Bond funds: continuing to get hosed

[soupcxan]

If I wanted to watch an investment drop in value every month, I would've put my money into an equity fund...yet even my high quality, intermediate duration bond funds are taking it right up the cinnamon starfish. Stupid interest rates and inflation...I thought all that crap was supposed to be priced into the asset, efficient markets and all that jazz...

So when can I expect the monthly drops in NAV to cease?

[wabmester]

Bonds don't price in predicted future events like stocks do. They fluctuate in price until their yield matches the *current* market yield. When rates rise, bond prices fall. That's why you stay in short-duration bonds in times like these. The NAV fluctuates based on the bond/fund's duration.

If you're planning to hold long-term, don't worry about the NAV fluctuations. Once your bond hits maturity (or the fund hits around average maturity), your overall return will match whatever your yield was at the time of purchase.

[MRGALT2U]

Quote:

Originally Posted by soupcxan If I wanted to watch an investment drop in value every month, I would've put my money into an equity fund...yet even my high quality, intermediate duration bond funds are taking it right up the cinnamon starfish. Stupid interest rates and inflation...I thought all that crap was supposed to be priced into the asset, efficient markets and all that jazz... So when can I expect the monthly drops in NAV to cease?

Maybe never.

JG

[Gone4Good]

Quote:

Originally Posted by soupcxan Stupid interest rates and inflation...I thought all that crap was supposed to be priced into the asset, efficient markets and all that jazz...

Efficient markets are only supposed to price in all of the information known at that moment in time. Even with all the information in the world, the market can't predict future events with any degree of certainty. This means that marketable securities are going to be volatile.

As to your question "when can I expect the monthly drops in NAV to cease?" - that will happen as soon as interest rates peak.

Just be happy that all those dividends are getting reinvested at a higher rate of return (assuming you're reinvesting).

[soupcxan]

Yes, I am reinvesting dividends, and yes, I am planning to hold to maturity, but damn...I still hate seeing red every month.

[Gone4Good]

Quote:

Originally Posted by soupcxan Yes, I am reinvesting dividends, and yes, I am planning to hold to maturity, but damn...I still hate seeing red every month.

CDs aren't marked to market. Neither are I Bonds and EE Bonds. Not the worlds best way to get rich, but zero volatility.

The other answer to your problem might be to stop looking every month.

[education]

What in hell is a cinnamon starfish?* I thought I'd heard it all.

Professor

[REWahoo]

Quote:

Originally Posted by Professor What in hell is a cinnamon starfish?

Everybody's got one, Professor!

[soupcxan]

Quote:

Originally Posted by . . . Yrs to Go CDs aren't marked to market.* Neither are I Bonds and EE Bonds.* Not the worlds best way to get rich, but zero volatility. The other answer to your problem might be to stop looking every month.

True, I do have a fair amount of I-bonds as well. I'm just annoyed with the portion in regular bond funds. I don't have the right constitution for investing.

[REWahoo]

Quote:

Originally Posted by soupcxan I don't have the right constitution for investing.

It's Hell to be a sprinter when the race is a marathon...

[soupcxan]

Quote:

Originally Posted by REWahoo! It's Hell to be a sprinter when the race is a marathon...

Oh, don't get me wrong, I have no desire to be a sprinter...I want steady consistent growth for the long term...I just don't want to be running backwards!

Quote:

Originally Posted by soupcxan Oh, don't get me wrong, I have no desire to be a sprinter...I want steady consistent growth for the long term...I just don't want to be running backwards!

If you want to be a successful long term Investor, you have to get used to years going backwards once in awhile. Think in terms of 25 years not 5 year periods.

[wabmester]

I am not a fan of mid- or long-term nominal bonds. In theory, these bonds are supposed to have inflation predictions built into them. Given that long-term treasury bonds have historically returned about 2.5% real, that means the current long-term market prediction for inflation is 2%. That seems like a very bad bet to me, especially given that we're already above 5% inflation this year, and even short-term bonds don't reflect that.

The yield spread between TIPS and nominal bonds just doesn't make sense to me. In theory, TIPS should have a slightly lower yield than nominal treasuries because TIPS remove part of the interest rate risk, but TIPS have a much higher yield right now.

Another thing to consider is that investors are no longer the ones who determine bond rates. In recent years, foreign central banks have become the biggest buyers, and they have different reasons for buying than "smart" investors.

Bottom line: if you buy or hold nominal bonds today, you are making a bet that long-term inflation will be 2% or less. You need to decide for yourself if that is a smart bet.

[MRGALT2U]

Quote:

Originally Posted by Professor What in hell is a cinnamon starfish?* I thought I'd heard it all. Professor

They are actually quite common. I have even found a few while
paddling around on this board

JG

[HFWR]

Few...

[Dawg52]

Here is an interesting article from Bill Gross. If one has some cd's maturing, do you think now is a good time to start locking in long term?

http://money.cnn.com/2005/10/27/mark...imco/index.htm

[brewer12345]

Quote:

Originally Posted by DOG51 Here is an interesting article from Bill Gross. If one has some cd's maturing, do you think now is a good time to start locking in long term? http://money.cnn.com/2005/10/27/mark...imco/index.htm

Actually, I think for mid term (5 year and less) CDs and bonds, this probably isn't a terrible time to buy. You might see some modest losses in the next 6 months or so, but I suspect that the Fed will at least pauuse after another 2 or 3 interest rate increases. The economy has taken enough body blows that at some point things may start slowing down. The drop off in gasoline consumption certainly makes me think that demand has been impacted to a certain degree.

[cute fuzzy bunny]

Quote:

Originally Posted by MRGALT2U They are actually quite common. I have even found a few while paddling around on this board

Some of them are KING sized...

This is probably the worst time to own intermediate or long bonds in a very long time unless you're holding to maturity and need the income...I dumped all of mine months ago in favor of high dividend stocks. I think it gets worse from here, not better. Possibly a lot worse.

[brewer12345]

Quote:

Originally Posted by () Some of them are KING sized... This is probably the worst time to own intermediate or long bonds in a very long time unless you're holding to maturity and need the income...I dumped all of mine months ago in favor of high dividend stocks.* I think it gets worse from here, not better.* Possibly a lot worse.

Hmm, a 5 year CD probably has a duration a tad under 4 and if you choose wisely has a surrender penalty of 3 months' interest. Hard to get too wacked out there. A beaten down bond, preferred, or trust preferred in an out-of favor sector may have yield over 9% without all that much risk of default. How much do you think that sort of thing will snap beck once people calm down and/or the Fed pauses?

[cute fuzzy bunny]

CD's, sure...but <>bonds. Probably a good snap once bernanke raises rates a few times to prove he isnt an inflation dove, then has to cut a little later to fix what he broke.