Poll:All in on Bonds

[chinaco]

Curious about people's thoughts on bonds and inflation.

What is the lowest nominal coupon rate would you need to get from 10 year treasuries for you to abandon the stock market for the most part and buy bonds (the actual bonds, ETF, or mutual funds)?

In other words.... reduce equity holdings to <= 20% (less than or equal)


Comment about how you would invest in the bonds.. Treasuries bought directly, versus etf, versus mutual funds, or a mix.

 

[Dawg52]

I'm already close to 20% equities. Should I still vote?

 

[FIRE'd@51]

Curious about people's thoughts on bonds and inflation.

What is the lowest nominal coupon rate would you need to get from 10 year treasuries for you to abandon the stock market for the most part and buy bonds (the actual bonds, ETF, or mutual funds)?

In other words.... reduce equity holdings to >= 20%

I assume you mean <= 20% (20% or less).

I can't imagine ever reducing my equity exposure to 20%, although if the nominal coupon rate were to rise above the historical rate of return on equities (~10%), I would consider cutting back my equity holdings from my long-term target (currently about 65%).

Comment about how you would invest in the bonds.. Treasuries bought directly, versus etf, versus mutual funds, or a mix.

I would purchase Treasuries at auction. For corporates I would use mutual funds (e.g. Vanguard), or closed-end funds if they traded at a discount to NAV.

 

[ziggy29]

I don't see myself ever going more "all in" to bonds than about 40/60, and that would require higher bond interest rates and massively overvalued stocks. Sitting on about 55/45 now and comfortable with that under the current market conditions.

 

[chinaco]

Interest rates drift over time. It is not like anyone would just make that commitment in one move.

If 10 year treasury auctions were offered at 7% coupon rates or (discounted + coupon), I would begin building a ladder using fixed assets to build a ladder. If rates kept going north, I would gradually commit more funds to the ladder. I would use a combination of ladder of bonds and bond mutual funds.

Assuming that the reason for the increase in rates is inflation... I would expect the fed to nail it down before it went too high.


How much would be committed to bonds would depend on how long the Fed let it go. At a certain level, I would expect many people to be exiting the stock market for bonds. Plus I think higher inflation seems to negatively affect equities in the short-term for several reasons... not the least of which is the fed raising rates which would negatively affect the business cycle.


It is anybody's guess as to what will happen in the next several years. But the last time rates got this low was in the 60's We know what happened about 10 years later in the 70's and early 80's.

Of course, the same thing may not happen this time... but locking in some high-yielding, high-quality bonds would be great.

http://www.federalreserve.gov/releases/h15/data/Annual/H15_TCMNOM_Y10.txt

 

[DblDoc]

Interest rates drift over time. It is not like anyone would just make that commitment in one move.

If 10 year treasury auctions were offered at 7% coupon rates or (discounted + coupon), I would begin building a ladder using fixed assets to build a ladder. If rates kept going north, I would gradually commit more funds to the ladder. I would use a combination of ladder of bonds and bond mutual funds.

Assuming that the reason for the increase in rates is inflation... I would expect the fed to nail it down before it went too high.


How much would be committed to bonds would depend on how long the Fed let it go. At a certain level, I would expect many people to be exiting the stock market for bonds. Plus I think higher inflation seems to negatively affect equities in the short-term for several reasons... not the least of which is the fed raising rates which would negatively affect the business cycle.


It is anybody's guess as to what will happen in the next several years. But the last time rates got this low was in the 60's We know what happened about 10 years later in the 70's and early 80's.

Of course, the same thing may not happen this time... but locking in some high-yielding, high-quality bonds would be great.

http://www.federalreserve.gov/releases/h15/data/Annual/H15_TCMNOM_Y10.txt

And there is the rub. While the Fed has been able to tame inflation in recent decades there is no guarantee they will do so in the future. There have been some threads on Bogleheads about using TIPS ladders that might work as an alternative. Personally I'll stick with a balanced portfolio gradually shifting to increased bonds as we age.

DD

 

[brewer12345]

Easy: when I could buy investment grade 5 year corporates with double digit YTMs in early 2009, I borrowed money to do so. So clearly I know what my tipping point would be. I bought individual issues on the secondary market after doing extensive credit work on each name.

 

[DblDoc]

Easy: when I could buy investment grade 5 year corporates with double digit YTMs in early 2009, I borrowed money to do so. So clearly I know what my tipping point would be. I bought individual issues on the secondary market after doing extensive credit work on each name.

But brewer your special. How risky would it be for someone without your expertise?

DD

 

[chinaco]

Easy: when I could buy investment grade 5 year corporates with double digit YTMs in early 2009, I borrowed money to do so. So clearly I know what my tipping point would be. I bought individual issues on the secondary market after doing extensive credit work on each name.

Yes, but at that time my head was swirling and it was all I could do to not turn and run for the hills.

You may have been more confident than many of us.

But did you bet the farm on it? 80%

 

[brewer12345]

But brewer your special. How risky would it be for someone without your expertise?

DD

In a sense, it wasn't risky at all. Anyone could have bought LQD or JNK at that point and made a killing. They would have been better diversified than I was, to boot. I did what I did because I could match the maturities of the bonds to be inside the maturity of my line of credit and I did enough research to be comfy that my bonds would not be likely to default, so all I had to do at worst was clip coupons until maturity. As it happened, I sold long before then because the bond market came back and I did not like the yield available from continuing to hold.

 

[brewer12345]

But did you bet the farm on it? 80%

I could not tell you the %allocation, but the fact that I was borrowing money to invest (which I had never done before and hope never to do again) means that I had effectively put it all on red.

 

[chinaco]

I could not tell you the %allocation, but the fact that I was borrowing money to invest (which I had never done before and hope never to do again) means that I had effectively put it all on red.

That's pretty confident.... and it looks like it turned out to be a good move.

 

[brewer12345]

That's pretty confident.... and it looks like it turned out to be a good move.

Hindsight is always 20/20. I made a bunch of extremely aggressive moves from December 2008 through June 2009: leveraged purchase of bonds, tripling and quadrupling down on large positions, buying call options, etc. I don't ever intend to be that aggressive in the future, but at the time I felt compelled to do so because I needed to try to repair the serious financial damage I had suffered in the crash. Thank Dog it all worked out, but I will be making it my business never to be put in that position ever again.

 

[Texas Proud]

I voted 12%....

But the problem is not the interest rate, but the nominal interest rate...

Earning 12% is great unless inflation is 18% or even worse... 100%....

 

[chinaco]

I voted 12%....

But the problem is not the interest rate, but the nominal interest rate...

Earning 12% is great unless inflation is 18% or even worse... 100%....

Yes.... you would have to have faith that the Fed would get it under control.

Assuming America is still strong a high inflationary period would eventually be contained.

 

[Alan]

And there is the rub. While the Fed has been able to tame inflation in recent decades there is no guarantee they will do so in the future. There have been some threads on Bogleheads about using TIPS ladders that might work as an alternative. Personally I'll stick with a balanced portfolio gradually shifting to increased bonds as we age.

DD

Same here.

I've stuck the course for 15 years, slowly decreasing the equities until I RE'd and don't see me changing. I think it will be a long time, if ever, that I drop the equity portion below 30 - 35%. (It is currently at 35%)

 

[HFWR]

Anyone could have bought LQD or JNK at that point and made a killing.

Yeppers... Except I bought LQD in the high $90s and HYG in the low $70s, plus a fair amount of TIP around $90.

No margin, though...

Currently 50% stocks, 30% bonds, 10% cash, and 5% each REIT and CCF.

Will gradually up bond allocation as the years progress, but probably not 100% bonds until I'm 80.

 

[clifp]

I voted 12%....

But the problem is not the interest rate, but the nominal interest rate...

Earning 12% is great unless inflation is 18% or even worse... 100%....

I voted 12% also and have the same caveat if bonds are 12% and inflation is 15% than bonds are an even worse investment than today. I currently have 15% of my assets in bonds so obviously I am not a big fan of them.


On the other hand since I own my own home and have no debt many of my expenses are fixed. Even in a time of high inflation, 12% bonds would give me $250K a year to spend. That is enough to buy plenty of $15 gallon gasoline and milk, and $30 plate lunches.

 

[Nords]

I don't ever intend to be that aggressive in the future, but at the time I felt compelled to do so because I needed to try to repair the serious financial damage I had suffered in the crash. Thank Dog it all worked out, but I will be making it my business never to be put in that position ever again.

Hopefully you just went through the opportunity of a lifetime...

 

[Running_Man]

I voted 9 percent, however I would be investing in 30 year treasuries in order to lock in the yield over the remainder of my retirement. At 9 percent I would be able to take 45% of the yield as spend yielding 4 percent of the portfolio and reinvesting the other 55%. In my research investing in this manner for the past 100 years to meet retirement needs has never required selling a treasury bond in the first 30 years of retirement to meet an inflation adjusted annual spend.

 

[FIRE'd@51]

I voted 9 percent, however I would be investing in 30 year treasuries in order to lock in the yield over the remainder of my retirement. At 9 percent I would be able to take 45% of the yield as spend yielding 4 percent of the portfolio and reinvesting the other 55%. In my research investing in this manner for the past 100 years to meet retirement needs has never required selling a treasury bond in the first 30 years of retirement to meet an inflation adjusted annual spend.

Very interesting. What data series did you use for your reinvestment rates?

 

[chinaco]

Wow... over 50% polled would not put 80% of their portfolio in 10 year treasuries if they auctioned with a 15% coupon.

I find that amazing! A 15% coupon would enable one to make a 400+% return in 10 years... with relatively low risk. Buying treasuries directly and holding for 10 years and getting the coupon (or when rates drop grab the gain and go back into stock.... something less than 10 years).

There has been a lot of blather about the potential for inflation lately. We could be seeing rates move higher. We many not see a return of what happened in the late 70's and early 80's.... But it is still probably a good idea to be thinking about your game plan.

Even if you are intending to maintain your strategic allocation... the moves you make, when you make them, and the assets you hold and how to own them can make a difference.

 

[harley]

Wow... over 50% polled would not put 80% of their portfolio in 10 year treasuries if they auctioned with a 15% coupon.

I find that amazing! A 15% coupon would enable one to make a 400+% return in 10 years... with relatively low risk. Buying treasuries directly and holding for 10 years and getting the coupon (or when rates drop grab the gain and go back into stock.... something less than 10 years).

There has been a lot of blather about the potential for inflation lately. We could be seeing rates move higher. We many not see a return of what happened in the late 70's and early 80's.... But it is still probably a good idea to be thinking about your game plan.

Even if you are intending to maintain your strategic allocation... the moves you make, when you make them, and the assets you hold and how to own them can make a difference.

The reason I chose the Never option is that in order to have treasuries offering that yield, inflation would have to be sky high. I would probably significantly increase my allocation in bonds in that situation, but no way would I go 100%. I lived through the 80s, I had a 15.75% mortgage, I remember paying ever increasing food prices. I am not sanguine about either the effect of inflation on savings, nor it's tendency to go away soon after appearing. It would, IMHO, be like borrowing 100% worth of my net worth now because rates are so low. I THINK they will go up soon, but I don't know it for sure. To go 100% in anything is a risk I'm not willing to take. This is MY life and retirement we're talking about here. I'd be glad to risk yours, but I'm too conservative to gamble with mine like that.

 

[DblDoc]

Wow... over 50% polled would not put 80% of their portfolio in 10 year treasuries if they auctioned with a 15% coupon.

I find that amazing! A 15% coupon would enable one to make a 400+% return in 10 years... with relatively low risk. Buying treasuries directly and holding for 10 years and getting the coupon (or when rates drop grab the gain and go back into stock.... something less than 10 years).

There has been a lot of blather about the potential for inflation lately. We could be seeing rates move higher. We many not see a return of what happened in the late 70's and early 80's.... But it is still probably a good idea to be thinking about your game plan.

Even if you are intending to maintain your strategic allocation... the moves you make, when you make them, and the assets you hold and how to own them can make a difference.

Not true. If we were to see bond yields like that again it is because the market sees inflation. This is NOT a low risk situation . I agree it is good to plan ahead with what ifs but diversification is the safest strategy that can possibly deal with a long term time frame. The only situation I could forsee being 80% bonds would be if I had way more money than I need for retirement. Even then I would sit at the efficient frontier of 80% bonds:20% equity.

DD

 

[chinaco]

Wow... over 50% polled would not put 80% of their portfolio in 10 year treasuries if they auctioned with a 15% coupon.

I find that amazing! A 15% coupon would enable one to make a 400+% return in 10 years... with relatively low risk. Buying treasuries directly and holding for 10 years and getting the coupon (or when rates drop grab the gain and go back into stock.... something less than 10 years).

There has been a lot of blather about the potential for inflation lately. We could be seeing rates move higher. We many not see a return of what happened in the late 70's and early 80's.... But it is still probably a good idea to be thinking about your game plan.

Even if you are intending to maintain your strategic allocation... the moves you make, when you make them, and the assets you hold and how to own them can make a difference.

That 400+% amount is incorrect. Math error! The coupons returned would be 150% of the face.