If you fear a significant and rapid rise in inflation, you should stick to shorter duration bond funds. The turn-over (maturation of older bonds and purchases of newer replacements) in a short-duration fund is rapid enough that the yield will not lag by too much.
Otherwise, if inflation climbs rapidly, the NAV (price) of a longer-term fund (whose composition will be stuck at a lower yield for a longer time) will drop dramatically.
I'm not saying there will be serious inflation in the future, but there are certainly signs that it may appear down the road.
Another potential issue is that the Total Bond fund is heavy in Treasuries, which many people would say are essentially in a bubble. Should this collapse, the price of the fund will decline as well.
You have raised some good points.
Agreed -- but the moves are on the upside AND on the downside. So if inflation and/or interest rates start rising again, suddenly the long bonds get slammed much harder.the move is almost double on long term treasuries vs intermediate when its time to do its job
big difference being up 13% for intermediate treasures vs 28% last year for long term
Actually, so far every time the market has sensed inflation, TIPS have rallied. Look at the Treasury's action a few days ago when they said they'd start buying back a huge amount of long-term Treasuries and presumably print money to do it. The market read inflation and everything that's an inflation hedge and/or an anti-dollar bet was up: gold, oil, other commodities, foreign currencies, and yes, TIPS. My 2025s were up 6% on that day. The evidence to date (what there is of it) suggests that TIPS will rally in periods of high inflation.reason i dont use tips is tips can take a beating when inflation rises as the base rate on new tips goes up making the older lower tips drop in value with their lower base rate. the new tips have a higher base rate and then get the inflation kicker added to it. tips dont have the power either in deflation or severe turmoil like last year... for a porfolio that bets on nothing you need maximum ooomph from each catagory.....
Actually, so far every time the market has sensed inflation, TIPS have rallied. Look at the Treasury's action a few days ago when they said they'd start buying back a huge amount of long-term Treasuries and presumably print money to do it. The market read inflation and everything that's an inflation hedge and/or an anti-dollar bet was up: gold, oil, other commodities, foreign currencies, and yes, TIPS. My 2025s were up 6% on that day. The evidence to date (what there is of it) suggests that TIPS will rally in periods of high inflation.
Like anything, people will pay more for security when they sense they need it most. People are paying a LOT for Treasuries now because they are willing to pay a high price for security. When investors fear inflation, they pay a high price for inflation protection.
Not all of us are looking to hit home runs with fixed income. I think my TIPS+VBMFX mix hits a lot of singles but rarely strikes out. And at this point in my "investing career," I'm content with singles out of my bonds. I bought my TIPS when their worst-case *real* YTM was over 2.5% (held to maturity), and I see nothing at all wrong with a safe, CPI+2.5% return out of fixed income.
So again, to the OP, it really depends on what you're trying to accomplish with your bond holdings: a "single set it and forget it" allocation or trying to move in and out of various types of bonds depending on perceived economic conditions. For me it's the latter. YMMV, naturally.
That was an anomaly, IMO. The reason was that because the Treasury was going to buy back its long bonds, the supply of them shrinks, the demand is artificially induced and leads to at least a short-term spike in price. But all the other stuff that usually rallies in an inflationary environment spiked up.dont forget the long term treasury ralleyed up 8% the other day and we all know inflation is hell for that, so the other day really wasnt much of an inflation performance indicator
IMHO, Vanguard's Intermediate Term Investment Grade bond fund is
the best overall compromise now for your tax sheltered bond money.
It was hammered last year and is currently paying about 6%. There
may even be a modest NAV gain when the economy recovers.