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Heading for a bond bubble?
02-04-2010, 07:11 PM
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#1
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Mar 2003
Posts: 18,085
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Heading for a bond bubble?
I have seen a shocking tendency toward the excesses of the credit bubble happening already. There has been massive issuance of both investment grade and junk bonds, bonds issued expressly to fund sponsor dividends, PIK/toggle issuance, etc. But what eally makes it start to look iffy is something really simple. I have started getting "server too busy" messages from the TRACE service website at Corporate Market At-A-Glance A year ago when you could not give good quality corporates away and I was buying 5 year stuff at double digit yields, the website was really fast and easy.
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Ezekiel 23:20
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02-04-2010, 07:13 PM
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#2
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Apr 2003
Location: Hooverville
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Intersting observation Brewer, and also a interesting site.
Ha
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02-04-2010, 07:18 PM
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#3
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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I use the site to get market pricing on the individual issues I still own. Have sold much of it, but still hanging onto a few bits for a while.
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"All animals are equal, but some animals are more equal than others."
- George Orwell
Ezekiel 23:20
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02-04-2010, 09:15 PM
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#4
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Thinks s/he gets paid by the post
Join Date: Jul 2003
Location: Pasadena CA
Posts: 3,341
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Is (VBMFX) VG total US bond fund still OK or is that likely to go negative as well? Quite a diversity of bonds and pays 4%.
Always looking for somewhere to hide.
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T.S. Eliot:
Old men ought to be explorers
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02-04-2010, 10:22 PM
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#5
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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Location: Kansas City
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Time to refresh my memory - tell me again if I have say a 5 yr duration average on the bond side of my portfolio - and the worm turns within a year.
?? each 1% increase drops my NAV 5%?? I've forgotten the old rule of thumb - handgrenade wise.
heh heh heh - Sooo if it happens I try to watch my SEC yield and not cry when looking at dimished portfolio value due to dropping bond prices?
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02-04-2010, 10:55 PM
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#6
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Moderator Emeritus
Join Date: May 2007
Posts: 12,894
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Quote:
Originally Posted by unclemick
Time to refresh my memory - tell me again if I have say a 5 yr duration average on the bond side of my portfolio - and the worm turns within a year.
?? each 1% increase drops my NAV 5%?? I've forgotten the old rule of thumb - handgrenade wise.
heh heh heh - Sooo if it happens I try to watch my SEC yield and not cry when looking at dimished portfolio value due to dropping bond prices?
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VG Target Retirement 2015, full auto, isn't it? You're not getting any younger UM, and worrying is not good for your health soooooo full speed ahead and laissez les bons temps rouler...
But hand grenade wise, you're right. For each 1% increase in interest rates, the NAV should go down approximately by the value of the average duration, i.e. if the average duration is 5 years, the NAV should go down by 5%.
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02-05-2010, 02:40 AM
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#7
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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Lots of data points to the herd moving into fixed income, I am guessing the correction will only help the trend. One of several articles I've seen on the subject key take away
"Flows into bond funds were two or three standard deviations above their long-term averages"
Also anecdotal evidence like new folks on the forum advocating 100% fixed income are always good contrary indicator. I am bailing out of high yield. I think I'll keep my Vanguard GNNA and probably the individual issues I've bought although not sure about them.
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02-05-2010, 06:06 AM
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#8
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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There's always a bubble somewhere. Sometimes the bubbles are based on greed and other times on fear.
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"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)
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02-05-2010, 09:52 AM
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#9
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Recycles dryer sheets
Join Date: Aug 2006
Posts: 478
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I found this Vanguard article interesting. Apparently a long- term b&h'r can do as well or better in a rising interest environment. Back to the nap.
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I still don't get it...
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02-05-2010, 10:26 AM
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#10
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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If there is a bond bubble it is in the treasury market. Credit spreads are still wide to historic averages (but maybe not as wide as they should be given 10% unemployment and near armageddon just one year ago).
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02-05-2010, 11:03 AM
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#11
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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I don't think we are at a bubble yet, just that the crowd has rushed into corporates on a massive scale pretty much without regard to any thoughts about downside risk. In the investment grade space, I think things are not cheap but they are not wildly over bid. In the junk space, I think things are rapidly getting aggressive, but we are not at full out stupidity yet. The main difference in junk is the much lower leverage levels that deals are being done at. 4 and 5 times leverage is a whole lot more sane than 9 to 12 times. But I am leery of how far this goes, since the uneducated buyers will probably remain frightened of equities for another year and will keep shoving money blindly into bond funds.
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"All animals are equal, but some animals are more equal than others."
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Ezekiel 23:20
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02-05-2010, 03:08 PM
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#12
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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Still pretty much full auto bond wise with Target 2015. The problem being football that I watch is pretty much over after Sunday.
Sooo - even though I should ignore market fluctuations and not peek.
Hormones.
heh heh heh -
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02-05-2010, 03:22 PM
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#13
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Thinks s/he gets paid by the post
Join Date: Jul 2006
Location: Denver
Posts: 3,506
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Quote:
Originally Posted by BOBOT
I found this Vanguard article interesting. Apparently a long- term b&h'r can do as well or better in a rising interest environment. Back to the nap.
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Thanks for posting a link to the article.
It obviously works for the accumulation phase.
For the withdrawal phase, you'll have to be sure that you worst case scenario doesn't force you to sell shares of the bond fund too soon. Worth thinking about and figuring out how much of the bond portfolio to put in long term bonds. A few of the AA books I've read have said that the risk of long term bonds are not worth the added return.
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02-05-2010, 03:34 PM
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#14
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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Quote:
Originally Posted by walkinwood
A few of the AA books I've read have said that the risk of long term bonds are not worth the added return.
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I assume that long bonds fair pretty poorly on standard measures of risk adjusted return, like the Sharpe Ratio. And as a stand alone asset class they may not be worth the trouble. But if you look at 2008-2009, treasury bonds were the only asset class that provided any diversification benefit whatsoever. And long bonds had enough juice in them to make a real difference. I'd like to see an analysis of the diversification benefits of long treasury bonds in a stock heavy portfolio that incorporates experiences from the past couple of years.
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02-05-2010, 04:12 PM
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#15
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Moderator Emeritus
Join Date: May 2007
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Quote:
Originally Posted by walkinwood
Thanks for posting a link to the article.
It obviously works for the accumulation phase.
For the withdrawal phase, you'll have to be sure that you worst case scenario doesn't force you to sell shares of the bond fund too soon. Worth thinking about and figuring out how much of the bond portfolio to put in long term bonds. A few of the AA books I've read have said that the risk of long term bonds are not worth the added return.
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I think that Swedroe is one of those people who have shown that, on a risk-adjusted basis, extending the maturities of bonds to the very long term is not worth it. But he also says that, long term bonds can play a very important role for those seeking a more stable source of income such as retirees.
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02-06-2010, 07:39 AM
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#16
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Full time employment: Posting here.
Join Date: Feb 2006
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I am still attempting to set up my preferred AA, and I had been trying to build up a bond position over the past year but pretty much chickened out other than the initial investment, and so my "bond" AA is still almost all sitting in cash.
With the bond fund I was looking at (VFICX) yielding only about 4% and my cash getting about 1.5%, I just can't make the jump.
What should the spread be over cash be to trigger me to put a decent amount of cash into this fund? Is there a rule of thumb?
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02-06-2010, 03:55 PM
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#17
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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Quote:
But what eally makes it start to look iffy is something really simple. I have started getting "server too busy" messages
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This could easily be result of a technical problem unrelated to the number of people accessing the site.
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Al
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02-06-2010, 04:07 PM
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#18
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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Quote:
Originally Posted by cardude
With the bond fund I was looking at (VFICX) yielding only about 4% and my cash getting about 1.5%, I just can't make the jump.
What should the spread be over cash be to trigger me to put a decent amount of cash into this fund? Is there a rule of thumb?
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Assuming cash = deposit account or money market, it has a duration of zero (ie principal doesn't fluctuate with changes in the interest rate). Compare the boost in yield that you would get by going to VFSTX, the Short Term Investment Grade fund, currently yielding 2.34%. 84 basis points more return, but a duration of 2.3 years. So if rates go up 1%, you would lose roughly 2.3% in principal value. That would take 3 years of +84 bp yield to pay for. Risk-reward, is it worth it? Hard question to answer. VFICX has an even longer duration, hence even more risk (albeit with more yield).
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02-08-2010, 08:36 AM
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#19
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Full time employment: Posting here.
Join Date: Feb 2006
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Quote:
Compare the boost in yield that you would get by going to VFSTX, the Short Term Investment Grade fund, currently yielding 2.34%. 84 basis points more return, but a duration of 2.3 years. So if rates go up 1%, you would lose roughly 2.3% in principal value. That would take 3 years of +84 bp yield to pay for. Risk-reward, is it worth it?
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OK, cool. That's what I was looking for. Thanks.
I don't think the extra risk is worth it right now after looking at your example, FWIW.
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02-08-2010, 02:48 PM
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#20
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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And the more stocks go back into the tank, the more the bond bubble may reinflate...
__________________
"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)
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