Timing purchase of bond funds?

[mathjak107]

today in the stock sell off tlt was up just shy of 1% and tip 3/4%. that offset 1/2 the loss. guess thats what going out so long is about right now

 

[Retire Soon]

This chart compares Vanguard Total Stock Market Index with Vanguard Total Bond Market Index from June 1990 to January 2008.

Yahoo! Finance Charts


charttype=line;crosshair=on;logscale=on;source=undefined

 

[mathjak107]

total bond market is to mixed time frame wise and is really more an intermediate term bond fund , it dosnt carry enough oooomph to recession proof an equity mix. for that you need long term bond funds.

actually this week the long term funds did great. ill probley sell tlt and tip on monday and wait for them to roll back after the over 2% run up this week.

 

[poyet]

Mathjak, Bonds only change in value if you are in a fund (no control over buying and selling) or you don't hold them to maturity. Just a thought.

They don't change in facial value but change in real value as 100 bucks ten years later is certainly not worth the 100$ of ten years before (rate power minus number-of-years to compute the present value of 100$ given back in ten years).

So the big bet is inflation and studies show that long term bond owners have always been left broke. That's why governments issue bonds...

To get a feel I've typed 2 formulas in excel and report the following table:
Inflation Principal 10 years 20years 30 years 4% 100 67,56 45,64 20,83 5% 100 61,39 37,69 14,20 6% 100 55,84 31,18 9,72
This means that if you hold a 30 years bond with 6% average inflation over the period the 100 bucks you're given back @ term are worth less than 10$ of today (9,72 todays' dollars).

Inflation, inflation....

 

[mathjak107]

you have to go back to the origional discussion, we arent talking holding long term bonds until maturity. we were using them for recession protection and as a trading vehicle when the threat of recession keeps surfacing like now. the long term treasuries have been moving as much as 2% in a day offsetting some of the declines.

 

[poyet]

you have to go back to the origional discussion, we arent talking holding long term bonds until maturity. we were using them for recession protection and as a trading vehicle when the threat of recession keeps surfacing like now.

OK then (I just hinted that rolling 5 years bonds over a 30 years period is identical to holding a 30y bond in the end or not very different), why not:

1) reducing market expo while cash is king ;
2) load on lightly on an a bear index fund ;
3) make some shorts ?

Holding fixed bonds if you expect rates to be substantially lowered is OK but that's not investing, that's speculating on bonds' reaction to rates moves. Isn't it ?

 

[mathjak107]

i believe like commodities bonds are not time in the market but timing the market. the yield at this point is so low that without trying to capture the swings and capital gains your better off with a money market in my opinion

 

[danm]

longer term treasuries only are effective in a recessionary enviornment as a counter to stocks. bonds tend to follow stocks more than they dont

Hardly, the long bond has been in a bull market since 1982. Buying zeros and rolling them over every year since then would have netted 4X the return on the S&P in the same period.

Think 1982 long bond approx 14% (IIRC)
Summer 2007 approx 5%
Today 4.35%

You're referring to the flight to quality, which is another affect.

 

[mathjak107]

well now its the fear of recession driving bonds. when interests rates are up high its a different story but even then it was the constant fear of recession thru the 80's that kept driving rates lower and lower coupled with a drop in inflation. thats the problem now, we are sooooo low theres more danger of long term rates rising than falling. historically the average is 5-1/4 % so we are well below the average . going forward from here i think its all buying and selling the dips on bonds

 

[danm]

well now its the fear of recession driving bonds.

Partially. There is short term noise, but yields are fundamentally set by long term inflation expectations.

we are sooooo low theres more danger of long term rates rising than falling. historically the average is 5-1/4 % so we are well below the average . going forward from here i think its all buying and selling the dips on bonds

So low relative to the 80's only. Look at rates over the last several hundred years, they're still looking quite good. We've begun a deflationary bust, trillions being lost in house equity, and a few trillion to be further lost in credit. Deflation is usually kind to highest quality debt.

 

[mathjak107]

actually bonds are tough to say whether you are in a bull market or not. yes if you bought at a higher rate you can call it a bull market like if you caught the 80's. but bonds bought even in the early 2,000's are still at a loss even today. because of the lower yield historically , the 60 year average is 5-1/4% and they are linked to the inflation rate and looking at a chart of the last 60 years its scarey how many negative return years bonds have had after being inflation adjusted. if anything i think we can say the bull market may have ended in the recession of the 2,000's. when rates bottomed out. if anything we are rising again from that point.

unlike equities which over time have higher highs and higher lows bonds are cyclical always changing . sometimes higher sometimes lower but not predictable at all. its a 99.9% chance that in 10 years your equities will be higher. id never attemp to guess where rates will be in 10 years

 

[danm]

mathjak107,
You are very knowledgeable, but I'm not sure about some of these ideas. It's a 99.9% chance stocks will be higher in 10 years - where do you get this number? 1960-1980 stocks got you nothing in nominal terms, and a big fat negative in real. Pick a S&P buyer from say 2009 to the present, flatline. OK it's not 10 years yet, but I doubt the S&P will be flying high this year.

In 2000 the long bond was above 6%, now 4.35%, sounds like a healthy gain. Like stocks, you have to specify which bonds you're talking about.

 

[free4now]

I still don't understand Mathjak's argument, which seems to be that bonds are more volatile than stocks over the long term. Sure stocks rise more over the long term due to the risk premium.

One thing that helps me understand that bonds and stocks are fundamentally similar is that both bonds and stocks are a way to purchase a future income stream. In both cases the price reflects the amount of future income, adjusted for the risk that income may not materialize. Looking at it from this point of view, you would expect that over the long term stocks and bonds will both return similar rates of return, and that any increase in return from stocks over bonds would come at the cost of increased risk of portfolio failure.

I've seen some say that long term bonds return 3% whereas stocks return 3.5 to 4% real. So it's actually not so big of a difference.

 

[free4now]

On second thought, it does seem like mathjak's argument is based on comparing long term bond funds versus stocks. Long term bond funds are a bit like leveraged stocks in that they respond very sensitively to long term predictions... Comparing a long term bond fund to unleveraged stocks will make the bonds look somewhat volatile, but not because of anything inherent in bonds, just because of the "leverage" of the long term bonds. I am sure I could convince mathjak that stocks are more volatile than bonds if we compared leveraged stocks to short term bonds.

 

[mathjak107]

the point was that bonds right now especialy long term are basically a trading vehicle not a buy and hold at this yield. the long bond has been swinging as much as 2% in a day responding to both flight to quality and recession fears. then it was brought up that bonds are in a bull market since 82 but i feel that wasnt exactly right as we bottomed out in the early 2000,s and prior to that except for the run up in the eighties in yield they basically have been bouncing back and forth in a tight range..


you would be hard pressed to find 10 year periods of time in the last 20 years or so where stocks werent up. the 60-80's time frame was a very different thinly traded market and i hardly doubt we would ever go more than 10 or certainly 15 years without being up