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Why would anyone buy bonds or bond funds right now?
Old 12-14-2013, 04:17 AM   #1
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Why would anyone buy bonds or bond funds right now?

with impending increases in interest rates over the next few years, why would anyone buy bonds or bond funds right now? I do have some bonds in a balanced fund, but am thinking of going solely equities for the couple of years. Thoughts?
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Old 12-14-2013, 05:06 AM   #2
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Equities can go down too?
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Old 12-14-2013, 06:21 AM   #3
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I don't know if I'd go 100% equities as a replacement for bonds. Equities can fall much harder than a bond fund.

PenFed has recently released a 5 year CD paying 3%. Tempting replacement for bonds. There is also I bonds but they are limited to $10k per year.
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Old 12-14-2013, 06:40 AM   #4
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with impending increases in interest rates over the next few years, why would anyone buy bonds or bond funds right now? I do have some bonds in a balanced fund, but am thinking of going solely equities for the couple of years. Thoughts?
This is like "Waiting for Guffman". Those increases in interest rates have been under discussion for more than 4 years and still are nowhere to be seen. They may never arrive, or they may show up in a totally unexpected way. When core inflation rises above 2% and real wages follow suit I will rethink my allocation, but right now we will keep our current allocations in both equities and fixed income pretty much the same.
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Old 12-14-2013, 06:45 AM   #5
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This is like "Waiting for Guffman". Those increases in interest rates have been under discussion for more than 4 years and still are nowhere to be seen. They may never arrive, or they may show up in a totally unexpected way. When core inflation rises above 2% and real wages follow suit I will rethink my allocation, but right now we will keep our current allocations in both equities and fixed income pretty much the same.
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Old 12-14-2013, 06:49 AM   #6
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This is like "Waiting for Guffman". Those increases in interest rates have been under discussion for more than 4 years and still are nowhere to be seen. They may never arrive, or they may show up in a totally unexpected way. When core inflation rises above 2% and real wages follow suit I will rethink my allocation, but right now we will keep our current allocations in both equities and fixed income pretty much the same.

I think that as long as the Fed keeps rates low buy buying.... it will stay low... how long will they (or can they) keep it up

Look a Japan, they have had low rates for what?.... three decades?
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Old 12-14-2013, 06:56 AM   #7
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Given the fact that everyone thinks the fed is going to raise rates in a few years has the yield curve VERY steep. Shorter yields are much lower than longer yields. So you can earn a "relatively" decent yield buying longer maturity bonds.
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Old 12-14-2013, 07:17 AM   #8
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This is like "Waiting for Guffman". Those increases in interest rates have been under discussion for more than 4 years and still are nowhere to be seen. They may never arrive, or they may show up in a totally unexpected way. When core inflation rises above 2% and real wages follow suit I will rethink my allocation, but right now we will keep our current allocations in both equities and fixed income pretty much the same.
Actually the 10 year treasury has risen quite a bit this year. I have a intermediate bond fund that's down around 5% for the year. Tips have gotten hammered recently.
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Old 12-14-2013, 07:41 AM   #9
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Actually the 10 year treasury has risen quite a bit this year. I have a intermediate bond fund that's down around 5% for the year. Tips have gotten hammered recently.
True. The 10 year rate is also below where it was 4 years ago, around the same time threads about rising rates first started to appear. In the period since the recovery began rates have risen and fallen, which is typical for any medium term timeframe.

My point was not that rates will not increase. They surely wiill ... someday. How much, over what period, what slope will the interest curve have? No one has any idea of these things, they will certainly affect bond prices, and also all other asset classe valuations. Changing an asset allocation now to shift from fixed income to equities does not assure us in any way that the new portfolio has a better risk / return ratio than the current one.
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Old 12-14-2013, 08:15 AM   #10
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Great discussion. This is why I enjoy this site. I can get real advice from those with similar goals and have more investing experience. Post the right question and you are sure to get plenty of guidance. Thanks.
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Old 12-14-2013, 08:41 AM   #11
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with impending increases in interest rates over the next few years, why would anyone buy bonds or bond funds right now? I do have some bonds in a balanced fund, but am thinking of going solely equities for the couple of years. Thoughts?
Would you have been comfy at 100% equities in 2008? Having bond/funds was helpful when that bubble burst.

If you're young with lots of earning/saving-investing years in front of you, going 80%+ equities is an option. Some of us did when we were younger, but most members here need a balance of stability and growth. We don't want to be exposed to a major loss that can come from swinging for the fences, especially for those who've 'already won the game' to some extent...
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Old 12-14-2013, 09:31 AM   #12
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I agree with others that abandoning fixed income and going all equities is not the best answer to potential interest rate risk. Besides, equities are arguably a bit frothy after the last couple year run-up.

For my fixed income I have moved from Total Bond and Intermediate-Term Corporate to PenFed's 3% 5 year and 2% 3 year CDs and target maturity bond funds from iShares and Guggenheim. Perfect, no - but I think I'll be better off in the long run than in a mid to long duration bond fund.
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Old 12-14-2013, 10:20 AM   #13
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Gunny

I don't agree with going total equity unless you have a long time horizon to recoup from a repeat of the depression, and have no need to withdraw from your portfolio. You're liable to get stuck with some heavy realized losses. I'm also not keen on putting new money into bonds at this moment, and have a fairly large cash holding, in case both equities and bonds have difficulties in the near future. I'll rethink the situation if there's a significant change in the situation that creates a buying opportunity.
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Old 12-14-2013, 11:27 AM   #14
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This is like "Waiting for Guffman". Those increases in interest rates have been under discussion for more than 4 years and still are nowhere to be seen. They may never arrive, or they may show up in a totally unexpected way. When core inflation rises above 2% and real wages follow suit I will rethink my allocation, but right now we will keep our current allocations in both equities and fixed income pretty much the same.
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My point was not that rates will not increase. They surely wiill ... someday. How much, over what period, what slope will the interest curve have? No one has any idea of these things, they will certainly affect bond prices, and also all other asset classe valuations. Changing an asset allocation now to shift from fixed income to equities does not assure us in any way that the new portfolio has a better risk / return ratio than the current one.
+2

After this lengthy and terrific run-up in equities, I think most of us expect the stock market to fall at some point. As I'm sure you know, the stock market doesn't just go up; it goes down, too. Back in 2008-2009, we all saw forum members selling low out of panic and some even getting rid of all their stocks at the absolute worst of times to do that. It was a good test for one's asset allocation.

I would not want to be all in equities or equity funds right now.

If you have not yet read at least a few of the books on this list, I would recommend picking a few that seem appealing and reading them. Many of us have found these books to be quite helpful at one time or another.
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Old 12-14-2013, 11:58 AM   #15
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Not a lot of places for fixed income, with interest rates so low and bond prices so high. For now I'm keeping much of my fixed income in short-term bond funds, and that includes high-yield (junk) short term ETFs, such as SJNK. The current yield (5%) is greater than the average duration (2 years), so as long as the default rate stays minimal, the yield should outpace any decline in price due to rising interest rates. Any bond or bond-ETF that is less than investment grade, there is a concern for default, but with a strengthening economy, the rate of default should be minimal.
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Old 12-14-2013, 12:28 PM   #16
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I've been moving a good bit of what was bond allocation to simple cash. Yeah, on line AMEX savings is only a whopping .85% but that's better than what my bond funds did over last year. Bond funds I do still have tend to be short term and somewhat junky. Figure if markets drop big I'll have cash to put in equities, but am not interested in getting higher equity AA with markets where they are now.
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Old 12-14-2013, 12:37 PM   #17
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with impending increases in interest rates over the next few years, why would anyone buy bonds or bond funds right now? I do have some bonds in a balanced fund, but am thinking of going solely equities for the couple of years. Thoughts?
I just read a market watch article yesterday that predicted the fed would continue to hold interests rates low throughout 2014. I have been hearing about the rise in rates all through 2013. It's all speculation, so I am not afraid of bond funds.
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Old 12-14-2013, 12:57 PM   #18
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Actually the 10 year treasury has risen quite a bit this year. I have a intermediate bond fund that's down around 5% for the year. Tips have gotten hammered recently.
Did you add back in your dividends to get your actual YTD return? None of my intermediate bond funds are down nearly that far - one down -1%, several are even or up slightly for the year.
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Old 12-14-2013, 01:13 PM   #19
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This is like "Waiting for Guffman". Those increases in interest rates have been under discussion for more than 4 years and still are nowhere to be seen. They may never arrive, or they may show up in a totally unexpected way. When core inflation rises above 2% and real wages follow suit I will rethink my allocation, but right now we will keep our current allocations in both equities and fixed income pretty much the same.
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Junk market has jumped the shark
Old 12-14-2013, 01:32 PM   #20
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Junk market has jumped the shark

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Not a lot of places for fixed income, with interest rates so low and bond prices so high. For now I'm keeping much of my fixed income in short-term bond funds, and that includes high-yield (junk) short term ETFs, such as SJNK. The current yield (5%) is greater than the average duration (2 years), so as long as the default rate stays minimal, the yield should outpace any decline in price due to rising interest rates. Any bond or bond-ETF that is less than investment grade, there is a concern for default, but with a strengthening economy, the rate of default should be minimal.
The junk market is a very dangerous place to play at present. Spreads are at multi-year lows, issuance is very high, and bond structures have become quite aggressive. Covenant protection for bondholders is very, very weak and PIK bond issuance is near credit bubble record levels. If you do not know what a PIK bond is, think "Option ARMs for really scary corporate borrowers." The music might keep playing for a while yet, but when it does stop there will be an awful lot of people holding hot potatoes. That will be the time to buy.
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