Author Topic: Bond Funds in rising rate environments  (Read 5086 times)

StressLess

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Bond Funds in rising rate environments
« on: January 28, 2015, 03:18:38 PM »
Just wanted to kick off a discussion about bond funds in rising rate environments.  Anyone considering moving into extremely short duration funds this year?

johnny847

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Re: Bond Funds in rising rate environments
« Reply #1 on: January 28, 2015, 03:20:14 PM »
I avoid market timing. So no.

Dodge

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Re: Bond Funds in rising rate environments
« Reply #2 on: January 28, 2015, 03:20:30 PM »
You might not see it, but this is market timing.  Ignore the noise, the news reports, and the doomsday articles.  You can't guess where the market will go next.  Let's review what happened to bonds the last time interest rates soared:



Interest rates spiked pretty high from 1975 through 1981 (the peak).  Let's see what happened to intermediate term bonds during this time (orange line):



A $10,000 deposit grew almost 60%!

This is why we say ignore the noise.

DrF

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Re: Bond Funds in rising rate environments
« Reply #3 on: January 28, 2015, 03:24:48 PM »
What about long term treasury bonds? How did they do? 20 year +

StressLess

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Re: Bond Funds in rising rate environments
« Reply #4 on: January 28, 2015, 03:32:01 PM »
Thats great thanks.

I didn't even consider that this was market timing till you guys stated the obvious.

SaintM

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Re: Bond Funds in rising rate environments
« Reply #5 on: January 28, 2015, 05:14:48 PM »
Any bit of "rebalancing" is really just a form of market timing.

Eric

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Re: Bond Funds in rising rate environments
« Reply #6 on: January 28, 2015, 05:56:50 PM »
Any bit of "rebalancing" is really just a form of market timing.

No.  No it's not.  Rebalancing occurs on a pre-set schedule.  Market timing occurs on a hunch or for some arbitrary reason.

Yankuba

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Re: Bond Funds in rising rate environments
« Reply #7 on: January 28, 2015, 07:33:19 PM »
You might not see it, but this is market timing.  Ignore the noise, the news reports, and the doomsday articles.  You can't guess where the market will go next.  Let's review what happened to bonds the last time interest rates soared:



Interest rates spiked pretty high from 1975 through 1981 (the peak).  Let's see what happened to intermediate term bonds during this time (orange line):



A $10,000 deposit grew almost 60%!

This is why we say ignore the noise.

How did cash do during that same time period?

Dodge

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Re: Bond Funds in rising rate environments
« Reply #8 on: January 28, 2015, 08:47:46 PM »
How did cash do during that same time period?

This time period saw yearly inflation rise from about 6% to about 13%.  Not a good time to be in cash.

FFA

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Re: Bond Funds in rising rate environments
« Reply #9 on: January 28, 2015, 08:57:30 PM »
interesting thread. Firstly, I fully agree with those on a disciplined asset allocation plan. It is best to stick with it and avoid market timing.

For me, i'm currently revising my AA plan (at the point of FIRE) and have been studying/considering investing more into bonds for income and lower risk profile. So this is very much on my mind. I am also concerned about rising rates in US this year and the unknown effects of unconventional policies by many central banks.

I just found this Buffett quote in another thread : "Today, a wry comment that Wall Streeter Shelby Cullom Davis made long ago seems apt: “Bonds promoted as offering risk-free returns are now priced to deliver return-free risk.” " - Feb 2012.

I think the situation can only have amplified in the subsequent 3 years since he wrote that.

Luckily for me as an Australian investor, cash interest rates (can get 3.5 to 4% if you hunt around) are not too bad and historically can be at a premium to bond yields. Therefore at the current time I'm inclined to keep my defensive allocation substantially in cash, only a small portion Aust gov bonds and an even smaller portion in International bonds. I will re-assess to add more bonds for steady income in some years time, after central bank balance sheets and bond yields are more "normalized" (if and when that ever occurs!).

DrF

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Re: Bond Funds in rising rate environments
« Reply #10 on: January 30, 2015, 09:40:55 AM »
Bumping to see if anyone has a fancy graph for my earlier question.

How do long term treasuries handle rising rates?

hodedofome

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Re: Bond Funds in rising rate environments
« Reply #11 on: January 30, 2015, 11:40:47 AM »
Bumping to see if anyone has a fancy graph for my earlier question.

How do long term treasuries handle rising rates?

About the best I could find: https://www.portfoliovisualizer.com/backtest-asset-class-allocation?s=y&portfolio3=Custom&portfolio2=Custom&portfolio1=Custom&annualOperation=0&initialAmount=10000&endYear=1982&mode=2&annualAdjustment=0&startYear=1974&rebalanceType=1&annualPercentage=0.0&LongTermBond1=100

Actual dollar returns in your account weren't horrible, but inflation-adjusted returns were.

Nobody knows what interest rates are gonna do the next 1, 3, 5 and 10 years. We could be like Japan or Germany and interest rates continue to fall to almost 0. Or they could go up. Nobody knows. Best course of action is to develop a well though out plan that takes all scenarios (inflation, deflation, growth, shrinkage) into account and follow that plan.

humblefi

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Re: Bond Funds in rising rate environments
« Reply #12 on: January 30, 2015, 12:16:30 PM »
Just wanted to kick off a discussion about bond funds in rising rate environments.  Anyone considering moving into extremely short duration funds this year?

Let me raise one issue that is not raised and ask for feedback.

Rising rates will depress the value of bond mutual funds. If you intend to hold the bond fund through the rising rate years and beyond, then this is mostly not a problem. But, if you sell the bond fund, bought before the rising rate years and sold after rates have gone up, then loss of principal is possible. Note that selling may come from you (need money for some other reason) OR the mutual fund manager might sell for some reason and take a loss.

So, if the time frame for when the money is needed is short, then going to shorter duration bond funds may be appropriate.

Feedback is appreciated. Thanks.

DrF

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Re: Bond Funds in rising rate environments
« Reply #13 on: January 30, 2015, 12:41:51 PM »
Bumping to see if anyone has a fancy graph for my earlier question.

How do long term treasuries handle rising rates?

About the best I could find: https://www.portfoliovisualizer.com/backtest-asset-class-allocation?s=y&portfolio3=Custom&portfolio2=Custom&portfolio1=Custom&annualOperation=0&initialAmount=10000&endYear=1982&mode=2&annualAdjustment=0&startYear=1974&rebalanceType=1&annualPercentage=0.0&LongTermBond1=100

Actual dollar returns in your account weren't horrible, but inflation-adjusted returns were.

Nobody knows what interest rates are gonna do the next 1, 3, 5 and 10 years. We could be like Japan or Germany and interest rates continue to fall to almost 0. Or they could go up. Nobody knows. Best course of action is to develop a well though out plan that takes all scenarios (inflation, deflation, growth, shrinkage) into account and follow that plan.

That cleared it up. Thanks. Then I did this. Nevermind, it's not letting me copy the URL of the completed analysis.

https://www.portfoliovisualizer.com/backtest-asset-class-allocation#analysisResults

Result is this: Looks like they went down for a few years during the crazy "let inflation go to infinity, we'll just keep raising rates" period.
« Last Edit: January 30, 2015, 01:38:51 PM by DrFunk »

johnny847

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Re: Bond Funds in rising rate environments
« Reply #14 on: January 30, 2015, 02:35:23 PM »
Just wanted to kick off a discussion about bond funds in rising rate environments.  Anyone considering moving into extremely short duration funds this year?

Let me raise one issue that is not raised and ask for feedback.

Rising rates will depress the value of bond mutual funds. If you intend to hold the bond fund through the rising rate years and beyond, then this is mostly not a problem. But, if you sell the bond fund, bought before the rising rate years and sold after rates have gone up, then loss of principal is possible. Note that selling may come from you (need money for some other reason) OR the mutual fund manager might sell for some reason and take a loss.

So, if the time frame for when the money is needed is short, then going to shorter duration bond funds may be appropriate.

Feedback is appreciated. Thanks.
That seems right to me. This is why money market funds are partially invested in incredibly short term US Treasury notes.

hodedofome

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Re: Bond Funds in rising rate environments
« Reply #15 on: January 30, 2015, 03:29:09 PM »
Just wanted to kick off a discussion about bond funds in rising rate environments.  Anyone considering moving into extremely short duration funds this year?

Let me raise one issue that is not raised and ask for feedback.

Rising rates will depress the value of bond mutual funds. If you intend to hold the bond fund through the rising rate years and beyond, then this is mostly not a problem. But, if you sell the bond fund, bought before the rising rate years and sold after rates have gone up, then loss of principal is possible. Note that selling may come from you (need money for some other reason) OR the mutual fund manager might sell for some reason and take a loss.

So, if the time frame for when the money is needed is short, then going to shorter duration bond funds may be appropriate.

Feedback is appreciated. Thanks.

Yeah there's a bit of a difference between holding the actual bond to maturity, and the bond fund itself. Although in theory the bond price should go down along with the bond fund, if you aren't getting a daily market price for your bonds you pretty much don't see anything different. Kind of the difference between buying income producing real estate vs holding a REIT ETF. The REIT is daily priced which causes all sorts of fluctuations, while the income producing real estate continues to bring in income and you only guess as to what you could sell it for, but generally don't track the market value of the property unless you have to sell it.

 

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