Jonathan Clements and John Lim on bonds

[daylatedollarshort]

I never needed inflation protection until the last 12 months. My equities provide plenty of inflation protection. If I was 100% fixed income, I would
spend time trying to match inflation. Equities are for eating well, bonds are for sleeping well. This year is an exception, and I hope "this time is different" is not true. Cash would also have looked terrible for the last 10 years. I don't own that fund and likely never will.

VW

My questions were about VISPX. You said Bogleheads look at ten to twenty year periods. Looking at a ten year period for VISPX, what do you think? This thread has been mostly about TIPS funds vs. individual TIPS. Do you think the fund performed just as well as individual TIPS have over the last ten years?

 

[VanWinkle]

My questions were about VISPX. You said Bogleheads look at ten to twenty year periods. Looking at a ten year period for VISPX, what do you think? This thread has been mostly about TIPS funds vs. individual TIPS. Do you think the fund performed just as well as individual TIPS have over the last ten years?

Per Portfolio Visualizer:

2011 to 2021 VISPX CAGR 3.78%
2001 to 2021 VISPX CAGR 5.26%

Are those as good as individual short term tips? I don't know the answer
but it is good enough to meet my goals without becoming more active in my investing. I like simple, so if you can squeeze extra by buying individual tips, more power to you.

VW

 

[daylatedollarshort]

Per Portfolio Visualizer:

2011 to 2021 VISPX CAGR 3.78%
2001 to 2021 VISPX CAGR 5.26%

Are those as good as individual short term tips? I don't know the answer
but it is good enough to meet my goals without becoming more active in my investing. I like simple, so if you can squeeze extra by buying individual tips, more power to you.

VW

The last ten years include this year. Looking at a comparison to actual inflation, has VISPX provided any inflation protection over the last ten years?

 

[jebmke]

The last ten years include this year. Looking at a comparison to actual inflation, has VISPX provided any inflation protection over the last ten years?

The inflation adjustment is made on each of the component bonds. Inflation protection does not protect one from interest rate risk, however.

 

[daylatedollarshort]

The inflation adjustment is made on each of the component bonds. Inflation protection does not protect one from interest rate risk, however.

Individual TIPS bonds bought at par and held to maturity don't have interest rate risk. Has VISPX provided inflation protection over the last 10 years?

 

[NW-Bound]

I never knew of VISPX. Just looked at it, and have to agree that its YTD performance is not what I expected. Tried to look into its holdings, but still don't understand it.

VISPX's 20-year performance is behind my lowly I bonds at this point. And of course, I would still have a lot more money if I put the I-bond money into S&P instead.

Oh well, I think I will just stick with my AA: 60-70% stock, and the rest in I bonds, stable value fund, and TSTXX.


PS. I was wrong. VISPX beat my I bonds over the last 20 years. I only had the lowly I bonds that pay 1-1.2% above inflation.

 

[aja8888]

Individual TIPS bonds bought at par and held to maturity don't have interest rate risk. Has VISPX provided inflation protection over the last 10 years?

2011 to 2021 VISPX CAGR 3.78%

Inflation averaged 2% (?) over the last ten years. Just about anything except 30 year treasury bonds and bank held cash beat inflation over that period.

 

[daylatedollarshort]

2011 to 2021 VISPX CAGR 3.78%

Inflation averaged 2% (?) over the last ten years. Just about anything except 30 year treasury bonds and bank held cash beat inflation over that period.

The last ten years would include this year, 2022, when inflation peaked for the first time in a long time and inflation protected bonds have really kicked into gear, like I bond returns that everyone here seems excited about. I posted the link for the 10 year annual returns for VISPX.

I can't really add much more to the performance stats or the definition of market risk as it applies to bonds and bonds funds. But if posters here think that inflation protected bond funds are a good deal and provide protection from high inflation, they are certainly free to load up all they want. People like Freedom56 will be waiting for the bond fund sell offs at a loss in the secondary markets.

 

[jebmke]

Individual TIPS bonds bought at par and held to maturity don't have interest rate risk. Has VISPX provided inflation protection over the last 10 years?

yes; but perhaps not interest rate risk protection.

 

[MichaelB]

VISPX has a duration of around 7 years, and over the past year it’s base interest rate has gone from -1% to +1.5%, so it’s no mystery that the market value has declined by double digits even as it earns inflation adjustments.

Any comparison of individual bonds to bond funds must adjust for duration and maturity. To compare market price of a fund holding 10 year avg maturity with the face value of an individual bond makes no sense.

There’s a strong hint of recency in the preference of individual bonds over bond funds. For a couple of decades, as interest rates fell, bond funds were the superior holding. Now, as interest rates rise, the bond fund is viewed as an inferior choice. There is no reason to assume that interest rates will continue to rise at close to this pace. Thus, there is no reason to assume individual bonds will be a superior choice over bond funds of similar duration.

Nothing wrong with holding individual TIPs over TIPs funds. The biggest drawback to individual bonds is credit risk, which doesn’t exist with a Treasurt bond.

 

[daylatedollarshort]

yes; but perhaps not interest rate risk protection.

You can't separate the two. Fund returns are based on math and performance numbers, not semantics. The funds' NAVs have either kept up with inflation or they haven't. That is the Inflation Protection part of TIPS. The reason interest rates are going up is because of high inflation. People buy TIPS and I bonds for the inflation protection.

I am going to try my hardest not to post more as I am happy to participate in lively discussions on pros and cons of different asset classes, but there is no point in debating facts, like market risk definitions in bond text books and cold, hard performance stats.

 

[NW-Bound]

... But if posters here think that inflation protected bond funds are a good deal and provide protection from high inflation, they are certainly free to load up all they want. People like Freedom56 will be waiting for the bond fund sell offs at a loss in the secondary markets.

As I looked on Schwab a few days ago, I recall seeing bonds with maturity 5 years out going for 6% YTM. It did not excite me because the Fed is still raising rates.

I think Freedom56 mentioned 8-9% YTM happening sometimes. Now, that looks juicy.

 

[Freedom56]

As I looked on Schwab a few days ago, I recall seeing bonds with maturity 5 years out going for 6% YTM. It did not excite me because the Fed is still raising rates.

I think Freedom56 mentioned 8-9% YTM happening sometimes. Now, that looks juicy.

Get ready for it because it is very likely to happen during tax loss selling season which starts in about two week. I have two notes maturing in 2023 and 2024 that are being called next week. I bought both during these bond fund induced sell-offs. My final YTM is now going to be 9.68% on the 2024 notes and 9.3% on the 2023 notes.

 

[VanWinkle]

The last ten years include this year. Looking at a comparison to actual inflation, has VISPX provided any inflation protection over the last ten years?

I'm not falling for your recency bias of 2022. I have been investing for more than one year. From 2020 to 2021 the average inflation has been 2.34. I think that the same period CAGR was well ahead of inflation. Over the last year, every bond fund(and individual bond) has taken a hit due to an unprecedented rapid increase in interest rates. I don't agree that the only way to get inflation protection is through individual tips or bonds. Buy more equities if you want a history of inflation protection. Oh, I forget, equities did not beat inflation either this year so don't buy any equity mutual funds after this.

VW

 

[daylatedollarshort]

VISPX has a duration of around 7 years, and over the past year it’s base interest rate has gone from -1% to +1.5%, so it’s no mystery that the market value has declined by double digits even as it earns inflation adjustments.

Any comparison of individual bonds to bond funds must adjust for duration and maturity. To compare market price of a fund holding 10 year avg maturity with the face value of an individual bond makes no sense.

There’s a strong hint of recency in the preference of individual bonds over bond funds. For a couple of decades, as interest rates fell, bond funds were the superior holding. Now, as interest rates rise, the bond fund is viewed as an inferior choice. There is no reason to assume that interest rates will continue to rise at close to this pace. Thus, there is no reason to assume individual bonds will be a superior choice over bond funds of similar duration.

Nothing wrong with holding individual TIPs over TIPs funds. The biggest drawback to individual bonds is credit risk, which doesn’t exist with a Treasurt bond.

If interest rates start falling and bond fund yields are higher than I can buy individual bonds at auction, I'm fine with moving some money back to bond funds. I have posted a Kiplinger article many times that recommends that exact strategy. I had bond funds up until early this year. But in a rising rate environment, personally I only want bonds with maturity dates. YMMV.

 

[NW-Bound]

Get ready for it because it is very likely to happen during tax loss selling season which starts in about two week. I have two notes maturing in 2023 and 2024 that are being called next week. I bought both during these bond fund induced sell-offs. My final YTM is now going to be 9.68% on the 2024 notes and 9.3% on the 2023 notes.

I will try to remember to watch out for this. I will most likely be preoccupied with watching stocks which probably will be on fire sales too.

If interest rates start falling and bond fund yields are higher than I can buy individual bonds at auction, I'm fine with moving some money back to bond funds. I have posted a Kiplinger article many times that recommends that exactly that strategy.

Will be watching for this too. When it feels right, I am willing to go back to owning some bonds, which I have not owned since liquidating my 401k and moving out to IRA, some time around 1998-1999.

 

[daylatedollarshort]

I'm not falling for your recency bias of 2022. I have been investing for more than one year. From 2020 to 2021 the average inflation has been 2.34. I think that the same period CAGR was well ahead of inflation. Over the last year, every bond fund(and individual bond) has taken a hit due to an unprecedented rapid increase in interest rates. I don't agree that the only way to get inflation protection is through individual tips or bonds. Buy more equities if you want a history of inflation protection. Oh, I forget, equities did not beat inflation either this year so don't buy any equity mutual funds after this.

VW

Individual TIPS protect against high inflation. TIPS funds have gone down with a spike in inflation this year. Bond funds tend to make money in declining rate environments, like we've had since the 80s, and lose money in rising rate environments, like we've had recently. They don't mimic actual TIPS, even if they hold TIPS. If you want to think of your TIPS bond funds as doing okay, as long as you subtract out the years when high inflation started, that is your choice, but the performance stats are what they are.

Individual TIPS with real yields are having a great year and are returning more than 0% real yield I bonds, with no losses if held to maturity, and have provided inflation protection, as advertised.

 

[NW-Bound]

I never knew of VISPX. Just looked at it, and have to agree that its YTD performance is not what I expected. Tried to look into its holdings, but still don't understand it.

VISPX's 20-year performance is behind my lowly I bonds at this point. And of course, I would still have a lot more money if I put the I-bond money into S&P instead.

Oh well, I think I will just stick with my AA: 60-70% stock, and the rest in I bonds, stable value fund, and TSTXX.

An important correction is in order!

I was deadly wrong. VISPX beat my I bonds soundly over the last 20 years, even with its recent YTD drop. I just remembered wrong my basis from 20 years ago, and had to look it up.

I only had the lowly I bonds that pay 1-1.2% above inflation. If you had the juicy 3.6% I bonds, you would win over VISPX, I believe.

When I discover my mistake, I always correct it. Don't want to be called a liar.

 

[all4j]

An important correction is in order!

When I discover my mistake, I always correct it. Don't want to be called a liar.

& what if everybody did that? This thread alone...anyone think it might wreck the internet?!?

So I took a deep breath, wrote off my individual-bond-portfolio to "ego," and swapped them for the Vanguard TIPS fund, VAIPX.”

So, to me, this gets to heart of matter. I've no problem with those who want to argue a hypothetical, rare instance. I just won't participate. For me, I look more broadly & what makes sense for the entirety of the portfolio & why it exists anyway.

 

[daylatedollarshort]

So, to me, this gets to heart of matter. I've no problem with those who want to argue a hypothetical, rare instance. I just won't participate. For me, I look more broadly & what makes sense for the entirety of the portfolio & why it exists anyway.

The hypothetical rare instance that happened to TIPS funds is called inflation and interest rates going up. When interest rates go up, bond prices fall and bond funds lose NAV. TIPS funds do not keep up with inflation when the Fed raises interest rates to fight inflation. That is simply math.

 

[daylatedollarshort]

The other event that has caused TIPS yields to increase in the past has been deflation, since they aren't a good deflation hedge. The yields went way up after the last recession on deflation fears.

 

[NW-Bound]

I was deadly wrong. VISPX beat my I bonds soundly over the last 20 years, even with its recent YTD drop. I just remembered wrong my basis from 20 years ago, and had to look it up.

I only had the lowly I bonds that pay 1-1.2% above inflation. If you had the juicy 3.6% I bonds, you would win over VISPX, I believe.

When I discover my mistake, I always correct it. Don't want to be called a liar.

DANG! I have to correct my mistake AGAIN. I am getting senile. No, I was just lazy and just eyeballed numbers instead of writing them down to do a simple division.

So, please indulge me once more and let me atone for my sin.

Here's the comparison between one of my I bonds and 3 different bond funds, none of these funds I had or even looked at until now.

This I bond was bought in August 2004, and pays 1% above inflation. The performance number for the I bond was computed from the balances on 8/2004 and 10/2022 as shown in my Treasury Direct account. The performance numbers for the bond funds come from Portfolio Visualizer.

I bonds trailed these funds until SHTF this year.

Fund	Performance 8/2004 to 10/2022
I-bond (Aug 2004)	1.8544x
TLT 20-year Treasury	2.1554x
VIPSX Vanguard Inflation Protected	1.7987x
VBMFX Vanguard Total Bond	1.6781x

My other I bonds also pay 1 to 1.2% above inflation. The above bond was the first one I bought, and it was in 2004 and not 2003 as I thought. Darn defective memory.

I never bothered to compare my I bonds with the general bonds, because I knew the I bond would trail them. I bought the I bonds for the stability, same as the Stable Value funds. After almost 20 years, suddenly the tide turns. Who would have thunk?

 

[COcheesehead]

DANG! I have to correct my mistake AGAIN. I am getting senile. No, I was just lazy and just eyeballed numbers instead of writing them down to do a simple division.

So, please indulge me once more and let me atone for my sin.

Here's the comparison between one of my I bonds and 3 different bond funds, none of these funds I had or even looked at until now.

This I bond was bought in August 2004, and pays 1% above inflation. The performance number for the I bond was computed from the balances on 8/2004 and 10/2022 as shown in my Treasury Direct account. The performance numbers for the bond funds come from Portfolio Visualizer.

I bonds trailed these funds until SHTF this year.

Fund	Performance 8/2004 to 10/2022
I-bond (Aug 2004)	1.8544x
TLT 20-year Treasury	2.1554x
VIPSX Vanguard Inflation Protected	1.7987x
VBMFX Vanguard Total Bond	1.6781x

My other I bonds also pay 1 to 1.2% above inflation. The above bond was the first one I bought, and it was in 2004 and not 2003 as I thought. Darn defective memory.

I never bothered to compare my I bonds with the general bonds, because I knew the I bond would trail them. After almost 20 years, suddenly the tide turns. Who would have thunk?

With all due respect, I don’t trust much of what you post now since your credit card oversight and lack of tracking which you detailed in another thread.

 

[NW-Bound]

With all due respect, I don’t trust much of what you post now since your credit card oversight and lack of tracking which you detailed in another thread.

OK, that's understandable.

I have tried to make amend by showing numbers that anyone can verify using Portfolio Visualizer.

The only thing that is not easily accessible is the particular I bond performance. However, I stated that it was issued on Aug 2004. There are plenty of I bond owners here, and no doubt someone also has this bond.

If I mess up again, I hope someone will tell me.


PS. Forgot to add an important reference point in the above table. The cumulative inflation factor of 8/2004-9/2022 is 1.5663x.

Now, the ratio of my I bond performance to the inflation is 1.8544/1.5663 = 1.1839.

Look at the 18.39%. That's the 1% fixed rate above inflation for 18 years! Don't you love it when things jibe?