Bond Funds when Interest Rates Rise

[pb4uski]

Would something like Vanguard Short-Term Treasury Index work? This is a 1-3 year Treasury fund with an average duration of 1.9 years.



A fund makes it easier to rebalance and I feel we are going to be rebalancing soon enough.

Yeah, then you would only lose 3.8% rather than 13.8%.

I would just buy a 3 year ladder of USTs and hold to maturity instead of the short term Treasury fund. Actually, I think I would go shorter and then go longer later in the year.

 

[pb4uski]

Not to derail but kind of answering differently, seems Brokered CD's are making a compelling argument right now to address a lot of the concerns in this thread. 18-24 months can be found for around 2.5-2.7%. I can see some around 2% for 12 months.

Last time that I looked on the short end USTs were slightly better yielding than brokered CDs but it was the inverse after about 4-5 years.

 

[Montecfo]

Yeah, then you would only lose 3.8% rather than 13.8%.

I would just buy a 3 year ladder of USTs and hold to maturity instead of the short term Treasury fund. Actually, I think I would go shorter and then go longer later in the year.

Yes! Or a 2 year but individual Treasuries.

 

[Closet_Gamer]

Bond math is bond math. 20% loss by end of year is not off the table.

If we see at 15-20% drop in bonds the impact on equities should be quite large.

Yields going that high (or higher?) on debt will inevitably create equity selling pressure as people rebalance/demand more yield on equities for the incremental risk.

High debt costs will also drain leverage and earnings power out of companies.

It should tip a number of businesses into banktruptcy as well.

But if the far side of the pain is that we end the war on savers and retirements can again be built on more stable yields from CDs, bonds, etc., that is not necessarily a bad thing.

 

[foxfirev5]

Since I'm convinced that I can not predict anything I will continue to go longer term as my CD ladder matures. Gradually until rates get stupid low again. As far as holding the TBM fund, hopefully you don't have a 5 year horizon. Match your holdings to your needs. Only you can make that determination.

 

[Dtail]

If we see at 15-20% drop in bonds the impact on equities should be quite large.

Yields going that high (or higher?) on debt will inevitably create equity selling pressure as people rebalance/demand more yield on equities for the incremental risk.

High debt costs will also drain leverage and earnings power out of companies.

It should tip a number of businesses into banktruptcy as well.

But if the far side of the pain is that we end the war on savers and retirements can again be built on more stable yields from CDs, bonds, etc., that is not necessarily a bad thing.

True, but not sure how long these increasing yields will play out. Can one build a 30 year plan on these CD/MYGA type products? (From the fixed income side portion)
Then again, possibly one might have to lock in longer dated yields and be happy with that situation, however the future yields.

 

[Still Learning]

We are 60/40 at Vanguard Funds. We have a small VASIX bond fund, several Target Retirement Funds from 50/50 to 90/10 and Stock Market Index Admiral Fund at 100% stock. Ideal or not a survey of available Vanguard funds just does not find anything substantially better at the moment.


Everyone says convert bond funds to stock but most days stocks are bleeding cash at a much higher rate than bonds. Not making any moves yet mostly to preserve principal best as possible in these times, yet the Fed will be raising interest rates at expected loss to bond funds. Also have a sizable cash fund that will not keep pace with inflation but is doing much, much better recently than stocks/bonds even at .01.


We have not reduced our spending but did cut back our withdrawal rate to 1.8% to reduce the surplus withdrawal that was simply going into savings each month.


May try a modest short term CD ladder but really just awaiting better market news which may be at least a couple years away.

 

[Lsbcal]

...


Everyone says convert bond funds to stock but most days stocks are bleeding cash at a much higher rate than bonds. Not making any moves yet mostly to preserve principal best as possible in these times, yet the Fed will be raising interest rates at expected loss to bond funds. Also have a sizable cash fund that will not keep pace with inflation but is doing much, much better recently than stocks/bonds even at .01.
...

For the cash there is VUSXX Treasury Money Market at 0.37% which seems to be about what a 1 month Treasury pays at 0.47% less the expense ratio. I just bought 3 month Treasuries at 0.82%.

 

[jazz4cash]

True, but not sure how long these increasing yields will play out. Can one build a 30 year plan on these CD/MYGA type products? (From the fixed income side portion).

I can’t see going out 30 yrs in this environment. I have only seen MYGA and CD products going to 10 yrs anyway. I am pretty optimistic about higher rates later this year.

 

[Graybeard]

For the cash there is VUSXX Treasury Money Market at 0.37% which seems to be about what a 1 month Treasury pays at 0.47% less the expense ratio. I just bought 3 month Treasuries at 0.82%.

Is the 3 month Treasury 0.82% what you earn for the 3 months or is that an annualized yield?

I need to start understanding this stuff, I never bought Treasuries but my ultra short term and short term investment grade bond funds are losing nav like water through a sieve.

 

[Graybeard]

I have 2 questions about my rollover IRA at Vanguard.

Can you buy treasuries bills at auction from this account from the settlement fund? I would think so but maybe there is a reason why it isn't allowed.

If the answer is yes, is this the right account to use vs a taxable account? I know the interest from them is tax free at the state and local level (taxable at the Federal level) that is why I ask. I'm wondering if this is like buying a tax free or a tax exempt fund in a rollover IRA cuz that doesn't make sense as any distribution would be taxable.

Thanks!

 

[pb4uski]

Is the 3 month Treasury 0.82% what you earn for the 3 months or is that an annualized yield?



I need to start understanding this stuff, I never bought Treasuries but my ultra short term and short term investment grade bond funds are losing nav like water through a sieve.

0.82% is the annualized yield. So if you invest $100, three months later you receive $100.20. Exciting, eh?

 

[Lsbcal]

Is the 3 month Treasury 0.82% what you earn for the 3 months or is that an annualized yield?

I need to start understanding this stuff, I never bought Treasuries but my ultra short term and short term investment grade bond funds are losing nav like water through a sieve.

This is the annual rate. After 3 months, if I don't have a better strategy I'll repurchase. The rate in 3 months should be maybe 1.5% assuming the Fed is raising the Fed Funds rate at 25 basis points per month or so. Of course, not going to make one rich.

 

[Lsbcal]

0.82% is the annualized yield. So if you invest $100, three months later you receive $100.20. Exciting, eh?

Well the real point is to have no interest rate risk, not to reach for nominal yields.

Dry powder until we get to some stable state with inflation and rate rises. I don’t know when that might happen.

 

[Closet_Gamer]

True, but not sure how long these increasing yields will play out. Can one build a 30 year plan on these CD/MYGA type products? (From the fixed income side portion)
Then again, possibly one might have to lock in longer dated yields and be happy with that situation, however the future yields.

I don't think you can go real long right now ... to the contrary I've tightened my duration ... but if we get a big reset in rates the world changes.

People who bought 30 year treasuries in 1980s made out like bandits. Huge coupon rates and appreciation. It was scary because inflation was roaring, but if you could grit your teeth at the time you did great.

If we start to see 30 rates rise to the 7-8%+ range, the short term carnage will be epic, but locking those yields for the long haul could be the foundation of a much lower risk retirement.

But you need to survive the transition with money left to put into those high yield bonds (should they come to pass).

 

[Fermion]

If interest rates rise to 7% to 8% for a 30 year, then mortgage rates are going to be even higher than that. How does this not cause an epic crash in housing prices when your average home buyer cannot afford $63,000 a year interest on a $700,000 starter home?

 

[Murf2]

I have what I’m sure is a dumb question. I already own Total Bond and have enough of a loss that I don’t like the idea of selling now.

I have been having dividends going to cash. Now, with the price lower & dividends higher would it make sense to have the reinvested?

Thanks
Murf

 

[Closet_Gamer]

If interest rates rise to 7% to 8% for a 30 year, then mortgage rates are going to be even higher than that. How does this not cause an epic crash in housing prices when your average home buyer cannot afford $63,000 a year interest on a $700,000 starter home?

Quite likely it might. Or at least a brutal housing pullback. Lots of buyers will get sucked out of the market for sure.

Though anyone holding long, low interest rate debt will be smiling on the rate arbitrage.

Variable credit card debt will be brutal as well.

 

[Closet_Gamer]

I have what I’m sure is a dumb question. I already own Total Bond and have enough of a loss that I don’t like the idea of selling now.

I have been having dividends going to cash. Now, with the price lower & dividends higher would it make sense to have the reinvested?

Thanks
Murf

I think that is basically a market timing question...so no clue.

Personally, I think rates are still going higher from here.

But that is about as valuable as any other opinion you find on the Internet...

 

[daylatedollarshort]

If interest rates rise to 7% to 8% for a 30 year, then mortgage rates are going to be even higher than that. How does this not cause an epic crash in housing prices when your average home buyer cannot afford $63,000 a year interest on a $700,000 starter home?

Home prices still seem to be going up in our suburb (Bay Area). We've had many big housing busts over the years in the past. It is hard to fathom how mortgage rates doubling can push prices higher. It seems like we are way overdue for a bust.

 

[aja8888]

Home prices still seem to be going up in our suburb (Bay Area). We've had many big housing busts over the years in the past. It is hard to fathom how mortgage rates doubling can push prices higher. It seems like we are way overdue for a bust.

Since I have been buying houses, we have had a bust several times. The last bust in 2010 -2011 I bought a 2,000 square foot 3 year old brick ranch house in a great neighborhood for $64/square foot. I had a choice of 100's of them!

If rates go "high" again, get ready for more housing deals.

Oh, I did the same type deal Thousand Oaks, Ca in 1981.

 

[Bergamo]

Yeah, then you would only lose 3.8% rather than 13.8%.

I would just buy a 3 year ladder of USTs and hold to maturity instead of the short term Treasury fund. Actually, I think I would go shorter and then go longer later in the year.

You are right about losing 3.8% in the ST Treasury fund.

How short would you go at present? I have not purchased Treasuries at Vanguard before and I am going to do a trial run next week. This thread has been an eye opener and very helpful.

 

[Bergamo]

Yes! Or a 2 year but individual Treasuries.

Do you mean purchasing a 1 year and a 2 year individual Treasury now, and then in a year buying a 2 year individual Treasury, and keep rolling?

 

[Sunset]

I have what I’m sure is a dumb question. I already own Total Bond and have enough of a loss that I don’t like the idea of selling now.

I have been having dividends going to cash. Now, with the price lower & dividends higher would it make sense to have the reinvested?

Thanks
Murf

Same here, and I fell for the story of how holding it is fine. Finally decided it hurts enough and sold some ~450 shares. It's a non-deductible loss for me.
That made it even harder to sell.

Just avoiding more loss (IMHO) and will have cash to buy whatever gets cheap in next few months to a year.

 

[Bergamo]

Since I'm convinced that I can not predict anything I will continue to go longer term as my CD ladder matures. Gradually until rates get stupid low again. As far as holding the TBM fund, hopefully you don't have a 5 year horizon. Match your holdings to your needs. Only you can make that determination.

I don't understand your point about "Gradually until rates get stupid low again."? What will you do when rates are low again?