Bear Bond Market Definition

[DEC-1982]

I keep hearing that we are in a bear bond market. What is a commonly accepted definition of a bear bond market? How do one KNOW that we are in one?

[audreyh1]

There is no accepted definition for such a thing. Talking heads like to use dramatic language. What Is a Bond Bear Market Anyways?

[LOL!]

Ha! It seems that we are ALWAYS in a bond bear market.

[HFWR]

Quote:

Originally Posted by DEC-1982 I keep hearing that we are in a bear bond market. What is a commonly accepted definition of a bear bond market? How do one KNOW that we are in one?

IMG_0467.JPG

Price being the inverse of interest rates, note the “bull market” in bonds, starting around 1982. Guesses are that rates are headed higher from here.

[Lsbcal]

Quote:

Originally Posted by DEC-1982 I keep hearing that we are in a bear bond market. What is a commonly accepted definition of a bear bond market? How do one KNOW that we are in one?

My personal definition: when you regret not having sold equities previously and we are 1 step up, 2 steps down.

Bull market: 2 steps up, 1 step down

[NW-Bound]

Quote:

Originally Posted by audreyh1 There is no accepted definition for such a thing. Talking heads like to use dramatic language. What Is a Bond Bear Market Anyways?

Stocks have higher volatility, and in exchange for large gains one faces the risk of losing 20% in a bear market.

Bonds do not offer a chance for outsize gains like stocks do, hence a smaller loss of 10% for long bonds would be commensurate to be called a bear market as the article describes. For shorter-term bonds, the article says 5% loss would be called bearish.

[COcheesehead]

If ones buys an individual bond, not a fund and holds it to maturity, there is no loss, unless by default. If one buys a diversified ladder of individual bonds and holds to maturity, you would see no downside in a rising rate environment, much different than a bear market in equities. So how can you have a bear market in bonds?

[Lsbcal]

Quote:

Originally Posted by COcheesehead If ones buys an individual bond, not a fund and holds it to maturity, there is no loss, unless by default. If one buys a diversified ladder of individual bonds and holds to maturity, you would see no downside in a rising rate environment, much different than a bear market in equities. So how can you have a bear market in bonds?

What about real returns? Suppose inflation goes up a lot. Your (nominal) bonds return their stated yield to maturity but you can loose a lot along the way.

[COcheesehead]

Quote:

Originally Posted by Lsbcal What about real returns? Suppose inflation goes up a lot. Your (nominal) bonds return their stated yield to maturity but you can loose a lot along the way.

I have about every 6 months maturing funds to reinvest. So I guess you could see a bit of lag, but compared to a fund with a sinking NAV I can't imagine it being of any great consequence.

[audreyh1]

Quote:

Originally Posted by COcheesehead If ones buys an individual bond, not a fund and holds it to maturity, there is no loss, unless by default. If one buys a diversified ladder of individual bonds and holds to maturity, you would see no downside in a rising rate environment, much different than a bear market in equities. So how can you have a bear market in bonds?

Quote:

Originally Posted by COcheesehead I have about every 6 months maturing funds to reinvest. So I guess you could see a bit of lag, but compared to a fund with a sinking NAV I can't imagine it being of any great consequence.

You don’t gain anything by buying individual bonds and holding to maturity unless you have a specific amount you need at some specific date in the future.

If you are laddering - constantly rebuying and maintaining some average maturity - then there is essentially no difference.

All bond prices react to changes in interest rate and inflation expectations. Just because you are holding to maturity doesn’t mean the value of your individual bonds hadn’t gone down in the interim. OK great - one of the laddered bonds reached par right at maturity - but all the other not matured bonds will still be below par in a rising rate environment.
http://awealthofcommonsense.com/2015...vs-bond-funds/

[NW-Bound]

People say you get back your principal for individual bonds when they mature, but look at what happens with a 3% inflation rate. After 5 years, your $1 is worth 85.9 cents. After 10 years, 73.7 cents. After 15 years, 63.3 cents.

And that's why the principal is discounted if you want to sell it. The money is locked up in an old and low interest rate, and is not worth as much as fresh money invested at a newer and higher rate.

[COcheesehead]

Quote:

Originally Posted by audreyh1 You don’t gain anything by buying individual bonds and holding to maturity unless you have a specific amount you need at some specific date in the future. If you are laddering - constantly rebuying and maintaining some average maturity - then there is essentially no difference. All bond prices react to changes in interest rate and inflation expectations. Just because you are holding to maturity doesn’t mean the value of your individual bonds hadn’t gone down in the interim. OK great - one of the laddered bonds reached par right at maturity - but all the other not matured bonds will still be below par in a rising rate environment. Misconceptions About Individual Bonds vs. Bond Funds

There's one important thing being left out: duration. I can pick an exact duration with a ladder. A fund while stating a duration is actually fluid and thus has no real end date. And there in lies the difference and the risk vs holding an individual issue. I've had both over the years and much prefer a ladder. Your preference may be different and I can respect that.

[COcheesehead]

Quote:

Originally Posted by NW-Bound People say you get back your principal for individual bonds when they mature, but look at what happens with a 3% inflation rate. After 5 years, your $1 is worth 85.9 cents. After 10 years, 73.7 cents. After 15 years, 63.3 cents. And that's why the principal is discounted if you want to sell it. The money is locked up in an old and low interest rate, and is not worth as much as fresh money invested at a newer and higher rate.

The equity part of my allocation is my inflation hedge. My bonds are for current income and to have something to rebalance from.

[Lsbcal]

Here is a chart I recently did to answer my own questions about bond funds. It shows a rolling 12 month real return for the Vanguard Total Bond Market fund. You can easily see periods of negative real returns. Not so great recently either.



The 3 year (red line) plot starts in 1990 so ignore the zero value before that.

[NW-Bound]

Nice chart!

Do you have your own financial blog site yet?

[audreyh1]

Quote:

Originally Posted by COcheesehead There's one important thing being left out: duration. I can pick an exact duration with a ladder. A fund while stating a duration is actually fluid and thus has no real end date. And there in lies the difference and the risk vs holding an individual issue. I've had both over the years and much prefer a ladder. Your preference may be different and I can respect that.

If you have a bond ladder, you are probably maintaining a certain average duration. That is no different from selecting a bond fund that maintains a certain constant maturity/duration. Say you have a bond ladder going from 1 year to 5 years, and every 5 years one bond matures and you buy a new 5 year bond. And the remaining bonds have 4, 3, 2, and 1 year left. So you are in fact maintaining a constant average maturity of 3 years. You can also buy a bond fund with a 3 year average duration/maturity.

The end date ONLY has meaning if you are going to then take the principal and do something else with it. If you keep reinvesting it in the bond ladder, then you have no “real end date” either, just like a bond fund.

[COcheesehead]

Quote:

Originally Posted by audreyh1 If you have a bond ladder, you are probably maintaining a certain average duration. That is no different from selecting a bond fund that maintains a certain constant maturity/duration. Say you have a bond ladder going from 1 year to 5 years, and every 5 years one bond matures and you buy a new 5 year bond. And the remaining bonds have 4, 3, 2, and 1 year left. So you are in fact maintaining a constant average maturity of 3 years. You can also buy a bond fund with a 3 year average duration/maturity. The end date ONLY has meaning if you are going to then take the principal and do something else with it. If you keep reinvesting it in the bond ladder, then you have no “real end date” either, just like a bond fund.

The bonds have an exact duration. When it matures, I get my par value. Bond funds never mature so...take your chances. As I said I can respect why people like bond funds. I used to have them as well. I like my ladder.

[audreyh1]

Quote:

Originally Posted by COcheesehead The bonds have an exact duration. When it matures, I get my par value. Bond funds never mature so...take your chances. As I said I can respect why people like bond funds. I used to have them as well. I like my ladder.

I’m just saying that if you are holding bonds and reinvesting indefinitely, the exact duration thing doesn’t matter.

I hold bond funds to diversify against my stock mutual funds, so I am rebalancing beteeen them. The average duration of the bond funds matter to me, as I hold mostly intermediate and some short-term bond funds. But any exact duration of a component doesn’t matter, as I am staying invested indefinitely.

[HFWR]

Quote:

Originally Posted by NW-Bound People say you get back your principal for individual bonds when they mature, but look at what happens with a 3% inflation rate. After 5 years, your $1 is worth 85.9 cents. After 10 years, 73.7 cents. After 15 years, 63.3 cents. And that's why the principal is discounted if you want to sell it. The money is locked up in an old and low interest rate, and is not worth as much as fresh money invested at a newer and higher rate.

Bingo

[haha]

This thread and all the other duplicates that show up from time to time always interest me. It shows how different perceived goals, or goal weightings, really affect behavior.

Ha