The effect of rising rates on Bond Funds

[RunningBum]

Bogleheads don't care about returns over a 5 month period. People here shouldn't either.

You're kidding, right? We have threads talking about a $100 bonus here, a $250 bonus there, 0.10% savings rate higher here, 0.02% lower expense rate on this index fund, etc. People try to squeeze a $10 savings on TurboTax.

I haven't figured out the exact numbers, but I have about a 10% upswing from dumping my bond funds for TIPs on a high 6 figures bond allocation. And it [the upswing] may go higher. I care. If you don't, that's no concern to me, but don't tell me I shouldn't.

 

[Sunset]

Bogleheads don't care about returns over a 5 month period. People here shouldn't either.

I care.
I wish I had sold my BND in January, instead of listening to experts who say "your bond fund will recover in X years.. "

Why wait X years for it to come back to where it was.

It's clear the Fed will raise rates a few times, or inflation will continue to burn everyone's purchasing power.

I'll buy back into BND when it has fallen a few more dollars as every dollar down is more than year's worth of dividend.

<edit> I did sell earlier some BND and unloaded the rest after waiting for the magic Regardless it's now below all my sell prices And going to fall more.

 

[aja8888]

I care.
I wish I had sold my BND in January, instead of listening to experts who say "your bond fund will recover in X years.. "

Why wait X years for it to come back to where it was.

It's clear the Fed will raise rates a few times, or inflation will continue to burn everyone's purchasing power.

I'll buy back into BND when it has fallen a few more dollars as every dollar down is more than year's worth of dividend.

<edit> I did sell earlier some BND and unloaded the rest after waiting for the magic Regardless it's now below all my sell prices And going to fall more.

I sold my bond fund in January as soon as I could to get the capital gain locked in for this year. At almost 79, I really don't want to wait 5 years for the fund to get back to even, maybe.

 

[OldShooter]

I care. We have never bought bond funds.

 

[Freedom56]

Those who are holding bond funds have to realize that with the 10 year note at 2.92%, if your investment grade bond fund is not yielding 4.5%-5% it will keep falling until it does. Bond funds are in a precarious position as they rolled over maturities and invested fund inflows into low coupon corporate notes over the last 14 months. Coupons on recently issued corporate notes from companies like Apple and Microsoft are so low that they may as well be zero coupon bonds and will trade like they are. Those funds that bought negative interest sovereign debt are now realizing cash stuffed in a mattress is a better asset class. Bond funds don't protect investors from market risk. They also are not portfolio ballasts. However, I suppose you could consider them ballasts if you own equity funds like ARKK. When the market sells off, bonds also sell off. It has more to do with fund inflow and outflows due to liquidity than pure logic. The only value in bond funds are with closed end funds (CEFs) that trade at heavy discount to their asset value. Otherwise, they should be avoided.

Those holding individual bonds are locked into the yield to maturity at the time of purchase just like those who bought treasuries and CDs. As I have stated in other post, 2022 will be a golden opportunity (like 2020, 2018, 2016, 2015, 2013, and 2008) for those that buy individual bonds and preferred stocks. Investment grade preferred stocks are already yielding 6% and it's a matter of time before we see a sell-off like March 2020 when yields shot up to 9-11% after heavy fund selling. At times like that, you have to take the emotion out of investing and load up the truck and buy those issues from JP Morgan, Banks of America, Capital One Financial, Wells Fargo and others and earn supercharged yields. None of those large money center banks are going out of business. Over two thirds of the population in this county are financially illiterate and those money center banks earn a fortune from that segment of the population and will continue to do so. This will be a great year to build up your individual bond ladder. Market timing with bonds is a viable strategy given the predictability of the selling algorithms used by passive bond funds. Rates are rising but how much can they rise? Remember we have 30 trillion of national debt and rising that is rolling over now at higher rates. We already have semi-conductor prices beginning to collapse and stocks like AMD and NVIDIA have been cut in half already in anticipation of what is to come. The supercharged inflation we were seeing with GPUs last years is collapsing. It's a matter of time before people start cutting back on spending which will cause a collapse in demand and a bursting of the commodity bubble. The only wild card is the mad dictator in Russia who is adding to the volatility.

 

[daylatedollarshort]

BTW the referenced Bogleheads thread was mostly from October of last year, with the final post in late December. I believe the last couple of months of last year bonds were down, and YTD this year VG Core Bond Fund is -9.18% and VG Total Bond Index is -9.60%. The advice in that thread didn't age well.

The advice in that Boglehead thread is illogical. Sure, bond funds usually recover, given enough time. The question to ask is not will my bond fund eventually recover but can I make more money, almost with 100% certainty, during periods of known rising rates buy switching out of bond funds and going to something like laddered short term Treasuries, until rates level off and then rebuying the fund. The math is pretty straightforward. Why lose huge amounts of money when there are less risky alternatives available at the touch of a keystroke?

 

[Closet_Gamer]

I am in the camp that rates are going to continue rising, perhaps precipitously. I've done something I've never done before which is dump my whole market, long-ish duration bond fund and build a two year treasury ladder. (Though I left my target date funds in my 401k alone.)

That said: we do need to consider that we are suffering recency bias and a bit of loss aversion leading us to think that we are super insightful on where rates are heading.

Mr. Market is still pricing the 30 year treasury below 3%.
Lots of smart people out there.

Any number of black swan events could come along and drive either a fed reversal on QT/rates or a giant flight to perceived/real safety in the face an economic dislocation. This would drive those high-duration bond funds right back up in value. Similarly, if China gets its act together so supply chains move and Russia goes home, the pack will get shuffled again on inflation.

I sold my duration -- a bit late as often happens -- bought some safety.

I may be quite wrong.

 

[daylatedollarshort]

Any number of black swan events could come along and drive either a fed reversal on QT/rates or a giant flight to perceived/real safety in the face an economic dislocation. This would drive those high-duration bond funds right back up in value.

It is possible those events could happen. But will there be huge moves in one day for bond yields like stocks sometimes move? Or will you have plenty of time to see that the planned interest rate increases by the Fed are ramping down and have time to rebuy your bond funds, if that is what you choose to do?

 

[aja8888]

The advice in that Boglehead thread is illogical. Sure, bond funds usually recover, given enough time. The question to ask is not will my bond fund eventually recover but can I make more money, almost with 100% certainty, during periods of known rising rates buy switching out of bond funds and going to something like laddered short term Treasuries, until rates level off and then rebuying the fund. The math is pretty straightforward. Why lose huge amounts of money when there are less risky alternatives available at the touch of a keystroke?

The vast majority of those long time folks on Bogleheads are multi-millionaires. They are hold bond funds because Jack Bogle told them to back when interest rates were 15%. And they were an income source when stocks did nothing. It's a much different game when interest rates are near zero.

 

[aja8888]

Those who are holding bond funds have to realize that with the 10 year note at 2.92%, if your investment grade bond fund is not yielding 4.5%-5% it will keep falling until it does. Bond funds are in a precarious position as they rolled over maturities and invested fund inflows into low coupon corporate notes over the last 14 months. Coupons on recently issued corporate notes from companies like Apple and Microsoft are so low that they may as well be zero coupon bonds and will trade like they are. Those funds that bought negative interest sovereign debt are now realizing cash stuffed in a mattress is a better asset class. Bond funds don't protect investors from market risk. They also are not portfolio ballasts. However, I suppose you could consider them ballasts if you own equity funds like ARKK. When the market sells off, bonds also sell off. It has more to do with fund inflow and outflows due to liquidity than pure logic. The only value in bond funds are with closed end funds (CEFs) that trade at heavy discount to their asset value. Otherwise, they should be avoided.

Those holding individual bonds are locked into the yield to maturity at the time of purchase just like those who bought treasuries and CDs. As I have stated in other post, 2022 will be a golden opportunity (like 2020, 2018, 2016, 2015, 2013, and 2008) for those that buy individual bonds and preferred stocks. Investment grade preferred stocks are already yielding 6% and it's a matter of time before we see a sell-off like March 2020 when yields shot up to 9-11% after heavy fund selling. At times like that, you have to take the emotion out of investing and load up the truck and buy those issues from JP Morgan, Banks of America, Capital One Financial, Wells Fargo and others and earn supercharged yields. None of those large money center banks are going out of business. Over two thirds of the population in this county are financially illiterate and those money center banks earn a fortune from that segment of the population and will continue to do so. This will be a great year to build up your individual bond ladder. Market timing with bonds is a viable strategy given the predictability of the selling algorithms used by passive bond funds. Rates are rising but how much can they rise? Remember we have 30 trillion of national debt and rising that is rolling over now at higher rates. We already have semi-conductor prices beginning to collapse and stocks like AMD and NVIDIA have been cut in half already in anticipation of what is to come. The supercharged inflation we were seeing with GPUs last years is collapsing. It's a matter of time before people start cutting back on spending which will cause a collapse in demand and a bursting of the commodity bubble. The only wild card is the mad dictator in Russia who is adding to the volatility.

Very good strategy and I am in the "wait" line.

 

[Closet_Gamer]

It is possible those events could happen. But will there be huge moves in one day for bond yields like stocks sometimes move? Or will you have plenty of time to see that the planned interest rate increases by the Fed are ramping down and have time to rebuy your bond funds, if that is what you choose to do?

I'm not so much thinking about one day moves as that the longer term changes never fully materialize.

There has been loads of thinking over the last 20 years that interest rates HAD to increase. But the world seems to keep handing us events that have prevented this.

9/11
Housing Crash
Covid

There could easily be another event that pushes rate increases out 5 more years.

30 year was at 1.7% six months ago, its at 2.95% now. If it retraces back down to 1.7% those of us who ditched our bond funds may suddenly be looking at having sold low and wondering if we should buy high.

The curses of trading are still there. They just play out a bit more slowly.

 

[lawman]

Those who are holding bond funds have to realize that with the 10 year note at 2.92%, if your investment grade bond fund is not yielding 4.5%-5% it will keep falling until it does. Bond funds are in a precarious position as they rolled over maturities and invested fund inflows into low coupon corporate notes over the last 14 months. Coupons on recently issued corporate notes from companies like Apple and Microsoft are so low that they may as well be zero coupon bonds and will trade like they are. Those funds that bought negative interest sovereign debt are now realizing cash stuffed in a mattress is a better asset class. Bond funds don't protect investors from market risk. They also are not portfolio ballasts. However, I suppose you could consider them ballasts if you own equity funds like ARKK. When the market sells off, bonds also sell off. It has more to do with fund inflow and outflows due to liquidity than pure logic. The only value in bond funds are with closed end funds (CEFs) that trade at heavy discount to their asset value. Otherwise, they should be avoided.

Those holding individual bonds are locked into the yield to maturity at the time of purchase just like those who bought treasuries and CDs. As I have stated in other post, 2022 will be a golden opportunity (like 2020, 2018, 2016, 2015, 2013, and 2008) for those that buy individual bonds and preferred stocks. Investment grade preferred stocks are already yielding 6% and it's a matter of time before we see a sell-off like March 2020 when yields shot up to 9-11% after heavy fund selling. At times like that, you have to take the emotion out of investing and load up the truck and buy those issues from JP Morgan, Banks of America, Capital One Financial, Wells Fargo and others and earn supercharged yields. None of those large money center banks are going out of business. Over two thirds of the population in this county are financially illiterate and those money center banks earn a fortune from that segment of the population and will continue to do so. This will be a great year to build up your individual bond ladder. Market timing with bonds is a viable strategy given the predictability of the selling algorithms used by passive bond funds. Rates are rising but how much can they rise? Remember we have 30 trillion of national debt and rising that is rolling over now at higher rates. We already have semi-conductor prices beginning to collapse and stocks like AMD and NVIDIA have been cut in half already in anticipation of what is to come. The supercharged inflation we were seeing with GPUs last years is collapsing. It's a matter of time before people start cutting back on spending which will cause a collapse in demand and a bursting of the commodity bubble. The only wild card is the mad dictator in Russia who is adding to the volatility.

This post moved me off my butt..I have been thinking of selling my bond fund and after reading this I just made up my mind and did it..Lost a lot but saved more..Now I want to buy individual bonds but I have never done it before. Now I have pot of money I need to do something with. What will you watch for and when will you know to start buying? I'm considering buying some 9 month to 1 year treasuries...Should I do this or just wait for a better opportunity?

 

[VanWinkle]

I'm not so much thinking about one day moves as that the longer term changes never fully materialize.

There has been loads of thinking over the last 20 years that interest rates HAD to increase. But the world seems to keep handing us events that have prevented this.

9/11
Housing Crash
Covid

There could easily be another event that pushes rate increases out 5 more years.

30 year was at 1.7% six months ago, its at 2.95% now. If it retraces back down to 1.7% those of us who ditched our bond funds may suddenly be looking at having sold low and wondering if we should buy high.

The curses of trading are still there. They just play out a bit more slowly.

Thanks for your common sense post!

This same scenario has played out before, but there is risk in any investment including bonds. I'm willing to accept the risk and remain calm.

VW

 

[jazz4cash]

This post moved me off my butt..I have been thinking of selling my bond fund and after reading this I just made up my mind and did it..Lost a lot but saved more..Now I want to buy individual bonds but I have never done it before. Now I have pot of money I need to do something with. What will you watch for and when will you know to start buying? I'm considering buying some 9 month to 1 year treasuries...Should I do this or just wait for a better opportunity?

You should at least buy some now to get familiar with the process. Check out the auction and purchase in the secondary market. You can just buy a bond or a few @ $1000/bond. Then you can decide if you want to wait, build a ladder, etc. Take the Plunge as the other thread is titled.

 

[Markola]

I note this comment from one of the readers of the OP’s Bogleheads post:

“I liked the way Bill McNabb of Vanguard used to put it - if your holding period is going to be longer than your bond duration, you actually WANT rates to go up as that bond holder. Simply worded, and quickly debunks the way too common myth that rising rates is always a bad thing if you own bonds.”

I assumed this but have never seen it put so succinctly. The duration of the Vanguard Total Bond Market Index Fund is 6.9 years.

 

[mikes425]

I note this comment from one of the readers of the OP’s Bogleheads post:

“I liked the way Bill McNabb of Vanguard used to put it - if your holding period is going to be longer than your bond duration, you actually WANT rates to go up as that bond holder. Simply worded, and quickly debunks the way too common myth that rising rates is always a bad thing if you own bonds.”

I assumed this but have never seen it put so succinctly. The duration of the Vanguard Total Bond Market Index Fund is 6.9 years.

So where do you bond fund nay-sayers come down on SCHO, (ST Treasury), VGIT(IT Bond) and VCSH (corporate). Three large bond fund holdings that are indeed intended as 'ballast' and insurance in my PF., which is about 50/50. Are you inferring that old 'this time it IS different' notion - or otherwise is a long-term well diversified AA aimed to hold in line with ones long term goals - vs trying to time the market - suddenly no longer a valid approach, albeit one of the most widely embraced investment mantras that is even basically modeled by FireCalc - upon which so many here seem to rely for their FIRE decisions?

 

[mrfeh]

Thanks for your common sense post!

This same scenario has played out before, but there is risk in any investment including bonds. I'm willing to accept the risk and remain calm.

VW

It just happened 4 years ago...rates had been rising from mid 2017 thru the 3rd quarter of 2018 and everybody was saying "rates will keep climbing". And then they proceeded to drop for the next 12 months.

I moved some $ from total bond to other fixed income vehicles last summer. This afternoon I moved about a third of that back to total bond.

 

[Markola]

So where do you bond fund nay-sayers come down on SCHO, (ST Treasury), VGIT(IT Bond) and VCSH (corporate). Three large bond fund holdings that are indeed intended as 'ballast' and insurance in my PF., which is about 50/50. Are you inferring that old 'this time it IS different' notion - or otherwise is a long-term well diversified AA aimed to hold in line with ones long term goals - vs trying to time the market - suddenly no longer a valid approach, albeit one of the most widely embraced investment mantras that is even basically modeled by FireCalc - upon which so many here seem to rely for their FIRE decisions?

Me? I’m pro Vanguard Total Bond Index Fund. That’s what my comment was trying to say.

 

[daylatedollarshort]

So where do you bond fund nay-sayers come down on SCHO, (ST Treasury), VGIT(IT Bond) and VCSH (corporate). Three large bond fund holdings that are indeed intended as 'ballast' and insurance in my PF., which is about 50/50. Are you inferring that old 'this time it IS different' notion - or otherwise is a long-term well diversified AA aimed to hold in line with ones long term goals - vs trying to time the market - suddenly no longer a valid approach, albeit one of the most widely embraced investment mantras that is even basically modeled by FireCalc - upon which so many here seem to rely for their FIRE decisions?

Here is an example I used in another thread, so skip this if you've read it. Both investors have $10K in a bond fund in January, 2022.

Investor A - Sells bond fund in Jan 2022, buys short term Treasuries in 2022, rebuys the bond fund in 2023 or whenever the Fed has signaled that rates have topped out. Has $10,300 to invest in the bond fund with interest from the Treasuries.

Investor B - hangs onto their $10K bond fund until the Fed signals rates are going to level off. Has $8,000 in her bond fund in 2023.

Both A and B start making money in bond funds again once the big rate increases have stopped, but A will make more than B, because A's starting balance is $2.3K more. The difference now is we know rates are going to go up all this year per the Fed with almost 100% certainty, which will push bond prices down. And the Fed will let us know well in advance when they plan to taper off the rate increases. You can follow a mantra or you can follow the math. I would be interested in seeing the math from anyone who sees a way where investor B is going to come out ahead of investor A.

 

[mrfeh]

The difference now is we know rates are going to go up all this year per the Fed with almost 100% certainty. And the Fed will let us know well in advance when they plan to taper off the rate increases. You can follow a mantra or you can follow the math.

The fed does not determine the rates of corporate or treasury bonds. The market does.

 

[mikes425]

Here is an example I used in another thread, so skip this if you've read it. Both investors have $10K in a bond
Both A and B start making money in bond funds again once the big rate increases have stopped, but A will make more than B, because A's starting balance is $2.3K more. The difference now is we know rates are going to go up all this year per the Fed with almost 100% certainty, which will push bond prices down. And the Fed will let us know well in advance when they plan to taper off the rate increases. You can follow a mantra or you can follow the math. I would be interested in seeing the math from anyone who sees a way where investor B is going to come out ahead of investor A.

Ok, well, i’ll admit i am following my occasional FA’s suggestion that I stay in the funds for reasons stated, that they fulfill a necessary AA role, that the dividend will be worth more - and that i am not timing the market - and as for NAV depreciation that already has happened at this point. Yeah i get that active traders can do wholesale changes to large chunks of their PF. I am not in long duration stuff. I follow your math but rates also may not necessarily go ballistic either

 

[Sunset]

The fed does not determine the rates of corporate or treasury bonds. The market does.

But if the Fed moves rates up 0.5%, I bet corp and treasury rates move up.

 

[lem1955]

I own VCOBX and VBTLX. I also own 1 CD paying 3.4% adequate to pay expenses for 2023. Concerned about 2024, I sold enough VCOBX for that year and purchased an 18month CD - pays 2.25%. I wasn't happy about selling at a loss, but I'll sleep better. After that, I will start collecting SS (70years old), and will not need to withdraw as much from my tIRA. So I can be calmer if interest rates continue to rise.

 

[mrfeh]

But if the Fed moves rates up 0.5%, I bet corp and treasury rates move up.

Nope.

The people that buy and sell bonds for a living know everything you do (and more). They know what the Fed is planning to do over the next couple years and price things accordingly. They don't wait for the actual rate change.

 

[pb4uski]

Nope.

The people that buy and sell bonds for a living know everything you do (and more). They know what the Fed is planning to do over the next couple years and price things accordingly. They don't wait for the actual rate change.

Definitely NO. Even the Fed doesn't know what the Fed is planning to do over the next couple years. I worked for a few years as the head of investment accounting for a life insurer and as a result spent a lot of time with the bond traders... they are very smart but they don't have that good of a crystal ball.