It seems to get drilled into us by the pundits to run from bonds in a rising interest rate environment. Sure, the logic makes sense that bonds will get hammered as interest rates rise, but will they really? I, like many, get a little antsy sometimes with my bond allocation anticipating an eventual rise in interest rates. While I subscribe to the the "ballast" argument in holding primarily short and intermediate bond ETFs in my 60/40 allocation, I continue to research better mousetraps, if nothing else, to appease my greed gland. Of course, I will do nothing in the end but stay the course, but found the article below interesting...
"1976-1981: Rising Rates
The six-year period from January 1976 to December 1981 saw an increase in the Federal Discount rate from 5.79% to 12.10%—and rising rates generally represent a head wind for fixed income. As might be expected, the long bond index was hit hardest, and experienced a six-year annualized return of 2.47%, which was substantially below its 8.88% annualized return over the past nearly 45 years (1976 through Oct. 31, 2020).
The short and intermediate bond indexes posted reasonably impressive gains of 7.31% and 6.34%, respectively. The aggregate bond index had a 5.04% annualized return... For those who do not remember the late 1970s, we are the aged messengers to remind you that inflation (as measured by the CPI) grew at an annualized rate of 9.18% from 1976-1981—essentially eclipsing the performance of all the fixed income indexes. Thus, all four fixed income indexes had a negative real rate of return between 1976-1981."
And more recently...
"2002-2007: Rising Rates Again
The second period that we will examine in which interest rates rose was the six-year period from January 2002 to December 2007. The Federal Discount rate moved from 1.25% to 4.75%. During that same time, short-term bonds cranked out a return of 4.34%, intermediate bonds returned just over 5.4%, and the aggregate bond index had a 5.37% annualized return."
I suppose it begs the question... should we really bail on our short/intermediate bonds? At least in the short term, while inflation has raised its head at least for now, my crystal ball says the current effects from Covid, supply chain challenges, employment, and current political policies, the Fed may slow play a run up in interest rates until the economy gets it's sea legs back again.
What say you?
https://www.etf.com/sections/etf-st...-class-returns-during-rising-rates?nopaging=1
"1976-1981: Rising Rates
The six-year period from January 1976 to December 1981 saw an increase in the Federal Discount rate from 5.79% to 12.10%—and rising rates generally represent a head wind for fixed income. As might be expected, the long bond index was hit hardest, and experienced a six-year annualized return of 2.47%, which was substantially below its 8.88% annualized return over the past nearly 45 years (1976 through Oct. 31, 2020).
The short and intermediate bond indexes posted reasonably impressive gains of 7.31% and 6.34%, respectively. The aggregate bond index had a 5.04% annualized return... For those who do not remember the late 1970s, we are the aged messengers to remind you that inflation (as measured by the CPI) grew at an annualized rate of 9.18% from 1976-1981—essentially eclipsing the performance of all the fixed income indexes. Thus, all four fixed income indexes had a negative real rate of return between 1976-1981."
And more recently...
"2002-2007: Rising Rates Again
The second period that we will examine in which interest rates rose was the six-year period from January 2002 to December 2007. The Federal Discount rate moved from 1.25% to 4.75%. During that same time, short-term bonds cranked out a return of 4.34%, intermediate bonds returned just over 5.4%, and the aggregate bond index had a 5.37% annualized return."
I suppose it begs the question... should we really bail on our short/intermediate bonds? At least in the short term, while inflation has raised its head at least for now, my crystal ball says the current effects from Covid, supply chain challenges, employment, and current political policies, the Fed may slow play a run up in interest rates until the economy gets it's sea legs back again.
What say you?
https://www.etf.com/sections/etf-st...-class-returns-during-rising-rates?nopaging=1