Bonds - Short Term or Longer

[mrfeh]

Quote:

Originally Posted by mathjak107 do not look at a 35 year old bull market where you could sit static in bonds during our lifetime with what will happen when the cycle reverses and goes up .

Look at the graphs in this thread; what bond fund investors care about is total return, not NAV:

Bogleheads • View topic - Bond Funds - Lower Rates - Impact on Total Return

Here's another explanation:

What Happens to Bond Funds When Rates Go Up?

[karluk]

Quote:

Originally Posted by mathjak107 the c9ncern now is just for the reasons i mention above. a reversing interest rate cycle is something we have not seen in our lifetime yet but we are darn close now.

Again, what's the reason for your concern? If the multi decade decline in interest rates really is at the cusp of a reversal, any long term bond investor should be absolutely ecstatic. Instead of looking at 2%-3% average returns in bond funds going forward, we can now look forward to the higher interest rates translating into better bond returns long before we will need the money.

[mrfeh]

Here's another example of what happened to total bond over a 4 year period where rates increased:

https://www.bogleheads.org/forum/vie...51665#p2273379

[mathjak107]

Quote:

Originally Posted by mrfeh Look at the graphs in this thread; what bond fund investors care about is total return, not NAV: Bogleheads • View topic - Bond Funds - Lower Rates - Impact on Total Return Here's another explanation: What Happens to Bond Funds When Rates Go Up?

duh!!!!!!!!!! that is my point . do you know what total return is ? . it is your nav and dividends and interest all looked at together . yes it includes the nav .

[mathjak107]

Quote:

Originally Posted by karluk Again, what's the reason for your concern? If the multi decade decline in interest rates really is at the cusp of a reversal, any long term bond investor should be absolutely ecstatic. Instead of looking at 2%-3% average returns in bond funds going forward, we can now look forward to the higher interest rates translating into better bond returns long before we will need the money.

you need to see what happens to your funds price at it falls with each uptick in rates.

a funds duratuion number will tell you what happens . an intermediate term bond fund with a duration of 7 will fall in value by 7% for existing shareholders for every one point increase in rates.

since a fund always has older bonds at lower rates as they replace them you are always behind the curve and down even if you stay for at least 7 years in this case.

[mrfeh]

Quote:

Originally Posted by mathjak107 duh!!!!!!!!!! that is my point . do you know what total return is ? . it is your nav and dividends and interest all looked at together . yes it includes the nav .

Look closely at the graph where interest rates are rising. You will see that is a good thing, if the funds are not sold soon after the rise in rates.

I'm no longer going to argue with you; you seem to be stuck on a conclusion despite evidence to the contrary.

[mathjak107]

you need a lesson in how bonds work,. you are looking at graph where rates went up and then fell back into a downward trend. you have no graph yet that shows a long bear market in bonds.

that graph is showing a drop in bond rates not an increase.

as rates go higher bond values fall for existing holders. that graph is the reverse.

the one shown from 2003 to 2007 was a burp in the long term trend which was down. had rates continued upward it could have been carnage.

in this case in 2003-2007 you had 10k grow to 11k in 4 years . that is only 2.50% average return when bonds were paying over 5%.

that difference in 2007 of you averaging only 2.50% while new bond fund buyers are getting over 5% reflects the damage done in share price by rising rates.

[karluk]

Quote:

Originally Posted by mathjak107 duh!!!!!!!!!! that is my point . do you know what total return is ? . it is your nav and dividends and interest all looked at together . yes it includes the nav .

I'm not sure what point you are trying to make. The graph in the link clearly shows that bonds were a good investment in a four year period of rapidly rising interest rates. As I've said already, you are concerned, but I am happy. We'll have to wait to see which emotion is better suited to bond investors in the next four or five years.

[mathjak107]

Quote:

Originally Posted by karluk I'm not sure what point you are trying to make. The graph in the link clearly shows that bonds were a good investment in a four year period of rapidly rising interest rates. As I've said already, you are concerned, but I am happy. We'll have to wait to see which emotion is better suited to bond investors in the next four or five years.

this is the point

in this case in 2003-2007 you had 10k grow to 11k in 4 years . that is only 2.50% average return when bonds were paying over 5% and if rates are at 5% you can bet inflation is close to 4% . you have negative real returns which are a loss. ..

that difference in 2007 of you averaging only 2.50% while new bond fund buyers are getting over 5% reflects the damage done in share price by rising rates.

if rates continued rising beyond 2007 and went to 7 or 8% you may be getting 3% or 4% total return on your invertment . 3% in 5 or 6% inflation is a loss no matter how you look at it. higher rates and higher inflation usually coincide.

you can do the math if you want but you will see your total return will likely be negative after inflation if you get caught in the bond fund as rates cycle up and stay higher.

rates and inflation generally move together as investors wan't more compensation for future inflation risk.

falling rates benefit existing bond holders , rising rates never do . you still may have a positive return but you can almost bet dollars to donuts that higher inflation went

with those higher rates so actual real returns turn negative.

it is like holding a bond until maturity. you will never lose money but getting back your 1000 bucks 30 years from now in todays dollars will have a purchaing power loss which is a loss no matter how you sugar coat it.

[karluk]

Quote:

Originally Posted by mathjak107 if rates continued rising beyond 2007 and went to 7 or 8% you may be getting 3% or 4% total return on your invertment . 3% in 5 or 6% inflation is a loss no matter how you look at it. higher rates and higher inflation usually coincide.

You seem to like slinging numbers around without providing any justification whatsoever. Inflation was never anywhere close to 5%-6% from 2003-2007. Intermediate term bonds provided positive inflation adjusted returns during this period, so they turned out to be a good investment in 2003. If rates had continued to rise after 2007 because of the huge spike in inflation you are envisioning, intermediate term bonds would have been an even better investment in 2007 than in 2003, because they were purchased during a period of high interest rates and the relatively high dividends would have been reinvested at even higher interest rates.

As I've said multiple times, you are concerned, I am happy. Assuming we both continue to contribute to ER.org, let's revisit this issue in future years and see how bond returns reflect our respective opinions. The key is to have a time frame that is at least as long as the average duration of the bond fund you're investing in.

[mathjak107]

2.50% average return from an investment paying 5.58% is not a good return , maybe to you , not to most . your rate of return as of 2007 is 1/2 of what a new bond buyer is getting. that is the price you paid for hanging in there.


i own 60% bond funds at this point , but i am watching them carefully and slowly starting to shift some out as investors bid rates higher which they did the last month.

is it a bump in the road? don'tt know but it certainly bears watching .

[mathjak107]

Quote:

Originally Posted by mrfeh Here's another example of what happened to total bond over a 4 year period where rates increased: https://www.bogleheads.org/forum/vie...51665#p2273379

the other issue with this chart is it is not accurate . we had an inverted yield curve in 2007 where shorter term rates were higher than long term rates . it was a rare fluke when bond investors disagree with poppa fed and bid interest rates the opposite the fed wants them to go .

the 5 year bond illustrated is part of the short term rate curve and not illustrative at all at what longer term bonds did .

they show rates going from 2.08 to 5,16% . that is a huge jump right?

but it is not reflecting the correct thing.

the 10 year treasury bond actually went from 4.03% in 2003 to 4.76% in 2007 ,hardly an increase at all. someone should notify who ever put that example up that they are illustrating what happend to short term rates which run out to 5 years as well as 5 year cd rates. these do not reflect actual longer term rates that are controlled by investors loike the the 10 year bond or longer.


that is why the 5 year bond shows a jump from 2.08 to 5.16 while an actual 10 year bond merely went from 4.03 in 2003 to 4.76% in 2007 . hardley a 3/4 point move .

[karluk]

Quote:

Originally Posted by mathjak107 2.50% average eturn from an investment paying 5.58% is not a good return , maybe to you , not to most . your rate of return as of 2007 is 1/2 of what a new bond buyer is getting. that is the price you paid for hanging in there.

This is sheer nonsense. A bond purchased in 2007 doesn't retroactively generate 5.58% interest going back to 2003. Your choices for fixed income investments from 2003-2007 were the choices available in 2003, 2004, 2005, and 2006 Among those choices were money market funds and a total bond market fund. The graph in the Bogleheads forum clearly shows that the total bond market fund beats the money market fund, unless you're clairvoyant enought to exercise perfect market timing in exactly the right time frame. Even then you're worse off over longer time frames.

So your concern over rising interest rates would most likely have caused you to make a poor investment choice in 2003. How about 2015? We'll see how holding short term cash compares with sticking with a total bond fund in the future. The bonds may not win every year, but if you compare over a period equalling the bond fund's average duration, it should easily be the winner.

[Mulligan]

Interesting debate and good viewpoints. I remember reading a similar debate in Bogleheads and the conclusion of graphs indicted over the long term, rising rates ultimately did improve total performance over lower current rates. Of course the amount, sequence, and some assumptions did factor in to these results which could make the conclusions disagreeable. Plus, remember these people were never selling or changing their allocation amounts. Mathjak appears to be considering looking to move money around for optimal capital performance which is a bit different than setting the allocation and riding it out.


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[mathjak107]

look at that chart posted , it does not reflect what happened to intermediate term bonds at all.

they picked a five year bond which is like a 5 year cd . it moved very different from the longer term intermediate term bonds we are discussing.

the 10 year moved less than .75% over the 4 years.

[mathjak107]

Quote:

Originally Posted by karluk This is sheer nonsense. A bond purchased in 2007 doesn't retroactively generate 5.58% interest going back to 2003. Your choices for fixed income investments from 2003-2007 were the choices available in 2003, 2004, 2005, and 2006 Among those choices were money market funds and a total bond market fund. The graph in the Bogleheads forum clearly shows that the total bond market fund beats the money market fund, unless you're clairvoyant enought to exercise perfect market timing in exactly the right time frame. Even then you're worse off over longer time frames. So your concern over rising interest rates would most likely have caused you to make a poor investment choice in 2003. How about 2015? We'll see how holding short term cash compares with sticking with a total bond fund in the future. The bonds may not win every year, but if you compare over a period equalling the bond fund's average duration, it should easily be the winner.

your data is flawed , since those were not the results of the intermediate term bonds of that time frame and were just reflective of short term moves by the fed. same as 5 year cd's.

whoever posted that as representative of what to expect from intermediate term bond funds like total bond fund or intermediate term bond funds better lay off the boglehead koolaid.


if you want to use that chart then you bought a 5 year bond in 2003 that payed 2.16% with 10k according to your chart.

in 2007 they had a bit over 11k giving an average return of about 2.50%. or just about the deal they signed on for.

on the other hand if you had a one year t-bill and flipped it each year you would have gone from 2% to 5% over the time frame.

you clearly would have made alot more had you been able to increase each year with the trend.

thinking that rising rates will help you in a bond fund is rediculious. you will never see any better than the deal you signed on for as the fund value will fall with each up tick in rates and even though you see a portion eventually it is never enough to get you out from behind the curve.

it is just math. if you stay the duration value of the fund it gives you back the origonal deal you signed on for ,in this case around 2.50% .

that is dispite the fact rates went from 2.16% to 5.58% and you got no where near that average no matter how you do the math.

[karluk]

Quote:

Originally Posted by mathjak107 your data is flawed , since those were not the results of the intermediate term bonds of that time frame and were just reflective of short term moves by the fed. same as 5 year cd's.

I am not sure what you are referring to, but I was talking about the chart that does a side by side comparison of VBMFX and VMMXX. Those are two real mutual funds that were both available in 2003. The chart shows that investors were better off sticking with a diversified bond fund with an intermediate length duration than panicking and moving into a money market fund from fear of higher interest rates.

https://www.bogleheads.org/forum/vie...51665#p2273379

Quote:

Originally Posted by mathjak107 if you want to use that chart then you bought a 5 year bond in 2003 that payed 2.16% with 10k according to your chart. in 2007 they had a bit over 11k giving an average return of about 2.50%. or just about the deal they signed on for.

What do you mean, "just about the deal they signed on for"? I say that they got a much better deal than they signed up for. The 34 BPs of extra return is the bonus investors got from being lucky enough to be invested in intermediate term bonds in a rising interest rate environment. If interest rates had stayed completely flat, the return would have been 2.16%, not 2.5%.

We may not be talking about the same chart, since you don't seem to think my example is comparing a money market fund to a total bond market fund, but even your example shows that rising yields are good for bond investors, not bad.

Quote:

Originally Posted by mathjak107 on the other hand if you had a one year t-bill and flipped it each year you would have gone from 2% to 5% over the time frame. you clearly would have made alot more had you been able to increase each year with the trend.

No, you clearly would have made less, as the chart shows. VMMXX invested in just such short term securities and underperformed the total bond fund over this time period.

Quote:

Originally Posted by mathjak107 it is just math.

It is just math - math that favors the intermediate term bond fund. You are waving your hands and making claims that contradict the historical record. You are entitled to your opinion, but don't expect me to follow such flawed reasoning when the math clearly favors intermediate term bonds.

[mathjak107]

the problem is the chart is flawed. a move from 2.08% on the 5 year bond is very different from the scenario that vbmfx or barclays saw.



over the 4 year period vbmfx saw intermediate term rates only rise less than 1% going from 4.03 to 4.76% not the 3.08% jump up in rates the short end took as it went from 2.06 to 5.62% . that is hardley an example of a soaring bond rate time frame for the intermediate term bond .

basically your comparisaon is looking at what happened when rates on intermediate term bonds rose ,76% over that time frame. there was little to be effected by a move like that.

the money market produced 11,702 and total bond 11,523.

had there been a real 3.06% rate increase in the intermediate term range the difference between the money market would have been pretty great.

the point is vbmfx hardly fell because there was less that a 1% change in 10 year rates,.

the chart is not illustrating the fact that that soaring bond rates had little effect . all it is showing is that when short term rates rise they can have little to do with where bond investors bid the intermediate term and longer bonds.

that we already know. the fed raising the short end by more than 1% has produced only 1 year the last 44 years where bonds lost money.


had the intermediate term bond actually seen a jump from 2.06 to 5.62 with a duration of 5.6 totay vbmfx would have fallen more than 16% in value .

back then its duration was closer to 7 which would have been a 25% drop with a 3 point increase. some of that would be offset by a increase in interest over time but no where near enough to make you get much more than whatever the rate was the day you bought vbmfx..

the discussion is what happens to intermediate term and longer bonds when investors bid them higher and higher like the last 2 weeks.

[karluk]

Quote:

Originally Posted by mathjak107 over the 4 year period vbmfx saw intermediate term rates only rise less than 1% going from 4.03 to 4.76% not the 3.08% jump up in rates the short end took as it went from 2.06 to 5.62% . that is hardley an example of a soaring bond rate time frame for the intermediate term bond .

Uh, so what? If intermediate term rates had risen as much as short term rates, the net result would have been to INCREASE the advantage of holding the intermediate term bond fund compared to the money market fund, assuming of course that the holding period is at least equal to the bond fund's duration. The period from 2003-2007 saw a situation where investors in the money market fund could get sharply higher interest rates quickly without risking principal. In comparison, the intermediate term bond fund could get only modestly higher yields from interest rates that hardly budged. The net result is that the money market fund almost kept pace with the bond fund instead of losing to it decisively, as it would have done if short and intermediate term interest rates had risen by the same amount.

So we are discussing a period 2003-2007 where investors would have paid only a small penalty to sit in a money market fund instead of bonds. If you want to hypothesize a period where the money market investment would have gotten trounced, please feel free to be my guest. I don't care. I'll just stick with the investment that promises the better returns.

[mathjak107]

you are way out in left field. if the intermediate bond rate was 2.06 when you bought in as you are hypothetically saying and rose to 5.62% then if you stayed for the duration figure of the fund currently 5.06 years you would simply get around the 2.06% rate you origonally got the day you bought in as a total return 5 years later on average per year..

that is what the duration of a fund means. it means for every point rates go up if you stay the duration you will get whole again back to the number you had the day you bought in.

however any downgrades in credit throw that number out the window in a fund like total bond and you may never get back to that 2.06%.

if rates are going higher and higher over those 4 years i doubt many would just sit and get 2.06% when rates are 3,4 and eventually 5% elsewherel


you could but not many will. last year when nbonds took a hit did you see the billions that fled the bond funds ?