Author Topic: What do you invest in during financial independence?  (Read 4726 times)

greencooper

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What do you invest in during financial independence?
« on: March 18, 2018, 04:36:02 PM »
My understanding is that with the target date funds that schwab or vanguard offer, the funds are mostly in bonds during retirement age, but that wouldnt have good returns since 4% withdrawl rule expects better return than what bonds would offer

So should target date funds be avoided if one wants to be financially independent? If so, should one invest in only index funds during financial independence?
« Last Edit: March 18, 2018, 04:37:55 PM by greencooper »

Financial.Velociraptor

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Re: What do you invest in during financial independence?
« Reply #1 on: March 18, 2018, 06:09:36 PM »
I'm 60/40 but my 40-fixed income is mostly in closed end funds bought below NAV.  The munis are earning a little over 6% and the taxable are earning 8 to 12%.
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AdrianC

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Re: What do you invest in during financial independence?
« Reply #2 on: March 19, 2018, 08:09:45 PM »
I looked up the Vanguard target date funds. The retire right now fund is about 40% stocks 60% bonds, but itís aimed at 65-70 years olds. I think thatís too conservative for a younger retiree.

The usual advice is donít put money in stocks youíll need within five years. At a 4% withdrawal rate that implies a max allocation to stocks of 80%. Then you have about five years expenses in bonds. Vanguard Lifestrategy growth is a good choice for 80/20.

Dicey

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Re: What do you invest in during financial independence?
« Reply #3 on: March 20, 2018, 08:13:20 AM »
So should target date funds be avoided if one wants to be financially independent? If so, should one invest in only index funds during financial independence?
You are aware that you're getting a little mixed up here? One can purchase bonds in index funds as well?

I personally feel bonds are somewhat overrated. I do not prize safety over growth. I want to retire early, but I don't want my money to. It works so I don't have to.

As you might guess, I am not a fan of target date funds, unless you tweak the dates to prevent excessive bond holdings-driven portfolio atrophy.
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Eric

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Re: What do you invest in during financial independence?
« Reply #4 on: March 20, 2018, 10:57:16 AM »
My understanding is that with the target date funds that schwab or vanguard offer, the funds are mostly in bonds during retirement age, but that wouldnt have good returns since 4% withdrawl rule expects better return than what bonds would offer

So should target date funds be avoided if one wants to be financially independent? If so, should one invest in only index funds during financial independence?

Which specific TDF are you looking at?  It should tell you exactly what the allocation is now and what it moves towards.  That way you don't have to guess.

But in general, of course you can hold bonds, even a lot of bonds, and still come out just fine with a 4% WR.  The original Trinity Study used a 50/50 stock/bond allocation.  The updated versions had multiple asset allocations that they tested, but there's little difference between them as long as you hold at least 50% stock.  A TDF could be fine for this.  If you think it's too conservative, then either pick one with a date further out or add more stock on the side.
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BTDretire

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Re: What do you invest in during financial independence?
« Reply #5 on: March 20, 2018, 11:00:15 AM »
I had a few houses in the 80s but almost 100% Stocks until I was 62. Recently bought some preferred stocks. Last year I put 2% in a bond fund, but only because I was limited it what I could invest in and couldn't decide on a stock fund. That has been a poor choice.
 Sorry, but this is a poor time to invest in bond funds, you can buy a bond and wait until it matures to get all you money back,  but you can't do that with a fund.

EDIT
 Sorry, I read that as getting to Financial Independence.
 Now that I'm more mature, OK 63yrs old, I want to move to less stock market exposure but I don't want bonds
at the time of the cycle. So, I'm buying REIT Preferred stocks. The pay 6.5% to 7.5% and will either payoff the full
amount or continue to pay the dividend, (assuming no bankruptcy). It's not for everyone, and I pay someone to
find companies with less risk in their holdings. You want Redeemable, Cumulative and FTF (fixed to float) is not a bad thing at this time, but not mandatory.
« Last Edit: March 20, 2018, 11:39:26 AM by BTDretire »

Eric

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Re: What do you invest in during financial independence?
« Reply #6 on: March 20, 2018, 11:12:25 AM »

 Sorry, but this is a poor time to invest in bond funds, you can buy a bond and wait until it matures to get all you money back,  but you can't do that with a fund.

It's always a poor time to attempt market timing.  That applies to both stocks and bonds.
"Compound interest is the most powerful force in the universe."  -- Einstein

BTDretire

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Re: What do you invest in during financial independence?
« Reply #7 on: March 20, 2018, 11:56:08 AM »

 Sorry, but this is a poor time to invest in bond funds, you can buy a bond and wait until it matures to get all you money back,  but you can't do that with a fund.

It's always a poor time to attempt market timing.  That applies to both stocks and bonds.

The FED has made it pretty clear that they will be raising interest rates, and probably 3 times this year.
If they do, bonds will lose value.
I consider it a conservative stance to believe what they say.

Obviously things can change, but...

https://www.cnbc.com/2018/03/16/federal-reserve-expected-to-raise-interest-rates-wednesday-and-provide-clues-about-its-next-moves.html

Eric

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Re: What do you invest in during financial independence?
« Reply #8 on: March 20, 2018, 12:52:31 PM »

 Sorry, but this is a poor time to invest in bond funds, you can buy a bond and wait until it matures to get all you money back,  but you can't do that with a fund.

It's always a poor time to attempt market timing.  That applies to both stocks and bonds.

The FED has made it pretty clear that they will be raising interest rates, and probably 3 times this year.
If they do, bonds will lose value.
I consider it a conservative stance to believe what they say.

Obviously things can change, but...

https://www.cnbc.com/2018/03/16/federal-reserve-expected-to-raise-interest-rates-wednesday-and-provide-clues-about-its-next-moves.html

I understand how bonds work.  Sometimes stocks lose value too.  Welcome to investing!  If you're doing it based on your prediction of the future, you're going to do a poor job of it.  Timing the market is always poor advice.
"Compound interest is the most powerful force in the universe."  -- Einstein

Financial.Velociraptor

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Re: What do you invest in during financial independence?
« Reply #9 on: March 20, 2018, 03:06:33 PM »
... you can buy a bond and wait until it matures to get all you money back,  but you can't do that with a fund.

This is why I put my bonds and income in Closed End Funds.  There is no early redemption to force selling.  All debts get held to maturity and duration risk expires.
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SwordGuy

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Re: What do you invest in during financial independence?
« Reply #10 on: March 20, 2018, 03:21:07 PM »
... you can buy a bond and wait until it matures to get all you money back,  but you can't do that with a fund.

This is why I put my bonds and income in Closed End Funds.  There is no early redemption to force selling.  All debts get held to maturity and duration risk expires.

Oh, thank you!!!!   I didn't know this was an option!

I didn't want to buy individual bonds.   And the bond funds that would sell off when times were bad seem more like stocks but without the up-side stocks provide.


SwordGuy

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Re: What do you invest in during financial independence?
« Reply #11 on: March 20, 2018, 03:30:22 PM »
Target funds don't make much sense to me.

You're being charged more fees to do something that would take less than 10 minutes a year.



robartsd

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Re: What do you invest in during financial independence?
« Reply #12 on: March 20, 2018, 05:28:10 PM »
Target funds don't make much sense to me.

You're being charged more fees to do something that would take less than 10 minutes a year.
I recommend Vanguard target date funds to people who are starting out and want automatic reinvestment (not available using ETFs). The $1000 minimum is nice and the expense ratio is reasonable compared to Investor class shares of the components. If your portfolio is large enough to buy Admiral shares of the components, it's time to start re-balancing yourself to save money.

DreamFIRE

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Re: What do you invest in during financial independence?
« Reply #13 on: March 20, 2018, 05:35:40 PM »
Sorry, but this is a poor time to invest in bond funds, you can buy a bond and wait until it matures to get all you money back,  but you can't do that with a fund.
I'm pretty much out of traditional bond funds now, but there is a type of bond fund that works more like holding individual bonds.

https://forum.mrmoneymustache.com/investor-alley/basic-bond-question/msg1902148/#msg1902148

kei te pai

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Re: What do you invest in during financial independence?
« Reply #14 on: March 21, 2018, 01:21:57 AM »
I guess this isnt really what you are asking, but I invest in relationships, in my health (exercise, good food, sleep), and my community. Financial independence is great, but its meaningless without some other stuff going on.

BTDretire

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Re: What do you invest in during financial independence?
« Reply #15 on: March 21, 2018, 06:18:58 AM »

 Sorry, but this is a poor time to invest in bond funds, you can buy a bond and wait until it matures to get all you money back,  but you can't do that with a fund.

It's always a poor time to attempt market timing.  That applies to both stocks and bonds.

The FED has made it pretty clear that they will be raising interest rates, and probably 3 times this year.
If they do, bonds will lose value.
I consider it a conservative stance to believe what they say.

Obviously things can change, but...

https://www.cnbc.com/2018/03/16/federal-reserve-expected-to-raise-interest-rates-wednesday-and-provide-clues-about-its-next-moves.html
Quote
I understand how bonds work.  Sometimes stocks lose value too.


Yes, there are cycles in stocks and bonds.

Quote
Welcome to investing!

Thank you, even if you are a little late, I've been investing for over 30 years.
Quote

 If you're doing it based on your prediction of the future, you're going to do a poor job of it.

I'm not predicting anything, the Fed has said they are raising interest rates.

Tell me, if a person was at a point in their life where they wanted bonds in their portfolio,
would it be good to buy a 30 year treasury bond?

Quote
Timing the market is always poor advice.

"The young man knows the rules, but the old man knows there are exceptions"

Edit to add,
 I just listened to Jerome Powell the Fed chiefs news conference,
he projected 2 additional interest rate increases over the next 3 years.
Today the rate was increased to 1.75% and the consensus of the Fed, is a projected rate of 3.4% in 2020.
« Last Edit: March 21, 2018, 01:49:45 PM by BTDretire »

DreamFIRE

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Re: What do you invest in during financial independence?
« Reply #16 on: March 21, 2018, 10:32:51 PM »
Edit to add,
 I just listened to Jerome Powell the Fed chiefs news conference,
he projected 2 additional interest rate increases over the next 3 years.

I'm still hearing there are going to be 2 to 3 additional THIS year alone.

Just read, "Of the 15 Fed board members, six anticipate the Fed will hike four times this year and one believes five hikes will be necessary."

Eric

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Re: What do you invest in during financial independence?
« Reply #17 on: March 22, 2018, 12:47:41 AM »
Yes, of course they are planning to raise interest rates.  If that happens, then bond funds will struggle a bit, but that means the downside is a couple of a percent or so. Unless of course the economy starts to sour and they decide to not raise rates.  Or stocks take a major drop and then bonds flourish as people flee the stock market.  It's not set in stone that rates will rise and bonds will fall.  If you think anyone can predict the future, even seemingly-qualified people, then I don't think you've been paying much attention to the success rate of past predictions.

Attempting to set your AA according to the latest prognostication is just silly.  Whether they raise rates in the short term or not, we're nearing the end of a long bull market.  It'll soon be a good time to own bonds.  Thinking you can simply time when this will happen is a fool's errand, no different than trying to time the stock market.  Feel free to do it yourself, but don't recommend it to others.  It's simply poor advice.  There's no other way to frame it.
"Compound interest is the most powerful force in the universe."  -- Einstein

BTDretire

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Re: What do you invest in during financial independence?
« Reply #18 on: March 22, 2018, 03:31:14 PM »
Yes, of course they are planning to raise interest rates.  If that happens, then bond funds will struggle a bit, but that means the downside is a couple of a percent or so.

 I don't want to sound like I'm a market timer. I just believe if the Fed says they are raising rates, the have raised rates, rates have been at a low for many years, and the economy is in a growth situation after slow growth for so long,
that it is worth thinking the Fed's opinion has some weight.
 When you say the down side is a couple of percent, a couple of percent of what?
 If rates rise 2%, a 10 year bond losses 15% and you must hold 8 more years to get full payout.
If rates rise 2%, a 1 year bond loses 1.9% and you get full payout in just 1 year. Then you can reinvest at the
new rate which with a 2% rate increase is probably double the rate you were getting.

If someone is going to buy bonds would you tell them to buy 1 year bonds, 10 year bonds or 30 year bonds?

 
Quote
Unless of course the economy starts to sour and they decide to not raise rates.  Or stocks take a major drop and then bonds flourish as people flee the stock market.  It's not set in stone that rates will rise and bonds will fall.  If you think anyone can predict the future, even seemingly-qualified people, then I don't think you've been paying much attention to the success rate of past predictions.

Attempting to set your AA according to the latest prognostication is just silly.  Whether they raise rates in the short term or not, we're nearing the end of a long bull market.  It'll soon be a good time to own bonds.  Thinking you can simply time when this will happen is a fool's errand, no different than trying to time the stock market.  Feel free to do it yourself, but don't recommend it to others.  It's simply poor advice.  There's no other way to frame it.

DreamFIRE

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Re: What do you invest in during financial independence?
« Reply #19 on: March 22, 2018, 06:18:48 PM »
I'll add that just because I have very little in traditional bond funds doesn't mean I'm anywhere near 100% stocks.

Even my mutual funds are diversified including REITs and Metals/Mining and even energy (which hasn't done well in some time.)  And I have a sizeable amount in VG Prime MM and CD's.  And to top it off, my work retirement account has a fixed income 3% guaranteed interest rate with no management fee applicable to that balance which I've been contributing to for a while.
« Last Edit: March 22, 2018, 06:20:37 PM by DreamFIRE »

Eric

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Re: What do you invest in during financial independence?
« Reply #20 on: March 22, 2018, 06:48:10 PM »
If someone is going to buy bonds would you tell them to buy 1 year bonds, 10 year bonds or 30 year bonds?

A mix.  I prefer the Vanguard Total Bond Market Fund, VBTLX.

The downside of a couple of percent means that VBTLX is unlikely to lose more than 2% in any given year.  The worst performance since 2003 was -1.97% (which happened in 2013).  The fed also increased rates from mid 2004 - mid 2007.

Fed rates:
https://fred.stlouisfed.org/series/FEDFUNDS

VBTLX yearly returns:
https://personal.vanguard.com/us/funds/snapshot?FundIntExt=INT&FundId=0584&funds_disable_redirect=true#tab=1a

Not sure how to put them on the same chart, but it's clear that raising rates doesn't not mean bond funds will lose money.  As such, people should buy them without consideration of hypothetical interest rate increases.
« Last Edit: March 22, 2018, 06:50:45 PM by Eric »
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BTDretire

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Re: What do you invest in during financial independence?
« Reply #21 on: March 23, 2018, 07:33:31 AM »
Just a couple quibles, between July 8, 2016 and Dec 16, 2016 VBTLX dropped 5.5%
and Between Sept 6, 2017  and Mar 9, 2017 VBTLX dropped 3.9%.

 I'm sure a bond fund is a bit more stable as the shorter term bonds are renewed at higher rates (if rates do increase)
I would stick with shorter term duration for now.

We will disagree, but I would not buy long term bonds or bonds funds now. Although I agree a fund will be more stable than a single bond.
 I think it is prudent to believe what the Fed says they are going to do.

Here's a chart showing the stability of Shorter duration 2.9 yr bond fund VBISX vs an Intermediate duration 6.1 yr bond fund VBTLX vs Fed funds rate.



Fishindude

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Re: What do you invest in during financial independence?
« Reply #22 on: March 23, 2018, 08:24:00 AM »
I feel like we already have enough money working for us in the general stock market between the 401K and mutual funds.   Have been buying shares of stock in one particular company I am quite familiar with that pays great dividends, and also have been buying farm ground.

tooqk4u22

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Re: What do you invest in during financial independence?
« Reply #23 on: March 23, 2018, 09:24:49 AM »
Edit to add,
 I just listened to Jerome Powell the Fed chiefs news conference,
he projected 2 additional interest rate increases over the next 3 years.

I'm still hearing there are going to be 2 to 3 additional THIS year alone.

Just read, "Of the 15 Fed board members, six anticipate the Fed will hike four times this year and one believes five hikes will be necessary."

This is already priced in, which is why the rate increase and data had no impact on the bond markets.

Duration and velocity of rate changes is what matters. 

Yes, of course they are planning to raise interest rates.  If that happens, then bond funds will struggle a bit, but that means the downside is a couple of a percent or so.

 I don't want to sound like I'm a market timer. I just believe if the Fed says they are raising rates, the have raised rates, rates have been at a low for many years, and the economy is in a growth situation after slow growth for so long,
that it is worth thinking the Fed's opinion has some weight.
 When you say the down side is a couple of percent, a couple of percent of what?
 If rates rise 2%, a 10 year bond losses 15% and you must hold 8 more years to get full payout.
If rates rise 2%, a 1 year bond loses 1.9% and you get full payout in just 1 year. Then you can reinvest at the
new rate which with a 2% rate increase is probably double the rate you were getting.

If someone is going to buy bonds would you tell them to buy 1 year bonds, 10 year bonds or 30 year bonds?

 
Quote
Unless of course the economy starts to sour and they decide to not raise rates.  Or stocks take a major drop and then bonds flourish as people flee the stock market.  It's not set in stone that rates will rise and bonds will fall.  If you think anyone can predict the future, even seemingly-qualified people, then I don't think you've been paying much attention to the success rate of past predictions.

Attempting to set your AA according to the latest prognostication is just silly.  Whether they raise rates in the short term or not, we're nearing the end of a long bull market.  It'll soon be a good time to own bonds.  Thinking you can simply time when this will happen is a fool's errand, no different than trying to time the stock market.  Feel free to do it yourself, but don't recommend it to others.  It's simply poor advice.  There's no other way to frame it.

Eric/BTD - your both basically right.  VBTLX solves both of your points - having bonds with modest downside.  VBTLX has a duration of 6.1 years, which means that if bonds suddenly spike 2% then the fund would experience a loss of 12.2%.  However, rates don't "typically" increase that fast so as long as increases are gradual and somewhat expected the losses are offset by interest income and turning over of maturing bonds. 

Personally I go with VFIDX (Intermediate investment grade) for my bond holdings as it has a slightly lower duration with high yield to maturity, but for this I have to accept increased credit risk as VBTLX is 2/3rds government bonds, which I am ok with. 

VBTLX - 6.1 duration, 3.1% YTM
VFIDX - 5.5 duration, 3.6% YTM

DreamFIRE

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Re: What do you invest in during financial independence?
« Reply #24 on: March 23, 2018, 05:10:57 PM »
Here's another interesting chart:



Inflation erodes most of the return on the side of "rising interest rates."

powskier

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Re: What do you invest in during financial independence?
« Reply #25 on: April 23, 2018, 10:30:08 PM »
I'm 60/40 but my 40-fixed income is mostly in closed end funds bought below NAV.  The munis are earning a little over 6% and the taxable are earning 8 to 12%.

 What do CEFs do during a downturn? I'm assuming the higher yield means higher risk i.e lower returns or losses? I know very little about CEFs but surely if they are the shizzle everyone would have them instead of boring old bonds, right? Genuinely curious, not trying to flame.

dude

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Re: What do you invest in during financial independence?
« Reply #26 on: April 24, 2018, 09:37:22 AM »
My understanding is that with the target date funds that schwab or vanguard offer, the funds are mostly in bonds during retirement age, but that wouldnt have good returns since 4% withdrawl rule expects better return than what bonds would offer

So should target date funds be avoided if one wants to be financially independent? If so, should one invest in only index funds during financial independence?

Choose a TDF that corresponds to your life expectancy, not your retirement date.

Linda_Norway

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Re: What do you invest in during financial independence?
« Reply #27 on: April 25, 2018, 03:13:20 AM »
No ones is putting some stash onto a saving account that guarantees a fixed <higher than current> interest rate under condition that you leave your money there for 3 years? I have noticed that such accounts often can give a whole % higher interest rate than a normal savings account. There are alternatives for 3 years and 5 years.

dude

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Re: What do you invest in during financial independence?
« Reply #28 on: April 25, 2018, 08:16:57 AM »
No ones is putting some stash onto a saving account that guarantees a fixed <higher than current> interest rate under condition that you leave your money there for 3 years? I have noticed that such accounts often can give a whole % higher interest rate than a normal savings account. There are alternatives for 3 years and 5 years.

Those options in the U.S. right now are not very palatable - interest on those accounts is not keeping up with inflation.  It's one of the reasons so much money has poured into the stock market the last decade. As the Fed moves rates upward over the next couple years, CD and bond ladders might get more attractive again. But until now, quantitative easing has been a real bitch for traditional savers like my in-laws and other older folks.

PizzaSteve

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Re: What do you invest in during financial independence?
« Reply #29 on: April 25, 2018, 10:16:02 AM »
So should target date funds be avoided if one wants to be financially independent? If so, should one invest in only index funds during financial independence?
You are aware that you're getting a little mixed up here? One can purchase bonds in index funds as well?

I personally feel bonds are somewhat overrated. I do not prize safety over growth. I want to retire early, but I don't want my money to. It works so I don't have to.

As you might guess, I am not a fan of target date funds, unless you tweak the dates to prevent excessive bond holdings-driven portfolio atrophy.
Your profile says you are age 60, so how do you define early retirement?  Just curious.

You arent worried about sequence of returns risk now that you are approaching 70s, or do you recommend bond equivalnts like CDs instead?
« Last Edit: April 25, 2018, 10:18:52 AM by PizzaSteve »
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Arbitrage

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Re: What do you invest in during financial independence?
« Reply #30 on: May 10, 2018, 08:05:43 AM »
The Fed does not control bond rates.  The Fed controls overnight lending rates and is connected to the prime rate, but that is very different from the rate on a 5, 10, or 30 year bond.  Basically, the Fed very strongly influences the extremely short-term end of the market.  That does influence the longer term rates (if you can get 5% short term, you're not going to invest in a 3% 30-year bond in nearly all cases), but those rates are set by the bond market - supply and demand, taking predictions over the next X years and balancing the risks.

It's been said that there is a plan to raise the Fed Funds rate by 3 more times this year.  Don't you think that bond investors already know that?  If there is a 100% expectation of a rate hike going into a meeting, and the Fed hikes rates by the expected amount, the bond market does not move.  What might make bond rates move at a Fed meeting is the unexpected - a hike or absence of hike where one was expected, or a between-the-lines reading on how the future might go - confidence in the economy, inflation readings, or other indications that the Fed might take action more or less than previously anticipated. 

It's akin to a company earnings call and the stock price.  A company might post dismal or glowing earnings, and the stock movement will not necessarily follow.  The key is whether the earnings were better, worse, or the same as expectations.