Short, Medium & Long Term Bond Funds 2013

[pb4uski]

I've spent the last couple days reading a couple dozen articles online and all it got me was confused. I guess i'll just hold what I have.

For each 1% rise in interest rates a bond (or bond funds) value would be expected to decrease by its duration divided by 100.

So if the duration is 5.4 and rates rise 1% then the bond's value would be expected to decline by 5.4%. If rates decline 0.5% then the bond's value would be expected to increase by 2.7%.

 

[racy]

I've spent the last couple days reading a couple dozen articles online and all it got me was confused. I guess i'll just hold what I have.

Hi aaron,
Here's something you might find interesting on Vanguard's site:
https://investor.vanguard.com/insights/bond-fund-basics-duration

 

[FIRE'd@51]

For each 1% rise in interest rates a bond (or bond funds) value would be expected to decrease by its duration divided by 100.

So if the duration is 5.4 and rates rise 1% then the bond's value would be expected to decline by 5.4%. If rates decline 0.5% then the bond's value would be expected to increase by 2.7%.

This is a good rule of thumb for relatively small changes in interest rates, but one should be aware that it overestimates (underestimates) the price change for large moves up (down) in rates, because the duration itself is a function of the interest rate.

 

[aaronc879]

For each 1% rise in interest rates a bond (or bond funds) value would be expected to decrease by its duration divided by 100.

So if the duration is 5.4 and rates rise 1% then the bond's value would be expected to decline by 5.4%. If rates decline 0.5% then the bond's value would be expected to increase by 2.7%.

Thanks. That helps a lot. I read an article that said the Fed doesn't plan to raise rates until unemployment gets down to 6.5%. That won't happen in 2014 most likely so bonds should still be ok this year, right?

 

[pb4uski]

This is a good rule of thumb for relatively small changes in interest rates, but one should be aware that it overestimates (underestimates) the price change for large moves up (down) in rates, because the duration itself is a function of the interest rate.

Agreed that the general rule decays some with very significant changes in rates.

 

[pb4uski]

...That won't happen in 2014 most likely so bonds should still be ok this year, right?

In need to think about that one for a while. Get back to me in December and I'll have a solid answer for you.

 

[FIRE'd@51]

I read an article that said the Fed doesn't plan to raise rates until unemployment gets down to 6.5%. That won't happen in 2014 most likely so bonds should still be ok this year, right?

Not necessarily. The Fed has direct control over very short-term rates (i.e. the overnight rate), but its control over intermediate and long-term rates is much more tenuous.

 

[racy]

Hopefully there's no one left here who doesn't recognize the risk associated with long duration bond funds when interest rates eventually increase. ...

Out of curiosity I looked to see what Vanguard does with their Target Retirement Income Fund, "designed for investors already in retirement". It holds approximately 70% in bonds. The bonds, percentage and duration are:

Total Bond Fund, 39.3%, 5.5 yrs
S-T Inflation Protected, 16.8%, 2.4 yrs
Total Int'l Bond Index, 14.0%, 6.6 yrs.

So, the weighted duration is 5.5 yrs, an intermediate duration fund.

 

[veremchuka]

So what are we taking about here? When rates rise, an intermediate-term fund will fall how far? 5%/yr,10%/yr? Even in bad years a bond fund won't fall 20%+ like equities, right?

There have been several replies but how about this -

say you own a long term bond fund (a very bad idea now), the duration is 14 years, say interest rates rise 2% over 2 years. You just lost 28% of the fund's nav! So it all depends upon the DURATION of the fund. If you don't know the duration of a bond fund you are in then you better find out because it is important in a rising rate environment.

 

[aaronc879]

There have been several replies but how about this -

say you own a long term bond fund (a very bad idea now), the duration is 14 years, say interest rates rise 2% over 2 years. You just lost 28% of the fund's nav! So it all depends upon the DURATION of the fund. If you don't know the duration of a bond fund you are in then you better find out because it is important in a rising rate environment.

Do you know what duration the bonds are in Wellesley?

 

[aaronc879]

Do you know what duration the bonds are in Wellesley?

Nevermind, I found it. Moderate-term investment grade.

 

[Lsbcal]

This M* interview with Bogle on fixing the Total Bond Mkt Fund and what to do now is worth listening to:
Bogle: We Need to Fix the Bond Index

 

[clifp]

This M* interview with Bogle on fixing the Total Bond Mkt Fund and what to do now is worth listening to:
Bogle: We Need to Fix the Bond Index

I think this link is better. I think any folks with large positions in the total bond fund or BND should listen to this interview.

I made a similar point in different thread, not knowing that Bogle himself agreed with me..

 

[veremchuka]

I'm not the 1st to point this out but the Total Bond Market Index Fund is far from being "total". There's no high yield or international or emerging markets bonds. The GNMA and treasuries in the TBMI is killing the yield.

 

[haha]

I think this link is better. I think any folks with large positions in the total bond fund or BND should listen to this interview.

I made a similar point in different thread, not knowing that Bogle himself agreed with me..

Maybe what he says is still relevant, but there have been huge changes in interest rates since this interview on April 17, 2013. Bogle refers to a couple of treasuries, like the 10 year, which at that time was well under 2% (around 1.7%), and now is just slightly below 3%.

Ha