We are entering a "Golden Period" for fixed income investing

[MichaelB]

Sorry there is a lot of misinformation spread on Boglehead forums regarding bond funds. That is a statement of fact as other Bogleheads have started to realize that they were impacted by the misinformation. Most don't even understand that bond funds are not bonds.

Here are some quotes from a recent thread (12 months after the start of rate hikes) where some are questioning the validity of the statements and theories promoted by Bogleheads:

"Simply saying I’ve seen a lot of confusion on this forum about how bond funds work…, and how they never lose money, because they’re always self-replenishing to keep up with inflationn"

"A lot of bond fund investors seem to have heard the myth that if they hold to duration they'll get their money back."

"It is terrible that this kind of misinformation gets propagated the way it does.

The mathematical origin of that fallacy, of course, is the example that sometimes is used to illustrate the concept of duration that if there is a step change increase in a previously constant interest rate, followed by no further change in interest rate, then there is indeed a point of indifference after time equal to the duration passes. Since a single step change in interest rate over long times never happens, that example is of no practical relevance.

I personally think the best resolution is to somehow shout down the idea that investing in bond funds can somehow be made risk free by some manipulation or placing of conditions on one's use of the investment. I personally think is is much easier and more practical to recognize that investing is risky and deal with it than to try to have one's cake and eat it too by claiming to invest without taking risk."


https://www.bogleheads.org/forum/viewtopic.php?t=399556&start=50

These are their own words, not mine, as they reflect on what has occurred over the past year. You can find even more misinformation with respect to what a bond fund actually earns as many Bogleheads have realized the SEC and YTM (versus distribution yield) are by no means what a fund actually earns.

Perhaps I wasn’t clear. Let me say this differently.

It doesn’t matter that you can find some words, ideas or posts you disagree with at the Bogleheads. We all can do that, disagreement is part of life. Your comments, though, are unacceptable.

Misinformation is deliberate falsification with the purpose of misleading or deceiving. It’s a very serious accusation. It’s not the same as poorly informed and it’s also not the same as a differing opinion or simply something you disagree with. To accuse and condemn an entire community based on a few posts you disagree with is totally out of line. It’s not appropriate for our forum (or civil society, for that matter). Let’s drop the invective now. And let’s also stop using Bogleheads as a whipping boy. It’s way overdone.

I’ll end this with words my grandfather always said. ”if you can’t say something nice then don’t say nuthin’ at all”.

 

[Gumby]

I would listen to MichaelB and lay off the Bogleheads. I have never participated in their forum and don't know what they say or don't say, but it seems like a waste of bandwidth to argue about them here. It's also rude to malign an entire board for the alleged misstatements of a few.

 

[aja8888]

I had an FHLB 5.5% 3/7/2025 note called last week. Sucks!

 

[COcheesehead]

I had an FHLB 5.5% 3/7/2025 note called last week. Sucks!

You can do better right now. Be glad it got called.

 

[aja8888]

You can do better right now. Be glad it got called.

Kind of strange it was called when they are selling notes with higher coupons at the same time.

 

[COcheesehead]

Kind of strange it was called when they are selling notes with higher coupons at the same time.

Sometimes just depends on when the call window opens.

 

[COcheesehead]

Let’s try and keep this thread open.

 

[MichaelB]

<mod note> This is a good discussion. The bickering and Bogleheads bashing is unhelpful and unbecoming of us and if it continues will cause the discussion to end prematurely. Let’s please put an end to that and move on.

Edit to add: if you see a post you feel does not contribute to the discussion, don’t ask for it to be deleted. Just scroll on to the next post.

 

[Free bird]

Let’s try and keep this thread open.

+1. We are guests here. We need to keep our eye on the ball. We’re all looking to better ourselves in this process. Let’s keep it together. I need the help.

 

[Fotodog]

+1. We are guests here. We need to keep our eye on the ball. We’re all looking to better ourselves in this process. Let’s keep it together. I need the help.

+1000!
Freedom obviously has strong opinions and might be a bit blunt in expressing them, but he (as well as others experienced with bonds) has helped many people tremendously, including me. I’m grateful for the knowledge I have gained from this thread and hope to continue learning more.

 

[Healthy Lifestyle]

+1000!
Freedom obviously has strong opinions and might be a bit blunt in expressing them, but he (as well as others experienced with bonds) has helped many people tremendously, including me. I’m grateful for the knowledge I have gained from this thread and hope to continue learning more.

I agree and appreciate the opportunity to learn and expand my understanding in the fixed income marketplace!
Thank you Freedom.

 

[Vincenzo Corleone]

+1000!
Freedom obviously has strong opinions and might be a bit blunt in expressing them, but he (as well as others experienced with bonds) has helped many people tremendously, including me. I’m grateful for the knowledge I have gained from this thread and hope to continue learning more.

Same here. Hey, Freedom, for the sake of the thread, ixnay on the oggleheadsbay .

 

[Freedom56]

Okay I will tone down the blunt language and focus on fixed income (bonds, CDs, treasury's, and agency notes). We are now about one year into this thread and investors should prepare for a generational change in fixed income investing. Rates will trend higher over the next year. While short term rates will peak by the end of the year, long term rates are well below their historic mean. We should see the 5, 10, 20, 30 year treasury's slowly trend up. We should see even higher treasury and CD yields in the coming months. Keep in mind that the top 20% of the population in this country control 86% of the wealth in this country. A record amount of cash sat in bank accounts earning near zero before the rise in rates. There is a lot of cash sorting happening as savers move their money into CDs, treasury's, MM funds, and corporate bonds. Many of you have been doing just that. Consider the increase in buying power of the top 20% when every $1M in cash that was previously earning $2-4K in bank accounts is now earning $50-$60K. That excess income will keep the economy strong and rate higher for much longer than many on Wall Street have been predicting. We are moving into a period where the national debt will climb to $51T over the next 10 years. There is no historical precedent for this in this country but what we do know is that when credit risk rises, so do yields.

 

[RetiredAndLovingIt]

Welcome back Freedom and keep up the good work.

 

[Echard]

Just to add to Freedom56's comment. The recent announcement by China to stimulate their economy will also add to the rate pressure. Some are saying we face a decade of higher inflation, and thus rates. As I've mentioned before, the federal government must inflate away the debt as a percentage of GDP (just like they did after World War II). So, inflation will run a little higher, but the Fed will continue to talk tough and act to make sure inflation doesn't get out of control over the next ten years. They probably want it around 3-4%, if I were to guess.

Now, with all of that said, I've still put some money into 6-10 year bonds because forecasting the direction of interest rates is impossible. I can live on 5% rates for several years, even in an inflationary environment. So those 5% bond purchases at 5-10 year maturities give me some cover for several years of living expenses. If I didn't have some of that in place, and rates did in fact drop back down to 2-4% for the 10 year, like what we saw for many years, then covering living expenses becomes more challenging, and requires more investments in stocks and other higher yielding securities. I really don't want to have to increase my stock/bond allocation ratios too high. I like boring 5% bonds.

 

[Healthy Lifestyle]

Thank you all for your intelligent and insightful comments.
Although I do like to see Becky Quick, CNBC could never compete with e-r.org members..

 

[calmloki]

We've had our hard money loans all pay off, and have sold over half our rentals with us carrying the contracts (ten year balloon). Hope to sell the last of the rentals, a sixteen unit apartment complex, next year - at 73 I just don't want to play anymore.

The carried contracts give us a fair amount of interest income and the sale of the apartments will result in rude amounts of state and federal tax - apartments are in Oregon and we've declared California as our primary residence. I've been putting our cash into 6-month treasuries since November to avoid state tax - have about 25% of our NW there right now. CDs and cash are about 10%. Stocks and ETFs represent 15.8% of our NW.

Right now we are in good shape as far as monthly income (social security is a tiny component thanks to me being a lay about landlord). The ten year balloon property contracts serve as ten year bonds in my mind. I'd like to bump up the stock portion, but this doesn't feel like a great time to be buying. Want to keep our taxes at a minimum and avoid state tax but keep pace with inflation...

So TIPS. Haven't invested in them knowingly before. Figure I'm looking to hold to maturity or my demise and think buying at auction rather than secondary market would fit my simple nature better. Heard about a 5 year TIP being reopened as a 4 year 10 month but haven't seen it offered at Vanguard or Fidelity on other than secondary. Anyone have good intel for me? CUSIP 91282CGW5

Other suggestions?

 

[Montecfo]

I'm dubious of Fed plans with inflation clearly on the run and the economy showing cracks. A pause is the right move.

The end of the student loan moratorium Aug 31 as agreed in the debt ceiling deal will siphon 5-10B monthly out of consumer spending. That, credit tightening due to the bank mini-crisis and ongoing QT will continue to weigh on inflation expectations and therefore rates in the near term.

But folks that ladder need not wait for higher rates or regret not pulling the trigger. Excellent rates are here now.

Freedom I appreciate your bond ideas. Looking forward to Freedom 2.0.

 

[Linney]

Heard about a 5 year TIP being reopened as a 4 year 10 month but haven't seen it offered at Vanguard or Fidelity on other than secondary. Anyone have good intel for me? CUSIP 91282CGW5

David Enna's "TIPSwatch" site is a great source for everything TIPS. He *just* posted his analysis of the 5-year TIPS reopening auction coming up this week:

https://tipswatch.com/2023/06/18/this-weeks-5-year-tips-reopening-could-get-the-highest-real-yield-in-14-years/

Investors who are fans of Individual TIPS fans are pretty interested in this auction. My TIPS ladder is complete so I won't be participating.

I'm not going to weigh in on whether TIPs vs. CDs vs TBills vs whatever is the "best" investment at this time as it just leads to a lot of arguments.

 

[Echard]

David Enna's "TIPSwatch" site is a great source for everything TIPS. He *just* posted his analysis of the 5-year TIPS reopening auction coming up this week:

https://tipswatch.com/2023/06/18/this-weeks-5-year-tips-reopening-could-get-the-highest-real-yield-in-14-years/

Investors who are fans of Individual TIPS fans are pretty interested in this auction. My TIPS ladder is complete so I won't be participating.

I'm not going to weigh in on whether TIPs vs. CDs vs TBills vs whatever is the "best" investment at this time as it just leads to a lot of arguments.

Why is there so much interest? There is a total lack of clarity over the future of inflation right now.

 

[Linney]

David Enna's "TIPSwatch" site is a great source for everything TIPS. He *just* posted his analysis of the 5-year TIPS reopening auction coming up this week:
https://tipswatch.com/2023/06/18/this-weeks-5-year-tips-reopening-could-get-the-highest-real-yield-in-14-years/
Investors who are fans of Individual TIPS fans are pretty interested in this auction.

Why is there so much interest? There is a total lack of clarity over the future of inflation right now.

1. It will likely have the highest real yield (for a 5-year TIPS auction) since October 2008.
2. With the nominal 5-year Treasury note currently trading with a yield of 3.98%, this TIPS currently has an inflation breakeven rate of 2.17%*.

*Auction is Thursday, these figures could go up or down between now and then.

This thread is more focused on nominal bonds so if we want to discuss this TIPS auction further, it would be best to start a new thread -- thanks.

 

[madatrub]

I'm dubious of Fed plans with inflation clearly on the run and the economy showing cracks. A pause is the right move.

We are rolling off 1%/month months and replacing them with 0.4-0.5. Thats still 5-6% annualized. Next month the largest monthly increase in the last 43 years will roll off.

 

[Echard]

We are rolling off 1%/month months and replacing them with 0.4-0.5. Thats still 5-6% annualized. Next month the largest monthly increase in the last 43 years will roll off.

I just posted about the potential for inflation to run hot for the next several years. However, the current inflation data includes housing as a major component responsible for about 60% of the core CPI. The problem with this number is that it is lagging with respect to housing. The current housing prices have corrected, so the “real” inflation is running much better than the official numbers.

 

[Montecfo]

It sounds like your point is it has not fallen enough yet. No disagreement here. I never said it had been defeated.

But it has declined sharply.

Further to my point, the Producer Price Index, a precurser to consumer pricing trends, was negative 0.3% for May, continuing a trend of low readings. It is up just 1.1% year over year.

"United States Producer Price Index (PPI) YoY"

http://www.investing.com/economic-calendar/ppi-734

Inflation appears to be on the run.

 

[Rianne]

Same here. Hey, Freedom, for the sake of the thread, ixnay on the oggleheadsbay .

Again, thank you Freedom. Your advice changed the direction of 60% of our portfolio. We are now making back the loss from bond funds and have solid gains looking to the future, following your guidance.