interest rates: are you less worried after reading this?

[perinova]

http://www.advisorperspectives.com/newsletters12/pdfs/Must_Bond_Investors_Fear_Rising_Interest_Rates.pdf

I am pondering if I should go Short Term only or stay in a Intermediate / Total Bond allocation...

 

[growing_older]

This is not easy to do because few of us have experienced any prolonged rise of interest rates.
How did investors do during rising interest rates? There is little data.

This is a year old and mainly says very little data is available. That doesn't make me any less worried.

 

[haha]

High quality bond returns are as close to a mathematical certainty as anything can be. Insurance companies buy bonds in all weather, and not just life insurers which have fixed liabilities, also P&C insurers which must meet real demands. Nevertheless, insurance companies have resources and longevity that no individual has.

If rates are rising and your longer term fund has high quality bonds with low yield to maturity, it will lose money, probably a lot more than you would imagine. If you stay put and keep reinvesting, you will eventually pull ahead, ignoring inflation.

Anyone who feels that he knows that interest rates are increasing should stay pretty short. Just how short is matter of judgment.

To me, interest rates may rise immediately and steadily from here, but it is a long way from a dead cert not matter how many pundits say that it is.

Nevertheless, I don't like much duration here. Just my taste in the matter.

Ha

 

[REWahoo]

Here are a couple of previous threads discussing this same article:

http://www.early-retirement.org/for...eard-psst-wellington-63915-2.html#post1253553

http://www.early-retirement.org/for...how-a-rate-rise-affects-bond-funds-64272.html

 

[2B]

This is a year old and mainly says very little data is available. That doesn't make me any less worried.

Your quote said that "few of us have experienced any prolonged rise of interest rates." Well, I have and it is pretty ugly when you are holding a long term bond fund. I saw a big drop in NAV when long term rates when from about 8% to 14% in the 1970's. I was in my early investing years and I was shocked how much damage can be done to "safe" investments.

There have been threads here discussing that the loss of principle is made up for with the rising interest rates but I can only think they've never watched a big chunk of their money disappear and never to come back.

Right now the Federal Reserve is manipulating interest rates and keeping them well below where they would be if their QE was not being done. When they stop, interest rates are almost certain to rise but then there are the unknowns. When will they stop? Japan has been doing this for about 20 years. How fast will they rise? That's anyone's guess.

Personally, I don't buy bond funds. I have laddered CDs. In normal times I have a 5 year ladder. At current rates, I give up very little yield to shorten this to 2 years. If held to maturity, my CD will cash out for par. I would have needed to hold my long term bond fund for several decades before the interest rates fell enough to recover their purchase NAV.

 

[jerome len]

To me, if you're high income muni bond funds make sense. But......don't buy them if you have to sell them in the next few years. I look at my muni bond funds as an annuity that gives me my money back. Yes, when rates go up my bond funds go down in value but my interest rate goes up and my monthly dividends remain about the same. Lately, I've added to Vanguard limited term muni bonds.....as a holding account until rates increase as I believe they have to. Now, I get just over 1% tax free, better than a one or two year bank CD on an after tax basis. this has worked for me since the mid 70's, even when the prime rate when to 20 and now. Over the years I've done far better than CD's and in recent years have done better than stocks. Yet, I'm diversified inot index funds and dividend ETF's. But if you're short term, don't need tax savings or can't stand to see the value of a muni fund go down, don't go into them and worry. But.....I'm really, really, happy with what they have done for me over the past 36 years.

 

[growing_older]

Your quote said that "few of us have experienced any prolonged rise of interest rates." Well, I have and it is pretty ugly when you are holding a long term bond fund. I saw a big drop in NAV when long term rates when from about 8% to 14% in the 1970's. I was in my early investing years and I was shocked how much damage can be done to "safe" investments.

Would this be true of TIPS, too? I would expect those to be somewhat protected against rising rates since they adjust for inflation.

 

[Gatordoc50]

My prediction was for 3.5 to 4 on the ten year this year and am invested accordingly on CDs, cash and short term bonds. I figure if I'm wrong and interest rates stay low for the next 100 years, I'm out about 12 dollars. lol

 

[haha]

Would this be true of TIPS, too? I would expect those to be somewhat protected against rising rates since they adjust for inflation.

IF inflation causes the rate rise, the answer to your question is TIPS would do better. But if rates rise independent of inflation, like this past spring and early summer, TIPS may well lose more than similar maturity nominal bonds. (As they have longer duration for similar maturities than nominal due to some cash flows being back-loaded

Ha

 

[karluk]

The article, IMHO, does a good job of presenting the expected behavior of bond funds in a rising interest rate environment and backing it up, to the limited extent possible, with historical data about the actual performance of the bond funds that were in existence throughout the last period of prolonged interest rate increases. Whether that's enough of sooth investors' worries is another question entirely. I'd say, "probably not". Investors always will have something to worry about, and the threat of rising interest rates has certainly grabbed everybody's attention recently.

 

[ESRwannabe]

I'm not worried about rising rates, but I am somewhat confident that it will happen within the next 1-3 years. However, in the back of my mind I do think it is possible that they could stay low for much longer as seen in Japan.

For bond funds I am happy with an intermediate duration.

 

[Fermion]

I moved $50,000 out of PIMCO and into a Vanguard stock fund in my 401K today. This puts me at 90/10 in that account.

I think bonds will lose again this year...probably should go 100/0

 

[Dash man]

That blip we had last May when interest rates jumped based only on speculation of the tapering of the Fed's bond buying caused two intermediate term bond funds I owned to drop enough to cost me a full year's interest, and they have not recovered. I moved most of that money into the 3% 5-year CD at Pentagon Federal. We're about 50/50 stocks and cash plus some real estate income. I just don't believe bonds are safe right now and history has never seen the situation we're in today with rates this low and government manipulation of the rates this way.

 

[Fermion]

That is what bites with bonds...no upside and plenty of downside, especially at these low rates.

The stock market can drop 10%, but now we see bonds can drop 10% too. When are bonds going to deliver 40% returns though?

 

[audreyh1]

That blip we had last May when interest rates jumped based only on speculation of the tapering of the Fed's bond buying caused two intermediate term bond funds I owned to drop enough to cost me a full year's interest, and they have not recovered. I moved most of that money into the 3% 5-year CD at Pentagon Federal. We're about 50/50 stocks and cash plus some real estate income. I just don't believe bonds are safe right now and history has never seen the situation we're in today with rates this low and government manipulation of the rates this way.

I had bond funds drop too mid year, but most of them recovered to slightly positive by year end. Even the intermediate bond funds. Even though the 10-year had jumped from 1.6% mid year to 3% at the end of the year.

Anyway - most of my bond funds were bought a loooong time ago, and rebalancing over the years I have harvested some of the capital gain.

My bonds are mainly there to help out when the stock market has a bad year.

 

[web_diva]

In speaking to 2 different full service brokerage firms recently about this very concern, they are all advocating no bond position in their current asset allocations, even for those for those in retirement. The one with the more sophisticated strategy is using options as a sort of insurance against share prices going down. The one with the more basic strategy is picking the highest quality of the blue chips and a carefully selected new/small company stock with strong upside and good fundamentals (eg biotech, energy).

 

[REWahoo]

In speaking to 2 different full service brokerage firms recently about this very concern, they are all advocating...

...that whatever you own you should sell and buy something else since they don't make any money unless you do.

 

[karluk]

In speaking to 2 different full service brokerage firms recently about this very concern, they are all advocating no bond position in their current asset allocations, even for those for those in retirement. The one with the more sophisticated strategy is using options as a sort of insurance against share prices going down. The one with the more basic strategy is picking the highest quality of the blue chips and a carefully selected new/small company stock with strong upside and good fundamentals (eg biotech, energy).

One's mind boggles at why these full service brokerages proposed such strategies instead of, say, steering you towards PenFed CDs as a bond alternative. The cynic in me is suspicious that the main reason is that they weren't willing to give up some of their commission by recommending a competitor's product, but let's be more hopeful and say that they really and truly believe their recommendation has your financial welfare at heart.

 

[ripper1]

...that whatever you own you should sell and buy something else since they don't make any money unless you do.

I heard that!

 

[ripper1]

One's mind boggles at why these full service brokerages proposed such strategies instead of, say, steering you towards PenFed CDs as a bond alternative. The cynic in me is suspicious that the main reason is that they weren't willing to give up some of their commission by recommending a competitor's product, but let's be more hopeful and say that they really and truly believe their recommendation has your financial welfare at heart.

Most likely the one who has your financial welfare at heart is the one you see in the mirror every morning.

 

[obgyn65]

I am still worried about interest rates. I like the certainty of CDs and therefore I keep buying CDs to build up my 10-year CD ladder.

 

[Spanky]

Most likely the one who has your financial welfare at heart is the one you see in the mirror every morning.

That's a scary thought.

 

[haha]

I am still worried about interest rates. I like the certainty of CDs and therefore I keep buying CDs to build up my 10-year CD ladder.

This makes good, low risk sense.

In my case, if I have fixed income outside a retirement account, I want it liquid and easily reached, either to take advantage of stock market dives, or to use for other needs. I do have an earlier PenFed 5 year CD, that has a slightly better rate than this recent offering and has about 18 months left to run.

My main fixed income is in my IRA or my Roth. I leave the TIRA at the broker, because I do not want to make RMDs a hassle, and I leave my Roth alone at the broker just for convenience and quality service. In any case the brokered CDs available to me are not inviting, so I do use intermediate bond funds, mostly 3 years<duration<5 years

Although I invested in these at lower rates than today's, the total return losses have been modest, and in some cases there has been a gain when interest is included.

The last few days have demonstrated to me anyway, that rates can go down after all. Poor jobs report, and down goes Frazier!

Ha.