Bond Funds in an IRA Prognostication please

[all4j]

This doesn't account for any dividends from the funds, nor from the money that I would earn on the CDs etc, just to keep the question simple.

What would you be doing - selling and reinvesting, or hold and hope?

I don't think you can turn this into a simple question & it be still be meaningful. There is a wide variation in bond funds -- credit quality, duration, style, etc. Each attribute will affect the answer.

Are you saying assume that you are NOT reinvesting fund distributions? They are often/usually the larger component of total return. There are rules of thumb for projecting fund return under certain assumptions; but these assumptions are critical & quite possibly not found in todays environment. For example, it may assume a "steady" rise in rates over time. There also may be impacts from having an inverted yield curve. They also likely assume the fund keeps a constant duration -- which not all funds do. Some will say the fund will return the initial yield if held for the same time as the duration; others twice the duration! In all honesty. no one knows the extent to which your assumptions will play out over the next 7.5 years.

I would suggest also that you consider your goal to not be "recover nominal amount of dollars in bonds", but rather maximize overall portfolio with acceptable risk. Might start with going back to see what your portfolio performance would be for the same time period if you had more in stocks. If you currently rebalance, consider impact of that also. For example, having a 5 year CD of sufficient size might constrain your ability to rebalance.

Matters little what I would do, but I'm not trying to duck that. I'm not a fan of locking in real return losses. However, since you are already in the funds, I would at most gradually shift some from longer term bonds into short term and/or "cash" (what that actually is varies between investors). Laddering 3 or 6 month treasuries might make sense as a transition. Decide upfront your criteria for "restoring" your aa. Also consider how you plan to do RMDs -- in kind transfer, cash out in advance, etc.

Lastly, don't lose sight of the sleep well at night factor!

 

[daylatedollarshort]

Note that inflation in 1994 was under 3% while now it is almost 9%. Different FED goals back then.

And not only that, real interest rates in 1994 were positive, not -4.4% like we have today. The Fed doesn't need to raise interest rates when inflation is low and real interest rates are positive.

Real interest rates chart -
https://www.longtermtrends.net/real-interest-rate/

 

[Lsbcal]

Note that inflation in 1994 was under 3% while now it is almost 9%. Different FED goals back then.

I am not saying to take the 1994 literally as we all know that the economics of the time are always different. Just saying that, for example, inflation could moderate and the Fed could even pull rates down a bit if a recession develops.

Right now you can get 5 year TIPS at +1.8%. So real rates are quite positive. BTW, TIPS are my bond choice at this time. The are rising quite rapidly this month.

 

[daylatedollarshort]

I am not saying to take the 1994 literally as we all know that the economics of the time are always different. Just saying that, for example, inflation could moderate and the Fed could even pull rates down a bit if a recession develops.

Right now you can get 5 year TIPS at +1.8%. So real rates are quite positive. BTW, TIPS are my bond choice at this time. The are rising quite rapidly this month.

Real rates on TIPS are positive, but not on nominal bonds, which is how real interest rates are defined.

 

[lawman]

I too had a realized loss on a bond fund I sold after holding it for around 15 years. Trying to fully understand the math I can't figure out if that number was affected by the dividends I took in cash throughout the years. I'm assuming it does account for reinvestment of dividends but If I had a $40,000.00 loss but had taken $40,000.00 in cash dividends did I really lose $40,000.00?

 

[Lsbcal]

Real rates on TIPS are positive, but not on nominal bonds, which is how real interest rates are defined.

Actually I don't know quite how to tackle this one. For instance, the 5 year Treasury currently is at 4.16%. If you buy that issue it is a contract for 5 years. True the past 12 months have had very high rates of inflation. But what about the next 5 years? With such intermediate funds you will have to look at the future inflation rate. I guess the bond market is predicting the 5 year inflation rate will be on the order of the nominal minus TIPS rate = 4.16 - 1.86 = 2.3%.

My point is you can buy TIPS paying a historically pretty good real rate. You don't have to worry then about today's past 12 months inflation. The short term TIPS are even better rates.

P.S. I am no bond expert, just trying to move with the punches.

 

[Chuckanut]

Actually I don't know quite how to tackle this one. For instance, the 5 year Treasury currently is at 4.16%. If you buy that issue it is a contract for 5 years. True the past 12 months have had very high rates of inflation. But what about the next 5 years?

Good point. The issue for many of us is simple. What makes us believe that inflation over the next 2-5 years will be lower, the same or higher than now?

OK, the Fed is planning on raising rates. That's one thing we can 'know' in general, though no guarantees. But, what about Federal spending? Is there any move to significantly reduce spending now in the next few years? Or is all the reduced spending waiting for some time later this decade?

 

[daylatedollarshort]

Actually I don't know quite how to tackle this one. For instance, the 5 year Treasury currently is at 4.16%. If you buy that issue it is a contract for 5 years. True the past 12 months have had very high rates of inflation. But what about the next 5 years? With such intermediate funds you will have to look at the future inflation rate. I guess the bond market is predicting the 5 year inflation rate will be on the order of the nominal minus TIPS rate = 4.16 - 1.86 = 2.3%.

My point is you can buy TIPS paying a historically pretty good real rate. You don't have to worry then about today's past 12 months inflation. The short term TIPS are even better rates.

P.S. I am no bond expert, just trying to move with the punches.

I'm buying TIPS now, too, because the yields are decent by historical standards.

But real interest rates are current interest rates adjusted for inflation. This St. Louis Fed chart has them at -2.56%, "calculated with a model that uses Treasury yields, inflation data, inflation swaps, and survey-based measures of inflation expectations." At -2.56% that means the Fed will likely still keep raising interest rates until that number is 0% or higher, or inflation is at their 2% target. We don't know what future real rates will be but we know what it is today, though the exact calculations and indices used may vary. The Fed's calculation show it to be -2.56% in this chart, as of September, 2022.

https://fred.stlouisfed.org/series/REAINTRATREARAT1YE

 

[Jerry1]

Rebalancing means trimming from the winners to buy more of the losers. This is the exact opposite of the sell your losers and hold on to (or buy more of) your winners advice.

Great plan but with the stock funds and bond funds tanking at the same time it's got to be hard to accomplish this.

Exactly what I was thinking. It is painful right now in that everything is taking a hit. With all this inflation, I thought for sure gold would take off, but not even that is going up.

 

[DawgMan]

So I have a similar dilemma after retiring this year. My strategy as of the beginning of the year was to effectively ladder 10 years worth planned spend in bonds (held to maturity), however, while I did this with year's 1-5 $$, I left years 6-10 primarily in short term bond funds with a smidgeon still in intermediate. My thought was the the bond funds had a min of 6+ years to recover and hopefully perform (total return) reasonably over a 6+ year period? How much of the Fed's planned interest rates bumps are baked in? Not sure. But my thought (hope) was rates settle down over the next 24 months and perhaps even come down if we go hard into a recession. I'm inclined to sit there and do nothing, but perhaps I can be convinced otherwise.

 

[audreyh1]

Great plan but with the stock funds and bond funds tanking at the same time it's got to be hard to accomplish this.

It’s not. Performance between asset classes is relative. If one is losing less than the other, it’s the winner.

 

[aja8888]

It’s not. Performance between asset classes is relative. If one is losing less than the other, it’s the winner.

Yes, they are just losing value at different rates.

 

[Sunset]

Actually I don't know quite how to tackle this one. For instance, the 5 year Treasury currently is at 4.16%. If you buy that issue it is a contract for 5 years. True the past 12 months have had very high rates of inflation. But what about the next 5 years? With such intermediate funds you will have to look at the future inflation rate. I guess the bond market is predicting the 5 year inflation rate will be on the order of the nominal minus TIPS rate = 4.16 - 1.86 = 2.3%.

My point is you can buy TIPS paying a historically pretty good real rate. You don't have to worry then about today's past 12 months inflation. The short term TIPS are even better rates.

P.S. I am no bond expert, just trying to move with the punches.

I'm a bond dummy, but trying to learn.

Can I buy these TIPs at my brokerage and are you saying they pay 1.86% plus go up with inflation (like the I-bond does, only it pays 0%) ?