Bond vs. Equity Risk Perf During Rising Rates

[Rianne]

We bit the bullet and sold all intermediate and long-term bond funds (tIRA). Kept the short-term bond fund for the time being in our tIRA. We'll be doing a Roth conversion next year with those funds. We laddered T-bills through VG with a portion of that (1/4) to 3 years. At least keeping our principal with 1.8-2.7% interest. The rest are in a money market waiting to re-evaluate in a couple of months.

Appreciate the interview which presented some optimism for a soft landing. Getting out of emerging markets. DH has a catastrophe in his Roth with those funds. MYGA looks interesting. What can you say? Talk/listen to smart people and react to the best of your comfort zone.

 

[Lsbcal]

One very bad year in bonds was 1994 although this one is shaping up to be worse with Total Bond Market off by -8.9% YTD.

I just wanted to look at how that 1994 market played out for a few assets. Here is the chart:

VMBFX = total bond market
VFSTX = short term investment grade

As you can see the bond funds reacted negatively well before the Tbills finished their ascent. Then it was off to the races in 1995.

I am not saying this is a template for the current market. But it does make me think that maybe Tbills followed by VFSUX (short term investment grade) or a mix of VFSUX and intermediate bonds might be a decent way to go.

 

[lawman]

One very bad year in bonds was 1994 although this one is shaping up to be worse with Total Bond Market off by -8.9% YTD.

I just wanted to look at how that 1994 market played out for a few assets. Here is the chart:

VMBFX = total bond market
VFSTX = short term investment grade

As you can see the bond funds reacted negatively well before the Tbills finished their ascent. Then it was off to the races in 1995.

I am not saying this is a template for the current market. But it does make me think that maybe Tbills followed by VFSUX (short term investment grade) or a mix of VFSUX and intermediate bonds might be a decent way to go.

Interesting! I wonder how much of the interest rate hike is already cooked into mutual bond fund share prices..Should the Fed only go up another 2% and then level off it seems to me like bonds could turn out to be fine for those who stay the course..What do you think? Today my VFIDX has a 30 day yield of 3.62%

 

[accountingsucks]

Interesting! I wonder how much of the interest rate hike is already cooked into mutual bond fund share prices..Should the Fed only go up another 2% and then level off it seems to me like bonds could turn out to be fine for those who stay the course..What do you think? Today my VFIDX has a 30 day yield of 3.62%

I don't get the same yield as you in yahoo finance on VFIDX?

Take a look at link below...it indicates what the market thinks about where Fed rate will be up to Summer 2023. You can see that in early 2023 the market is skeptical about further rate hikes right around the 3% mark. Every medium/long term bond fund is already pricing in these expectations 100%.

I truly believe once we hit a Fed funds rate in the high 2's that will be enough, I don't see it north of 3% so on my bond funds I am staying pat and I would say 80% of the pain is already priced in at this point

It's a Canadian link, but is for US Fed rates:

https://ca.investing.com/central-banks/fed-rate-monitor

Then on the flip side at some point rates will come down when we invariably have the next recession or slowdown (not IF but WHEN)....the bond market is so forward looking that at some point in the near future they will start pricing in RATE DECREASES and bond funds will go up well before anyone thinks they will. Look at the rate increases back in 2018 or whenever it was...the Fed rate was going up while bond funds were also going up (after a dip) as the bond market didn't believe rates would go up substantially in the long term.

The last CPI annualized read was 3.6% and I'm in the transitory camp myself...big component of CPI are used car prices and those have started to come down alot in the last few weeks (see Manheim index). https://www.economy.com/united-states/manheim-used-vehicle-value-index

Long story short it is absolutely impossible to predict where interest rates will go, just stick to your asset allocation everything will be fine.

 

[Chuckanut]

We bit the bullet and sold all intermediate and long-term bond funds (tIRA). Kept the short-term bond fund for the time being in our tIRA. We'll be doing a Roth conversion next year with those funds. We laddered T-bills through VG with a portion of that (1/4) to 3 years. At least keeping our principal with 1.8-2.7% interest. The rest are in a money market waiting to re-evaluate in a couple of months.

Appreciate the interview which presented some optimism for a soft landing. Getting out of emerging markets. DH has a catastrophe in his Roth with those funds. MYGA looks interesting. What can you say? Talk/listen to smart people and react to the best of your comfort zone.

I ditched most of my long and medium term bonds a few years ago. The only such bonds I have are in my Wellesley fund holding. I am trusting the fund management to keep working its magic and produce a descent income with limited downside risk. But, I would not and have not bet the farm on that. Trust but verify.

 

[Midpack]

I've resisted the urge to reduce shares in bond funds, though I did some tax free exchanges to reduce duration. I need to read articles like this from time to time, so thanks.

I am delaying Roth conversions this year, I'll convert more shares at the same $ amount sometimes (much) later this year - instead of the quarterly conversions I've done in years past.

 

[Lsbcal]

I wondered after posting the chart for 1994-1995 what stocks did then. Did the 1995 bond rally take the mojo out of stocks? Here is an updated chart with the SP500 (black) added:

Stocks did not cool in 1995 and posted excellent returns.


EDIT: I discovered an error in my SP500 data and so this is the corrected chart.

 

[lawman]

I don't get the same yield as you in yahoo finance on VFIDX?


long story short it is absolutely impossible to predict where interest rates will go, just stick to your asset allocation everything will be fine.

https://investor.vanguard.com/mutual-funds/profile/VFIDX

If I bail out now I'm afraid I am getting out at the worst possible time..And where else can I get 3.62% without taking on more risk than I have with my investment grade bond fund?

 

[FREE866]

Look at this

S and P down about 7%

Current bond ETF drawdowns:

TLT (20+ yr treasuries) -28.6%
IEF (7-10 yr treasuries) -15.2%
LQD (corp bonds) -15.0%
IEI (3-7 yr treasuries) -9.4%
JNK (high yield bonds) -7.2%

 

[corn18]

VTI -8.42%
VXUS -13.71%
BND -14.44%

This is from all time high, not YTD and is NAV only.

 

[ERhoosier]

One wildcard in the mix today is the Fed's massive balance sheet that it will be starting to unwind. It has never been that high either in absolute or relative terms. Few consider that it has grown to $9 TRILLION, which is almost a quarter of the overall US bond market (public & commercial) and over 1/3rd of US annual GDP.



https://www.federalreserve.gov/releases/h41/current/h41.htm#h41tab1
https://finance.zacks.com/bond-market-size-vs-stock-market-size-5863.html
https://www.bea.gov/news/2022/gross...orate-profits-and-gdp-industry-fourth-quarter


No one really knows how the unwinding of this massive Fed position will affect the bond market, but the law of supply and demand suggests it will not be a positive for bond prices. IMHO- Pundits who ignore this are whistling past the graveyard.



Personally I am staying very cautious with my fixed income AA. Sticking with short term instruments at this point as I feel we are still WELL below the eventual peak in rates. Switching to longer term bonds too early in a rate cycle can be VERY painful, as 9% drop in TLT (long bond ETF) YTD illustrates. OTOH, buying long bonds at or near peak in an interest rate cycle can be equally rewarding.

 

[mikes425]

Good sentiment in that article. Not enough data to use it to draw a definitive conclusion, but I like the premise of don't just do something, stand there.

I don't know enough to know the mechanics, but as a bond fund's NAV drops due to rates rising, the yield goes up. At some point, the yield rising offsets the NAV dropping. It has something to do with the average duration of the bond fund. It does suck to see your total assets go down 13% just due to bonds when they should be acting as ballast for stocks.

Exactly my sentiments and it was difficult at first for me to wrap my head around this reality and 'come to terms' with it - in my case down about 7% YTD in large part due to bond funds but helpful to bear in mind that yes...the rising yield offsets the NAV losses. And in the case of a market day like today, they did in fact act as ballast for stocks.

 

[mikes425]

https://investor.vanguard.com/mutual-funds/profile/VFIDX

If I bail out now I'm afraid I am getting out at the worst possible time..And where else can I get 3.62% without taking on more risk than I have with my investment grade bond fund?

Same sentiment here. I think I've basically come to terms with it and will stick to my AA. Hopefully most of the damage (losses) has already been done and going to cash with bond funds at this point, IMO would only be losing to inflation - with zero div. income.

 

[COcheesehead]

I am more of individual muni bond ladder guy and hold them to maturity. So while mark to market pricing shows some of mine in the red, it doesn’t matter since they return to their face value at maturity for zero NAV loss. I have a bunch maturing now through the end of the year. I am buying as yields go up. 6-10 year maturities in my state are yielding 3-4+% double tax free. Those are yields I have not seen in awhile.

 

[mikes425]

Interesting! I wonder how much of the interest rate hike is already cooked into mutual bond fund share prices..Should the Fed only go up another 2% and then level off it seems to me like bonds could turn out to be fine for those who stay the course..What do you think? Today my VFIDX has a 30 day yield of 3.62%

I think you may well be right. I am not exiting a smallish IT fund position or existing ST treasury SCHO or Corp (VCSH) funds. The losses have already been rather significant and they fulfill a role in my balanced and diversified moderate AA. Also Cash offers no dividends.

 

[mikes425]

I've resisted the urge to reduce shares in bond funds, though I did some tax free exchanges to reduce duration. I need to read articles like this from time to time, so thanks.....

Same here. I appreciate the article too.

 

[mikes425]

I still think it is a decent strategy to stay short term *if* one is currently in short term bonds or Tbills.

I agree with you there.

 

[clifp]

I would say the major difference between the mid '70s to the early '80s is the very low interest rates on savings compared to the inflation rate. As I have mentioned before, Treasury rates were very high (though never above the inflation rate), sometimes in the area of double digits for longer Treasury issues. Today, we have 2 year Treasuries around 2% with inflation currently running at over 8%. Not so good.

I agree. Many years ago I read (and I think I even posted about) a comprehensive study of interest rates, over the last 700 years. The two main takeaways were that the long-term sovereign (10+ years) debt averages is about 5%.
And second, countries that have never defaulted on their sovereign debts like the US, Canada, Australia, and few dozen other countries are the minority. Most countries eventually do default, either outright (like Russia is doing), or via hyper-inflation. Frankly, there are a lot of advantages to defaulting, especially if you can do so via inflation.

The problem with study the OP posted is that it shows nominal returns. Any study done during times of high inflation should show real returns.

 

[Markola]

I just feel that this environment of worry is exactly what we passive, long-term, globally-diversified, index fund, fixed AA investors have prepared for. No changes made and none expected. Our plan does not take into account rising home equity, so that’s perhaps another passive, long-term inflation hedge.

 

[Markola]

The problem with study the OP posted is that it shows nominal returns. Any study done during times of high inflation should show real returns.

Fair enough but the tables do list inflation rates for comparison.

 

[jazz4cash]

I am more of individual muni bond ladder guy and hold them to maturity. So while mark to market pricing shows some of mine in the red, it doesn’t matter since they return to their face value at maturity for zero NAV loss. I have a bunch maturing now through the end of the year. I am buying as yields go up. 6-10 year maturities in my state are yielding 3-4+% double tax free. Those are yields I have not seen in awhile.

Agree. I’m a bit surprised at the angst over bond fund behavior in this transitional phase. I guess it’s tougher to clip the coupon and ignore NAV vs holding individual bonds. I just don’t have the money or time to find enough individual bonds to be truly diversified. I’m generally looking forward to a selloff if fund managers have redemptions I might scavenge for crumbs to get less concentrated. 4% double tax free on AA paper is sweet.