Short Term vs. Intermd Term Bonds

[wabmester]

Hey, bond guys.  What's your opinion of TIPS vs nominal bonds right now?   Seems like a no-brainer to me.   Even the 5-year TIPS seems to have a large premium over nominals, and I really don't understand why.   The embedded inflation estimate has been low for 2 years now.   Does the market expect inflation to go to zero over the next 3 years?

 

[saluki9]

Hey, bond guys. What's your opinion of TIPS vs nominal bonds right now? Seems like a no-brainer to me. Even the 5-year TIPS seems to have a large premium over nominals, and I really don't understand why. The embedded inflation estimate has been low for 2 years now. Does the market expect inflation to go to zero over the next 3 years?

You might see that estimate of future inflation moderate even more in the near future as we've seen growth slowing a little bit

On the 6 month bills i'm showing an estimated CPI of 2.588% and it narrowing to 2.34% on the 5 year.

2.34 isn't zero, but it's heading in that direction

Also, please read my comment above about predicting interest rates

 

[wabmester]

On the 6 month bills i'm showing an estimated CPI of 2.588% and it narrowing to 2.34% on the 5 year. 

Right, but the market has been making that same prediction now for a couple years.   Even when inflation has been in the 4%+ range.   That's what I don't get. I figure the past prediction will only be true if future inflation is way lower than the current prediction.

 

[IBWino]

What was the difference in current yield between total and intermediate if you have those numbers handy?

Short Term Bond Index - Current yield 5.32% Duration 2.5 Avg Return (10 yr) 5.09%

Intermediate Term Bond Index - Current yield 5.57%  Duration 5.9  Avg Return (10 yr) 6.41%

Total Bond Market Index - Current Yield 5.31% Duration 4.8 Avg Return (10 yr) 5.93%

 

[ats5g]

WARNING!!! OPINIONS FOLLOW:

In my professional experience, predicting future interest rates ranks somewhere between predicting winning lottery numbers and guessing how much congress is going to spend next year

In other words, I think it's a waste of time. Therefor my best estimate of future fixed income returns are the current yield. Henceforth taking almost twice the risk for the same return doesn't rank as a wise decision in my book.

OMG I was only able to keep my opinion to myself for 16 minutes

I definitely agree that it's a waste of time to predict interest rates.

However, I don't think that the intermediate term bonds are necessarily twice the risk. I think it depends on an investors time horizon.

For example, for investors who need the money next week, ST bonds, Tbills, or MM funds are definitely "less risky" than IT and LT bonds. However, for someone who is investing for money need [read: liabilities] 5, 10, 20, or 30 years in the future, Longer Term bonds are "less risky" than ST bonds, Tbills, or MM funds. Hence, insurance companies use LT bonds to match liabilities. We can also do the same. For our real LT liabilities, we can use LT TIPS, and for LT nominal liabilities we can use LT nominal bonds.

- Alec

 

[brewer12345]

In a rising rate environment?   OMG!!!1! 

Umm, check the longer end of the curve (5 to 30 years) over the past few months. It is down.

FWIW, I think the TBM Index is likely to be a better choice for a portfolio that includes equities and some commodities exposure. Why? you get closer to the efficient frontier. If rates move up, commodities are likely doing well and stocks may be, while bonds are falling. If rates are flat, commodities , stocks likely up, bonds flat. If rates fall, commodities down, stocks , bonds up. But you don't get these offsetting less-than-perfectly correlated moves with short paper, only medium and long term bonds.

 

[astromeria]

For those who still wonder why the average bloke sits quivering in a corner instead of managing their portfoilio, it's the conflicting and confusing advice...slice & dice (and which flavor?) VS slice & dice is "dead" VS value/small cap/foreign is the thing VS now it's time for growth or Dow or dogs of the DOw or CANSLIM or technical analysis VS the current hot newsletter OR last year's hot newsletter OR the best newletter over the past 3/5/10/15 years VS Jim Cramer or Jim Jubak or some other Jim VS Ben Stein this month OR Ben Stein last month VS trust my broker VS it's a stockpicker's market VS move to cash or commodities or real estate or oh-my-gog-get-out-of-real-estate-NOW! VS pssst Wellesley or Lifestrategy or Target Retirement or Dodge & Cox or Vanguard or Fidelity...get short-term bonds/intermediate bonds/individual bonds/TIPS/I-Bonds/MM accounts or funds/CD ladders...it's time to get out VS time to get in. And if you change your mind in a taxable account, there's taxes to worry about. And you're stupid and will be eating cat food if you get it wrong...so just buy a new truck and a big screen TV with surround sound and have faith in the future, it's happy hour in America!

 

[unclemick]

Hmmm

And people wonder why Bogle sometimes comes across as a grumpy old man - toiling in the wilderness.

heh heh heh heh heh heh heh - So what's new out there other than PCRIX to counterbalance my TBM and MM?

 

[Rich_by_the_Bay]

For those who still wonder why the average bloke sits quivering in a corner instead of managing their portfoilio

That is one of the funnier posts I've read in a long time. You outta write a column.

 

[brewer12345]

Hmmm

And people wonder why Bogle sometimes comes across as a grumpy old man - toiling in the wilderness.

heh heh heh heh heh heh heh - So what's new out there other than PCRIX to counterbalance my TBM and MM?

DJP as an alternative to PCRIX, for one thing. I also like a slug of high grade, non-USD bonds.

 

[saluki9]

For example, for investors who need the money next week, ST bonds, Tbills, or MM funds are definitely "less risky" than IT and LT bonds. However, for someone who is investing for money need [read: liabilities] 5, 10, 20, or 30 years in the future, Longer Term bonds are "less risky" than ST bonds, Tbills, or MM funds. Hence, insurance companies use LT bonds to match liabilities. We can also do the same. For our real LT liabilities, we can use LT TIPS, and for LT nominal liabilities we can use LT nominal bonds.

- Alec

What you have said is correct for pension funds and insurance companies. However, this discussion is concerning bond funds. If you have the capital, you certainly can immunize your FIRE portfolio simply by buying zero coupon long bonds and waiting out the peaks and valleys. However, you will not accomplish the same thing buying a long bond fund becuase unlike your portfolio of actual bonds the maturity and duration of the fund will stay the same over time. In addition, most funds aren't just buy and hold, so the safety you get by holding the bonds to maturity also will not be realized.