Time To Buy Bonds?

[yakers]

Time to bail on bonds - May. 15, 2008

So if fear is driving others, is it time to stock up?

 

[Abreutime]

Being contrarian is not automatically the best idea. With regard to the article, it says that bonds are at unsustainably low yields. Since an increase in yields results in a decrease in prices, it doesn't seem like a great time to "stock up." I dont mean to try to predict the market, it's just that I dont see evidence that bonds are "on sale."

Last year, everyone predicted the dollar to decrease, and they were largely correct. Often, the prevailing opinion happens to be the most likely scenario. It's not too hard to foresee general changes in price, but it's very hard to predict exactly when a correction will take place.

 

[mathjak107]

depends why you want them, if its income i think you missed the party , rates are toooo low.

if you want them to protect your portfolio in deflation/depression nothing works better than long term bonds. rates during the depression were 1% on the long bond. that still gives you almost 35%- 40% of deflation protection even at these levels.

i always say if nothings going down at the same time your other stuff is going up then your not diversified enough and speculating as to what you think the outcome will be..

 

[cute fuzzy bunny]

Wouldnt touch tips or treasuries with a ten foot pole right now. Really wouldnt touch any long term bonds. Maybe a little good quality junk. Otherwise...wait a while.

Losing 15-20% of your money on bonds really, really sucks...

 

[slazenger]

I'd recommend junk only too. They tend to do decent during (perceived in this case?) recoveries of a recession and aren't very sensitive to eventual rising interest rates. With a change in presidency coming in, it'd be a nice play to augment an overall asset allocation.

 

[cute fuzzy bunny]

8.23% yield on the vanguard HY admiral shares. Not too bad considering MM rates and going tips/treasury rates. A little more risk to be sure. But I think theres just about enough compensation for that risk...

 

[ats5g]

Wouldnt touch tips or treasuries with a ten foot pole right now. Really wouldnt touch any long term bonds. Maybe a little good quality junk. Otherwise...wait a while.

Losing 15-20% of your money on bonds really, really sucks...

Not to pick on CFB , but I'm curious if people also realize that when long term nominal bonds/TIPS fall in value because interest rates rise, the present value of their long term liabilities are also falling. If my TIPS fall by 15-20% at the same time he present value of my future liabilities fall by a similar amount, have I really lost?

Just curious,
Alec

 

[HFWR]

The etf TIP was at $98 as recently as last October. That represents a $9+ per share drop from here...

 

[cute fuzzy bunny]

Not to pick on CFB

Oh come now, its a popular sport. Go ahead! You just might want to strap on your protective headgear first

have I really lost?

Not if you hold to maturity or dont care about the NAV. Both of which are viable options.

But some people get jumpy when they buy something nice and steady and safe like TIPS and a couple of months later they're down 50k on paper..

On another tack, short term investment grade bonds are okay if you want last years money market rates without a ton of NAV volatility.

 

[slazenger]

Interesting - I have no idea how bonds work bought separately. I buy mutual fund everything.

But I will say, I don't believe in "paper losses". If you can "paper lose" 50K in your bonds, you lost 50K from my viewpoint. I think in terms of net worth/net liquidateable value calculated daily.

 

[ats5g]

Oh come now, its a popular sport. Go ahead! You just might want to strap on your protective headgear first

 

[ats5g]

Interesting - I have no idea how bonds work bought separately. I buy mutual fund everything.

Bond funds are just a portfolio of individual bonds that never mature.

But I will say, I don't believe in "paper losses". If you can "paper lose" 50K in your bonds, you lost 50K from my viewpoint. I think in terms of net worth/net liquidateable value calculated daily.

Ah, but if you consider future payments as negative net worth, and they go down as much as your "paper losses", then your net worth hasn't really gone down at all. [I think I got that right]

 

[cute fuzzy bunny]

Weeeellllll...allegedly if you buy an intermediate term fund and hold it for 10-12 years, you'll get the same results as holding a ~ten year bond. Sort of. Minus the expenses, plus any diversification from the average fund that holds 100-200+ bonds. So its a cheap boring bond ladder more or less...

BTW for the peanut gallery, I think Alec is pretty much the expert in these areas. Do what he suggests and you probably wont be sorry.

Probably not as much fun as doing what I say, but maybe more profitable...

 

[Lsbcal]

Time to bail on bonds - May. 15, 2008
So if fear is driving others, is it time to stock up?

It doesn't feel to me like TIPS rates of 1.36% for 10yrs is a reasonable real rate to lock in. Looking at the Fed charts it looks a bit low doesn't it? Here is the chart link : St. Louis Fed: Series: DFII10, 10-Year Treasury Inflation-Indexed Security, Constant Maturity

So I've been betting for awhile now that the best approach is to be chicken and go with a combo of money market and short term bonds. I notice that the yield on Vanguard Short Term investment grade at 4.36% is not too far off of it's 5yr return of 4.93%. Might work out over the next few years until TIPS pay nearer the long term average for intermediate bonds of 2.3% real yield.

 

[cute fuzzy bunny]

For what its worth, I went with a mix of some HY corp (bought a while back), slimmed down the money market, and divided some money out between the 3/5/7 year vanguard managed payout funds to get the income I wanted.

I bailed out of the remainder of my Wellesley shares in my taxable account. The only "normal" bonds I have are in some balanced funds like the TR and LS series in my IRA.

 

[Lsbcal]

CFB, I've stayed away from high yield funds because I've bought the Larry Swedroe argument that the bond part of your portfolio should not have any equity component of risk in it and should have a high safety level. Helps me to keep the right balance and to sleep at night. I worry too much .

 

[cute fuzzy bunny]

Well there is that. I dont mind equity level risk very much. But sometimes I like a little extra income in the #1 bucket.

 

[Rambler]

Just bought some long term tax free munis the other day, with a 5% yield, to start building my income producing bucket. I would have to get an 8.5% yield on corporates to get that kind of after tax yield. Nothing is risk-free, but I feel pretty good about the relative stability and tax free status these bring. I haven't investigated junk yet. BTW, anyone have experience with convertibles?

R

 

[mathjak107]

there are four potential outcomes to any economic event we can have. no matter what happens in the world there are only 4 means to an end

prosperity

inflation

recession

deflation/depression

thats it folks.... stag flation is only a temporary status that leads to one of the above

without including long term bonds in your plan despite what you think may happen , you have no coverage really that can protect your portfolio if some event not even on the radar pushes us towards deflation/depression.. shorter term bonds dont react with enough oooomph to carry ones portfolio enough.


as we all know by the time that trend starts to take shape so we can go "aaah long term bonds look good here" its to late and the biggest portfolio protecting gains are gone. TLT can move 2% in a session normally with no major event happening ,just perception of something brewing..

a well protected portfolio takes the good with the bad and if bonds drop 20% something else should rise even better . besides rebalancing and re-investing interest will let you buy the lower cost stuff over time too.

it just depends on what level you want to bullet proof your portfolio and whether you want to try to rule out certain economic conditions from the 4 possibilities.

it reminds me of when oil went from 10 bucks to 40 and i felt this is crazy , im not buying any energy stocks at these levels, how much more could they go up before falling...

damn ....... shouldnt have listened to myself.......

while millions of investors go for maximum gains and try to specualte that we will head in one direction or another and typically get it wrong there are many others who believe in not just buying fire insurance for our house only during a dry spell and protecting their portfolios from being devasted at all times and bigger gains become secondary to less losses. things not on the radar have away of devasting portfolios when no one expects that event.

its for these people to decide whether they need the protection of longer term bonds too or not but a blanket statement of im not buying a particular asset class because i think it will go down is not the best way to protect your portfolio

 

[Lsbcal]

without including long term bonds in your plan despite what you think may happen , you have no coverage really that can protect your portfolio if some event not even on the radar pushes us towards deflation/depression.. shorter term bonds dont react with enough oooomph to carry ones portfolio enough.

I agree that in a depression long Treasury (not corporate) bonds would be best. What percentage of your portfolio do you have in long term bonds? I've read though haven't seen the data that long bonds have not compensated you for the risk and that intermediate bonds are therefore best. The reason is apparently that long bonds are used by insurance companies to match their obligations' duration so they accept lower yields to do so.

I've chosen to emphasize inflation risk over depression risk in our portfolio. So am using 10yr TIPS and short term bonds as per some suggestions from Larry Swedroe. Currently out of TIPS as they are much lower then the long term average for real rates on intermediate bonds of 2.3%.

 

[brewer12345]

I find junk and bank loans to be very attractive. Treasuries don't do anything for me.

 

[mathjak107]

I agree that in a depression long Treasury (not corporate) bonds would be best. What percentage of your portfolio do you have in long term bonds? I've read though haven't seen the data that long bonds have not compensated you for the risk and that intermediate bonds are therefore best. The reason is apparently that long bonds are used by insurance companies to match their obligations' duration so they accept lower yields to do so.

I've chosen to emphasize inflation risk over depression risk in our portfolio. So am using 10yr TIPS and short term bonds as per some suggestions from Larry Swedroe. Currently out of TIPS as they are much lower then the long term average for real rates on intermediate bonds of 2.3%.

I run 2 portfolios , one consists of following the fidelidy insight newsletter which i have been doing for over 20 years.

the other is my bullet proof portfolio which i recently started because of this confusing economic enviornment we are in. i figure if the trend is bad enough ill profit no matter what .

25% TLT LONG TERM TREASURY
25% GLD GOLD
25% VTI MARKET INDEX
25% US TREASURY MONEY MARKET

 

[brewer12345]

I run 2 portfolios , one consists of following the fidelidy insight newsletter which i have been doing for over 20 years.

the other is my bullet proof portfolio which i recently started because of this confusing economic enviornment we are in. i figure if the trend is bad enough ill profit no matter what .

25% TLT LONG TERM TREASURY
25% GLD GOLD
25% VTI MARKET INDEX
25% US TREASURY MONEY MARKET

Sounds like, whatsisname, Harry Browne has been reanimated. Frankly, I think a broader commodity index would be a better choice than the gold.

 

[mathjak107]

YEP i loved ole harry ..... always thought the gold was a drag on it though back before gold was on the radar again as an asset class and so i got out of it 20 years ago

i also thought to go with a broad based commodities fund but after listening to harrys old broadcasts he was against it because other commodities respond to other things as well both up and down and not just inflation or dollar issues. . he wanted a pure gold play , sold my GSG which i had quite a while and bought gld

 

[haha]

Not to pick on CFB , but I'm curious if people also realize that when long term nominal bonds/TIPS fall in value because interest rates rise, the present value of their long term liabilities are also falling. If my TIPS fall by 15-20% at the same time he present value of my future liabilities fall by a similar amount, have I really lost?

Just curious,
Alec

What's that again? If a hillbilly like Ha can't understand it, it may be bogus.

ha