Respected VG guy with low bond expectations

[Lsbcal]

Here is an interview with Gus Sauter that I think is worth looking at:Bond investors, beware - Dec. 3, 2012

Here is the quote that catches my eye:

What about bonds?
The best predictor of bond returns is the yield to maturity of the 10-year bond. The 10-year Treasury is at less than 2%, so returns would probably be 2%, maybe 3%. Historically bonds have returned about 6%. It's difficult to see how we could get that.

and regarding equities:

Seems like there's a lot of economic danger ahead.
It turns out equity returns are not related to economic growth. The best predictor of future returns over the long term -- over, let's say, a five-or 10-year horizon -- tends to be current valuations. The market is priced at about 13 times [expected] earnings, and that is a little bit cheaper than normal.

Of course, I'm looking for confirmation bias.

 

[Midpack]

Interesting in the same interview:

We're trying to educate clients to be aware of the risks. A rise in rates will negatively impact their principal. At the same time, we do believe that even with lower expected returns, bonds play an important part in the portfolio: diversification. You want to have that anchor.

Now we've got European debt, and we've got the fiscal cliff. Still, that does not convince us at all that you won't get normal [equity] returns going forward.

Bottom line: Stay the (AA) course for the most part? No place to hide...

 

[foxfirev5]

You're right there is no place to hide. I've really stuck to my 45/40/15 cash AA through thick and thin. However I probably will let it drift a little over the next couple of years to 50 equity/ 30 bond / 20 cash with the bonds on the shorter end of the spectrum. I don't deviate enough for a full blown barbell approach but that might payoff for some.

 

[Spanky]

We plan to keep our AA unchanged except to shift our bond holding to short-term.

 

[Khufu]

Here is an interview with Gus Sauter that I think is worth looking at:Bond investors, beware - Dec. 3, 2012

Here is the quote that catches my eye:
and regarding equities:
Of course, I'm looking for confirmation bias.

The guy is basically an equity manager. He pumps equities. Is there any information there?

Here's Shiller's graph of PE using historical CAPE data. Equities don't look so cheap.

 

[jebmke]

I don't know whether 13x is cheap or not but I would tend to agree with his bond assessment. I am assuming 0 to -1% real on bonds going forward. Hopefully there will be some equity kick to offset crappy bond performance.

 

[Spanky]

I don't know whether 13x is cheap or not

Historically average is 15 - thus, 13 is considered below average.

 

[mathjak107]

bond yields are all relative to inflation. historical norms of 6% are looking at 3-4% inflation .

while yes the yields are lower then they should be for 2% inflation the capital gains have been just great up to now.

my guess is we still have a little life left to the party but a gradual shift into other bond areas like emerging market bonds or international may be a good idea.

 

[eytonxav]

While all bonds can be affected by rising rates, the same can be true for equities , many of which don't necessarily like a raising rate environment either. Also, when the term bond is used in many of these cautionary articles, the implication is usually with respect to longer term treasuries (implicitly understood, but not always stated), but those raising rates won't necessarily affect other types of bonds to the degree longer term treasuries will be affected by such raising rates. Again, bonds are for diversification and are not nearly as volatile as equities. While its wise to shorten duration and to diversify your mix of bonds, IMO abandoning bonds could prove to be a costly mistake.

 

[Lsbcal]

The 5 year TIPS are at -1.4% and the 7 year is at -1.1%. So nominal bonds might be a little better but not enough to give good bond returns. I've heard it said that the bond yields today are the best (but not necessarily correct) predictor of future returns.

I do own a fair helping of bonds but have some plans for sidestepping sharp rate increases. Might not work though.

 

[Spanky]

I've heard it said that the bond yields today are the best (but not necessarily correct) predictor of future returns.

Many "experts" say that bond return will most likely be about 1-2% + current yield.

Has anyone looked into BulletShares® USD High Yield Corporate Bond funds with various maturity dates at which the fund would be terminated? This might protect, though not entirely, the adverse effect future of rate increases.

 

[samclem]

Many "experts" say that bond return will most likely be about 1-2% + current yield.

Has anyone looked into BulletShares® USD High Yield Corporate Bond funds with various maturity dates at which the fund would be terminated? This might protect, though not entirely, the adverse effect future of rate increases.

Yes, I'm considering the "regular" investment grade version of these. I just haven't expended the effort to figure out what I should be paying for them (I'd prefer to steer clear of a big premium). Buying these out 2-4 years makes sense for use in a ladder.

 

[Midpack]

The guy is basically an equity manager. He pumps equities. Is there any information there?

I've never heard Gus Sauter described that way. While he manages equity funds (including many index funds) he's also responsible for bond funds, and he clearly recommends above that folks maintain a bond position. Otherwise he's noting that bond yields are low and the eventual interest rate rise will hit bond fund NAVs. Is there any information there?

TITLE: Chief investment officer, The Vanguard Group Inc., with responsibility to oversee $1.5 trillion in stock and bond mutual fund assets and other investments.

 

[mathjak107]

While all bonds can be affected by rising rates, the same can be true for equities , many of which don't necessarily like a raising rate environment either. Also, when the term bond is used in many of these cautionary articles, the implication is usually with respect to longer term treasuries (implicitly understood, but not always stated), but those raising rates won't necessarily affect other types of bonds to the degree longer term treasuries will be affected by such raising rates. Again, bonds are for diversification and are not nearly as volatile as equities. While its wise to shorten duration and to diversify your mix of bonds, IMO abandoning bonds could prove to be a costly mistake.

i think there is a big difference between an interest rate cycle and a market cycle.

like day follows night the business cycle always follows over and over. generally it gives us higher highs and higher lows.

the interest rate cycles are alot less predictable and unless we get some new worse case scenerios these rates will never cycle around this low .
of course anyone who has their money in equities expects it to be a volatile ride. most who fled to bond funds did so with the idea they could avoid the wild ride as well as not lose money.

most don't understand how things work and the first glimpe of their income funds showing 5 to 8% losses will be a real shock and panic i think.

 

[rbmrtn]

Has anyone looked into BulletShares® USD High Yield Corporate Bond funds with various maturity dates at which the fund would be terminated? This might protect, though not entirely, the adverse effect future of rate increases.

Yes. I'm buying BSJF, BSJI

I'm selling some muni bonds funds purchased in late '08, mainly because the dividend payout has fallen 40% in 2012 and sitting on large CG.

 

[Midpack]

most don't understand how things work and the first glimpe of their income funds showing 5 to 8% losses will be a real shock and panic i think.

+1. When I see folks 'fleeing' bond funds for dividend/income equity funds as an alternative I wonder what they're thinking. Part of the logic seems to be that bond fund NAVs will fall when interest rates rise (true enough, though no evidence it will be anytime soon or sudden/abrupt), as though income fund NAVs are less susceptible to "cratering" - more than bond fund NAVs. Still trying to understand that.

Vanguard Total Bond Index and Short Term Investment grade are at almost 4% YTD.

Nothing against income/dividend equity funds, but less risky than (short-medium duration) bond funds? I still learn something new almost every day...

 

[mathjak107]

when rates rise it will more then likely be short term rates. that may or may not have an effect on longer term rates. believe it or not most short term rises have not been met with rises in longer term stuff.

time will tell what will happen. as of now im still 97% bond funds but i started moving more into international type bond funds.

 

[Lsbcal]

Suppose you invested in an intermediate bond fund that had a basic characteristic like the 5 year Treasury which has a current yield of 0.80%.

Now suppose the Treasury stayed flat for 1 year and then rose by 3.0% total up to a final yield of 3.8%. My simulations show that if that rate rise occurred over 5 years, your total return over the entire period of 7 years would be about 1.2%.

That is total return over the entire period, not total return per year. There would be years where this total return would be net negative. I think this is pretty scary. Retirees might learn their next investment lesson. It won't probably be a severe decline like equities but it could easily change investment habits over some years.

But note that if one's bond fund has a decent SEC yield now (maybe 2%) and has the same rate rise, the situation isn't so bad.

I might post a chart with some ramp rates and total returns.

 

[bondi688]

Do not see interest rate going up anytime soon though. Central Banks around the world are trying the darnest to hold down interest rates. With that much sovereign debts to service, they cannot afford to let interest rate go up. Imagine what kind of budgetary pressure the US will be facing on the 16 trillion dollars national debts if interest rates have gone back to the historical average !

 

[pb4uski]

My current bond portfolio is concentrated in investment grade and high yield intermediate term corporate bonds + a bit of GNMAs. Weighted avg yield is ~2.68% and weighted avg duration was about 4.8 which is over 100 bps better yield than Total Bond with a slightly lower duration. My plan is to hold with these for a couple years until interest rates begin creeping up. Not sure what i will do then, but I'll probably sell and go a lot shorter or into the Bulletshares.

 

[mathjak107]

we bailed out of the gnmas's yesterday. our newsletter made a switch and that fund was dropped from the line up going forward.

 

[Spanky]

we bailed out of the gnmas's yesterday. our newsletter made a switch and that fund was dropped from the line up going forward.

What was the rationale used to drop GNMA? Just curious - what's the batting average (or effectiveness) of the newsletter?

 

[audreyh1]

we bailed out of the gnmas's yesterday. our newsletter made a switch and that fund was dropped from the line up going forward.

That move seems rather odd to me as well. Although if it is to buy a different bond fund, it might make more sense.

 

[Dawg52]

What was the rationale used to drop GNMA? Just curious - what's the batting average (or effectiveness) of the newsletter?

I remember this from a previous thread. Doesn't answer your GNMA question.

http://www.early-retirement.org/for...n-history-past-9-years-63382.html#post1240581

 

[eytonxav]

we bailed out of the gnmas's yesterday. our newsletter made a switch and that fund was dropped from the line up going forward.

And what did they use to replace it?