Bond Funds when Interest Rates Rise

[Bergamo]

Yes, -20% for 2022 seems plausable.

7yr Treasury was 1.55% at beginning of 2022 vs 2.96% today... a decline of 1.41% times 6.9 duration is -9.729%... close to the -9.3% YTD that you noted.

If rates rise another 2%, then * 6.9 duration is a price decline of another 13.8%.

So total price decline of 23.1% for the year, partially offset by say 2.3% of interest earnings would be a 20.8% decline for 2022.

Your numbers are right. It's not a pretty picture is it? And if rates continues to rise in 2023 then we may have to wait (2 x maturity) - 1 to recover. Maturity of TBM is 9 years, so potentially up to 17 years.

In this situation TBM might be a good choice for someone 20 years or more from retirement but not in retirement.

Another 11.5% decline in TBM in 2022 is not something I would want to contemplate.

Any suggestions from the forum on better approaches for a retired person?

 

[daylatedollarshort]

Can you explain how you built the rolling ladder up to a year? And how will you manage it between now and the end of the year and beyond?

I divided up the cash I had on hand between 3, 6, 9, 12 month Treasuries, more or less. Each month is a rung and when that matures, I'll replace it with something else short term at a higher rate, at least until there are no more planned rate increases. When rates level off, I'll probably switch to TIPS at auction.

 

[daylatedollarshort]

Any suggestions from the forum on better approaches for a retired person?

With TIPS, even at a 0% real return, the safe withdrawal rate over 30 years is 3.33%. And they will likely get to 1 -2% real return again before too long with the planned rate increases.

 

[pb4uski]

....
Any suggestions from the forum on better approaches for a retired person?

Individual bonds held to maturity, perhaps in a bond ladder. Or CDs or MYGAs. Or stable value if your 402k has it.

I'd stay short for now and wait and see.

 

[Montecfo]

The folks suggesting rate increases may already be reflected in pricing are getting their heads handed to them last couple of days.

 

[VanWinkle]

The folks suggesting rate increases may already be reflected in pricing are getting their heads handed to them last couple of days.

That may be a bit of an exaggeration, but sounds good if you want to express your dislike for bonds at the moment. 1 or 2 additional percent is hardly a head losing proposition.

VW

 

[Lsbcal]

I showed this chart in another thread. 1994 was a very bad bond market year.

It shows that Tbills went up about at a rate of about 25 basis points per month. That seems to be about what is contemplated by the Fed now. As you see, in 1994 total bond market (VMBFX) and short term investment grade (VFSTX) both reacted very negatively at in the first half of the year (VMBFX down about -5%) but then stabilized while Tbills rates continued up. 1995 was a happy ending for these 2 years.

Not saying it will happen like this now but it is something to contemplate.

 

[Montecfo]

That may be a bit of an exaggeration, but sounds good if you want to express your dislike for bonds at the moment. 1 or 2 additional percent is hardly a head losing proposition.

VW

Not at all. I have been clear for a very long time. I like bonds, but not duration.

And there have been some pundits saying the rate increases are maybe already reflected in bond pricing.

Now look at market reaction when Fed reiterates what futures already were predicting: a half point hike.

Just some really bad punditry in my opinion.

 

[Bergamo]

Individual bonds held to maturity, perhaps in a bond ladder. Or CDs or MYGAs. Or stable value if your 402k has it.

I'd stay short for now and wait and see.

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.

 

[Bergamo]

That may be a bit of an exaggeration, but sounds good if you want to express your dislike for bonds at the moment. 1 or 2 additional percent is hardly a head losing proposition.

VW

I don't disagree but look at the calculation above. TBM may be down 20% by the end of the year.

 

[npage]

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.

 

[Bergamo]

Not at all. I have been clear for a very long time. I like bonds, but not duration.

And there have been some pundits saying the rate increases are maybe already reflected in bond pricing.

Now look at market reaction when Fed reiterates what futures already were predicting: a half point hike.

Just some really bad punditry in my opinion.

I agree. Powell referenced Volcker and said half a point is on the table and look at the reaction. It's as if the bond traders did not believe that Powell was serious last year.

What approach do you take in your portfolio? Which funds do you use?

 

[Bergamo]

I showed this chart in another thread. 1994 was a very bad bond market year.

It shows that Tbills went up about at a rate of about 25 basis points per month. That seems to be about what is contemplated by the Fed now. As you see, in 1994 total bond market (VMBFX) and short term investment grade (VFSTX) both reacted very negatively at in the first half of the year (VMBFX down about -5%) but then stabilized while Tbills rates continued up. 1995 was a happy ending for these 2 years.

Not saying it will happen like this now but it is something to contemplate.

What I don't understand is why TBM is down 9.3% YTD with a smaller increase in rates than in the graph.

It does make me consider whether the duration of TBM is appropriate during retirement and whether short term investment grade (VFSTX) or short term bond index or short term treasury index are not more appropriate. Or a mix of 50% short term and 50% TBM.

I hope that something similar to 1994 happens again this year. Bond mathematics has not changed since then after all.

 

[Lsbcal]

What I don't understand is why TBM is down 9.3% YTD with a smaller increase in rates than in the graph.

It does make me consider whether the duration of TBM is appropriate during retirement and whether short term investment grade (VFSTX) or short term bond index or short term treasury index are not more appropriate. Or a mix of 50% short term and 50% TBM.

I hope that something similar to 1994 happens again this year. Bond mathematics has not changed since then after all.

I guess there are many factors affecting bond prices. You can look up the 1994 bond decline to see what people say about that.

One factor, inflation was going down in 1994 and today we have a huge surge.

Short answer is this stuff is complicated.

 

[Bergamo]

I guess there are many factors affecting bond prices. You can look up the 1994 bond decline to see what people say about that.

One factor, inflation was going down in 1994 and today we have a huge surge.

Short answer is this stuff is complicated.

I did think about the different inflation situation in 1994 but bond maths is bond maths.

I agree stuff is complicated.

And my poor brain hurts.

 

[Dtail]

I did think about the different inflation situation in 1994 but bond maths is bond maths.

I agree stuff is complicated.

And my poor brain hurts.

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

 

[Bergamo]

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

Agreed. What would be your advice to those in TBM?

 

[Lsbcal]

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

I don't quite get your thought. Suppose inflation accelerates and and compare to scenario where inflation suddenly goes down. Should be quite different outcomes, no?

 

[aja8888]

Agreed. What would be your advice to those in TBM?

As an example, I sold VWITX (Muni bond fund) about the start of the year. It's down 9% as of today from when I sold it. And that's with the FED only doing a 0.25% FFR increase and jawboning about a 0.50% on the first week in May.

They have been telegraphing 3% FFR by year end. If that happens, bond fund NAV's could be down 20 - 25%.

Even at 3% FFR the inflation war is not over and probably won't be for a couple of years.

The defining moment (my guess) on the stock market losses (so far) is when Microsoft's CEO (Satya Nadella) dumped a huge portion (maybe all?) of his stock in late Nov 2021. Seems like right after that incident the tech stocks and meme stocks all started their decent out of the stratosphere.

 

[Bergamo]

As an example, I sold VWITX (Muni bond fund) about the start of the year. It's down 9% as of today from when I sold it. And that's with the FED only doing a 0.25% FFR increase and jawboning about a 0.50% on the first week in May.

They have been telegraphing 3% FFR by year end. If that happens, bond fund NAV's could be down 20 - 25%.

Even at 3% FFR the inflation war is not over and probably won't be for a couple of years.

The defining moment (my guess) on the stock market losses (so far) is when Microsoft's CEO (Satya Nadella) dumped a huge portion (maybe all?) of his stock in late Nov 2021. Seems like right after that incident the tech stocks and meme stocks all started their decent out of the stratosphere.

What did you exchange VWITX to?

 

[aja8888]

What did you exchange VWITX to?

One year and three month (15 month maturity) treasury bill with a yield to maturity of 2.063%. The rest of the bond fund sale is still in cash and I plan to buy more treasuries in May after the FED announces the FFR rate increase.

I have a load of cash and will be making a ladder of T bills/bonds to capitalize on the situation. I may even buy some corporate bonds when their YTM gets over 5% if they are investment grade only. Maturities will be short, of course.

My equity portion of my portfolio is about 20% right now and mostly in FENY, EPD, XOM, and a few other energy positions. I feel the equity market is going to blow up later this year.

 

[24601NoMore]

I feel the equity market is going to blow up later this year.

Agree wholheartedly, except for the timing.

I suspect the next mega-Bear is just getting started, and we're already in the early days of it.

SPX 3,600 or lower is IMHO likely near-term based on pretty convincing TA by a whole lot of people, all who seem to come up with the same rough number. Will it fall below that? Possibly.

My gut tells me we're looking at 3-5 years underwater until we get back to SPX 4,800+, minimum.

And bond funds? Whoo boy..yeah, those are not fun at all to hold at the moment. I foolishly didn't sell those, either, even though I saw the freight train headed down the tracks at a high rate of speed. Stupid on my part.

Time will tell where all this ends up, but 2022 is all but certain to end (maybe hugely) red.

In the meantime, I'm loading up on guaranteed fixed income (MYGAs) to generate enough cash flow to pay the bills, and trying to not touch the equity and bond portfolio. I actually sold a small amount (1% or so) on the last bounce to 4,600 and had a strong suspicion it wasn't going to hold and that we'd be headed a lot lower. Unfortunately, looks like that hunch was right..

 

[aja8888]

Agree wholheartedly, except for the timing.

I suspect the next mega-Bear is just getting started, and we're already in the early days of it.

SPX 3,600 or lower is IMHO likely near-term based on pretty convincing TA by a whole lot of people, all who seem to come up with the same rough number. Will it fall below that? Possibly.

My gut tells me we're looking at 3-5 years underwater until we get back to SPX 4,800+, minimum.

And bond funds? Whoo boy..yeah, those are not fun at all to hold at the moment. I foolishly didn't sell those, either, even though I saw the freight train headed down the tracks at a high rate of speed. Stupid on my part.

Time will tell where all this ends up, but 2022 is all but certain to end (maybe hugely) red.

In the meantime, I'm loading up on guaranteed fixed income (MYGAs) to generate enough cash flow to pay the bills, and trying to not touch the equity and bond portfolio. I actually sold a small amount (1% or so) on the last bounce to 4,600 and had a strong suspicion it wasn't going to hold and that we'd be headed a lot lower. Unfortunately, looks like that hunch was right..

Yeah, the timing on the stock market meltdown is up for grabs. But we may be in for a "Japan like" market period if rates don't get high enough to quell inflation. Having a 3% FFR and 6% inflation, as an example, means we are still losing purchasing power of 3%. Remember the good old days when inflation was less than the FFR and you could actually grow your savings buy buying CD's?

What people are not focusing on is the FED balance sheet needs to be reduced to get the huge amount of liquidity out of the banks and the system. The FED and the banks and "approved institutions" are playing "daily and extended Repo's" (and Reverse Repo's) on this liquidity and it's gong nowhere. The balance sheet has near $6 trillion on it that needs to go away.

This liquidity was the result of years of QE whch was done to prop up banks and keep markets liquid. The FED has committed to unloading the balance sheet starting sometime in or after May and that will be a huge series of events as Treasuries will be flooding the markets to be sold and/or rolled over. The $6 T is made up of treasury instruments and mortgage backed securities that the FED has been buying to keep the economy propped up.

 

[Montecfo]

I agree. Powell referenced Volcker and said half a point is on the table and look at the reaction. It's as if the bond traders did not believe that Powell was serious last year.

What approach do you take in your portfolio? Which funds do you use?

Treasuries and PRFRX.

 

[Dtail]

Agreed. What would be your advice to those in TBM?

Possibly into treasuries.
Being that I am not a fan of bond funds, I have all my fixed income allocation in a Stable Value 401k fund and the other piece in 2019 5 yr issued CD's at 3.05/3.30%.