squeezed by a flattening yield curve and large defaults in commercial loans. The regional banks are will be impacted the most. It's a matter of time before banks start selling off. There are far too many stores, malls, and chain restaurants in this country. The retail sector is going to go through more pain than anticipated and as the year progresses will become more apparent. Remember, the market is driven by fund flows (supply and demand) in the near term and can behave very irrationally near market tops. This was the case in late 1999 and also 2007. Many sectors are already in a deep bear market - retail, REITS, energy, and some industrial stocks. If you hold individual bonds and notes to maturity, you can ride out this interest rate cycle. If you own bond funds, you are exposed to market risk and will suffer capital losses.
You made me look

While I don't suggest that rates aren't going up and bonds won't drop, I can't find much data that backs your summary of current conditions.

Per the FRED, delinquency rates on commercial loans seem to be around 25-year lows

https://fred.stlouisfed.org/series/DRBLACBS

and

https://fred.stlouisfed.org/series/DRCRELEXFACBS

I own Vanguard REIT index and while it is down over 9% ytd, it is flat for the last year, hardly a "deep bear market". Energy crashed back in 2015 and has been recovering for two years. The S&P Retail Select Industry Index has been kind of flat for four years, again not great but not a bear.

While interest rates are surely rising from unusual lows, I'm not seeing a calamity on the way.
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Old 02-27-2018, 05:52 PM   #99
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I'm not so sure about this. It seems that if too many people are in debt that would mean rates go higher if demand for loans is high? Creditors should be able to get paid more in this scenario? High quality debtors like the US government issuing more bonds (and the Fed rolling over increasingly less) could squeeze out commercial debtors, for example, raising interest rates farther for them (increasing spread as well).

But I can see how that ultimately slows the economy, due to expensive credit, and in turn that would help bring interest rates down again as demand drops.
The national debt is $20 trillion and increasing by $1 trillion per year. Look at the cost of servicing this debt:

https://www.treasurydirect.gov/govt/...ir_expense.htm

Do you really think that the Federal Reserve are going raise rates that much? Think of what it will do to the cost of servicing that debt. The spike in the 2 - 10 year notes has more to do with supply coming to the market due to the increase in the budget deficit. Then there all those S&P 500 companies that issued debt to buy back their stock over the past 7 years. They will get crushed. The real estate market will also get crushed. I would like nothing more to hold a portfolio of FDIC insured CDs that yield 5-7%, but I just don't see that happening.
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Old 02-27-2018, 06:12 PM   #100
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You made me look

While I don's suggest that rates aren't going up and bonds won't drop, I can't find much data that backs your summary of current conditions.

Per the FRED, delinquency rates on commercial loans seem to be around 25-year lows

https://fred.stlouisfed.org/series/DRBLACBS

and

https://fred.stlouisfed.org/series/DRCRELEXFACBS

I own Vanguard REIT index and while it is down over 9% ytd, it is flat for the last year, hardly a "deep bear market". Energy crashed back in 2015 and has been recovering for two years. The S&P Retail Select Industry Index has been kind of flat for four years, again not great but not a bear.

While interest rates are surely rising from unusual lows, I'm not seeing a calamity on the way.

The Federal Reserve data is a lagging indicator. Look back to to 2007/2008
on the charts in your link. Everything was great until it wasn't and then things got ugly. Here are some of the trends I monitor:

https://www.americanbanker.com/news/...personal-loans

More Securitized Commercial Real Estate Debt Becomes Delinquent in June | Fox Business

These stores and malls that are shutting down will eventually lead to more defaults.
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