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Old 12-29-2012, 04:50 AM   #21
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I am not persuaded that interest rates will rise any time soon. Those who think rates will go up seem to me to be underestimating the likely recovery times of an economy that has received a shock of the magnitude of 2008. The fact that rates are low now is not a reason to expect them to rise soon. Just the opposite. The bond market is predicting them to remain low or go lower. While the bond market can be wrong just like any other market, the belief that rates have no place else to go but up is hardly persuasive, especially considering the counter-example of Japan. To me that expectation just reflects a habit of thought, not based on data.
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Old 12-29-2012, 05:50 AM   #22
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Quote:
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I am not persuaded that interest rates will rise any time soon. Those who think rates will go up seem to me to be underestimating the likely recovery times of an economy that has received a shock of the magnitude of 2008. The fact that rates are low now is not a reason to expect them to rise soon. Just the opposite. The bond market is predicting them to remain low or go lower. While the bond market can be wrong just like any other market, the belief that rates have no place else to go but up is hardly persuasive, especially considering the counter-example of Japan. To me that expectation just reflects a habit of thought, not based on data.
Khufu brings up an essential point.

Over on M* capecod occasionally updates us on what the futures predict about the Fed Funds Rate: End Q3 Market.-based Rate Predictions

What if the Fed doesn't start tightening until Q4 2015 - almost 3 years from now?
Fed funds rate 1% Dec 2016
Fed funds rate 2% Q4 2018
Fed funds rate 3% sometime after June 2022

That's a long drawn out process.
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Old 12-29-2012, 06:46 AM   #23
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I think the article misses one important point, the fact that reinvesting the dividends is what gave the bond fund their gains during the inflation years, So what happens to the retiree that is living off the dividends ? Looking at just price chart and not total return, some of the bond fund lost 60% + of their NAV, just as bad or worse than stocks ( and never really recovered )

I'm in the rates will not rise soon camp. Still have high unemployment,no demand for the money, the japan scenario looks plausible. hoisington research has been mentioned here, they have some interesting comments on rates and inflation, Economic Overview

I was also thing about what the current energy revolution might do for future inflation, I read some studies that say the US can become energy independent by 2025. If so that tames a major component of inflation. Most of the 70s inflation was energy related.
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Old 12-29-2012, 06:51 AM   #24
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Great info. I plan to hang on to my bond funds although I'm a little short on the duration end. I believe those that promote these funds as a way to offset volatility in equities as well as provide income. My expectations for income from these funds is very conservative for the next 8-10 years. If interest rates do start to rise at a good clip,for an extended period, reinvesting the dividends will be the only way not to lose out.
Through the ups and downs of the last 30 years I have felt comfortable with my understanding of equities. Not so much with bond funds. But since I can't purchase CD's or individual bonds in my current retirement accounts the bond funds are my only option. I'm sticking to 45/40/15 equity/bond funds/cash. We'll see how it works out.
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Old 12-29-2012, 07:33 AM   #25
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I'm still mulling over using Guggenheim Bulletshares with various maturities in lieu of bond funds. While the fair value will take the same hit as a bond fund if rates decline, I "think" the structure would outperform bond funds in a rising interest rate environment. That said, I don't expect interest rates to increase in the next year or two so I'm in no hurry to act.
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Old 12-29-2012, 09:33 AM   #26
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while the fed may want to hold short term rates down it is investors that will determine the intermediate and longer end.

if you remember what happened when investors spooked and drove rates higher at the beginning of qe2 even the feds buying was no match for the pull of the worlds investors.

as your charts show changes in the fed funds rate may or may not effect longer term rates. but one thing is certain,when the investors of the world say its time its time.
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Old 12-29-2012, 10:54 AM   #27
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Quote:
Originally Posted by audreyh1 View Post
Khufu brings up an essential point.

Over on M* capecod occasionally updates us on what the futures predict about the Fed Funds Rate: End Q3 Market.-based Rate Predictions

What if the Fed doesn't start tightening until Q4 2015 - almost 3 years from now?
Fed funds rate 1% Dec 2016
Fed funds rate 2% Q4 2018
Fed funds rate 3% sometime after June 2022

That's a long drawn out process.
This is the sort of question that my spreadsheet tool is decent at. The first chart shows 3 funds with a 3 year ramp occurring after 1 year. The next chart shows the 3 year ramp occurring after 3 years.







BTW, I suspect in the case of both BOND and DODIX that the fund will change the duration during this 7 year period as a reaction to perceived rate changes. So the above constant duration simulations are just for comparison purposes.

Just from a standpoint of the bond fund investor, it would be better if the rate ramp occurs sooner and is faster rising. That assumes the bond fund investor stays the course over an extended period.
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Old 12-29-2012, 11:04 AM   #28
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the real problem is historically a rise in short term fed funds rates has resulted in more times than not no corralation to longer term rates.
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Old 12-29-2012, 11:18 AM   #29
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the real problem is historically a rise in short term fed funds rates has resulted in more times than not no corralation to longer term rates.
From the Fed chart below, it looks like their is a correlation but it's not 1:1. In the case of the 2004 - 2006 rate rise, intermediate Treasuries started rising ahead of the 3mo Treasury (best controlled by Fed).

As I understand it, the Fed currently is controlling longer dated maturities but normally they do not do this. Caveat, I'm no expert.


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Old 12-29-2012, 11:23 AM   #30
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interesting reading on the subject of corralation.

How to invest with interest rates so low - CBS News
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Old 12-29-2012, 12:58 PM   #31
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whats interesting is bonds have been in a bull market for 36 years yet there have been at least 17 years where the fed increased interest rates at least 1% on the short end yet bonds rose.

in fact only 1 year did the fed raise short term rates 1% and intermediate term bonds fell , that was 1994.

thats very little corralation . but the reverse may be true and while all our eyes are on the fed it may not be the fed that lowers the hammer to the bond market.

it may come from left field from the worlds investors.
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