Bonds !!!

[bacchi]

I follow McClung's strategy, which suggests selling stocks to buy bonds when the portfolio is +20% for the year.

VGSH (short term US treasuries) is -0.15% today (and -3.1% vs SPY's -12.4% for YTD).

Well, cash is -0% today... which is much better than most other asset classes.. it doesn't mean it's a good idea to hold more than a sliver over the long term (or even the medium term, at this rate) - cash has lost 98% of its purchasing power over the last century due to inflation - and some currencies have lost much more.

Likewise, without the tailwind of higher coupon payments, T-Bills will get killed by inflation. It may be a more gradual decline that long term bonds, but that is why it is so much of danger - most people only think in nominal terms and forget the insiduous lost of purchasing power that inflation is doing - boiled frog etc

Right. It's not a 100% switch.

The purpose of the strategy is to avoid selling equities low when making withdrawals. To put it another way, trying to squeeze another 3-9 months of equity return out of a portfolio is not worth the risk for future portfolio growth (using backtesting data from markets around the world).

The YTD loss with VGSH (t-notes, fwiw) is nearly equivalent to the cash loss due to inflation. Either way, t-notes or cash, it's better than selling SPY/VTI.

I also converted some cash to inflation bonds but, given the rate lag, there's a risk that inflation will increase over the next 6 months and even those I-bonds will decrease in real value.

[MustacheAndaHalf]

Jesus. If you think stocks are having a bad day, check out long term bonds today...

Moving to TIPS keeps looking better and better!

VTIP has lost 1% YTD while bond yields priced in about 2% of rate hikes.  If you buy TIPS, keep in mind you will be fighting the Federal Reserve.  The Fed bought tips last year, and is expected to start selling them this year.

Well, cash is -0% today... which is much better than most other asset classes.. it doesn't mean it's a good idea to hold more than a sliver over the long term (or even the medium term, at this rate) - cash has lost 98% of its purchasing power over the last century due to inflation - and some currencies have lost much more.

Based on the March inflation data, the current best guess is that cash was -0.04% yesterday but we won't know for sure until mid-June when the May inflation data is posted.

I think it's more accurate to say everything lost to inflation.  Relative to bond and stock losses, cash is well ahead for 2022.

Markets are currently waiting for inflation data due next Wednesday, May 11.

[ChpBstrd]

I'm kicking myself for not making what should have been an easy call: Shorting TLT back when the high inflation numbers were coming in and the fed was talking about rate hikes in March. The decline was mechanical and predictable, and the options market for bear spreads was just sitting there with free money. Nothing was "already priced in".

Now it's not so obvious what's going to happen. There are early signs inflation might have peaked and 10y yields have already almost doubled. There is no new catalyst on the horizon like another Ukraine war or stimulus bill. Inflation is in a tug-of-war between full employment and slowly tightening monetary conditions. Without stimulus and with the start of QT, inflation could start falling this summer. We could also discover this month that we're already in a recession, simply because of how hard the comparison is against the stimulus-fueled 2021 economy. In either scenario, the market could pull back its rate hiking expectations and TLT could rally. So I'm not so keen on shorting it. Still, that was a missed layup.

[Mr. Green]

Jesus. If you think stocks are having a bad day, check out long term bonds today...

Moving to TIPS keeps looking better and better!

VTIP has lost 1% YTD while bond yields priced in about 2% of rate hikes.  If you buy TIPS, keep in mind you will be fighting the Federal Reserve.  The Fed bought tips last year, and is expected to start selling them this year.

Well, cash is -0% today... which is much better than most other asset classes.. it doesn't mean it's a good idea to hold more than a sliver over the long term (or even the medium term, at this rate) - cash has lost 98% of its purchasing power over the last century due to inflation - and some currencies have lost much more.

Based on the March inflation data, the current best guess is that cash was -0.04% yesterday but we won't know for sure until mid-June when the May inflation data is posted.

I think it's more accurate to say everything lost to inflation.  Relative to bond and stock losses, cash is well ahead for 2022.

Markets are currently waiting for inflation data due next Wednesday, May 11.

Considering cash, bonds, and stocks have all lost more than 1% year to date, I'm comfortable with the VTIP position as 90% of my bond allocation. I may not be in VTIP two years from now but it feels like the best option at the moment.

[HPstache]

If you think we're heading into a recession, you can always pick up a recession stock like Dollar Tree!

[vand]

My main "bond alternative" play - renewable energy infrastructure - is doing really well, 10% - 22% gains YoY and + 6-7% dividends on top.
Of course I wish I had bought a LOT more!

[clifp]

I'm kicking myself for not making what should have been an easy call: Shorting TLT back when the high inflation numbers were coming in and the fed was talking about rate hikes in March. The decline was mechanical and predictable, and the options market for bear spreads was just sitting there with free money. Nothing was "already priced in".

Now it's not so obvious what's going to happen. There are early signs inflation might have peaked and 10y yields have already almost doubled. There is no new catalyst on the horizon like another Ukraine war or stimulus bill. Inflation is in a tug-of-war between full employment and slowly tightening monetary conditions. Without stimulus and with the start of QT, inflation could start falling this summer. We could also discover this month that we're already in a recession, simply because of how hard the comparison is against the stimulus-fueled 2021 economy. In either scenario, the market could pull back its rate hiking expectations and TLT could rally. So I'm not so keen on shorting it. Still, that was a missed layup.

I remember trying to do this during the 2008 crash and not being able to do it because TLT was too hard to borrow.  But you are right we could have done it anytime in the last couple of months and made money. I still think both TLT and BND are likely to fall but my conviction isn't as high as it was a couple of months ago.

[franklin4]

About 2 months ago someone on this forum suggested TTT, an inverse long-term bond ETF. I bought a little and it has shot up, but has only served to take the edge off other losses... I expect inflation and rates to continue to rise and will hold it for awhile.

[MustacheAndaHalf]

Well, cash is -0% today... which is much better than most other asset classes.. it doesn't mean it's a good idea to hold more than a sliver over the long term (or even the medium term, at this rate) - cash has lost 98% of its purchasing power over the last century due to inflation - and some currencies have lost much more.

Based on the March inflation data, the current best guess is that cash was -0.04% yesterday but we won't know for sure until mid-June when the May inflation data is posted.

I think it's more accurate to say everything lost to inflation.  Relative to bond and stock losses, cash is well ahead for 2022.

Markets are currently waiting for inflation data due next Wednesday, May 11.

Considering cash, bonds, and stocks have all lost more than 1% year to date, I'm comfortable with the VTIP position as 90% of my bond allocation. I may not be in VTIP two years from now but it feels like the best option at the moment.

Is a category like "lost more than 1%" useful?

Everything has suffered under 7-9% inflation, but setting that aside cash has lost zero, bonds (BND) -10% and the market (VTI) -14%.

[MustacheAndaHalf]

I'm kicking myself for not making what should have been an easy call: Shorting TLT back when the high inflation numbers were coming in and the fed was talking about rate hikes in March. The decline was mechanical and predictable, and the options market for bear spreads was just sitting there with free money. Nothing was "already priced in".

I used an inverse bond ETF to do just that for most of March.  But I'm kicking myself for not doing it back in December, when the gap between inflation (7%) and expected rate hikes (under 1%) didn't make sense.

About 2 months ago someone on this forum suggested TTT, an inverse long-term bond ETF. I bought a little and it has shot up, but has only served to take the edge off other losses... I expect inflation and rates to continue to rise and will hold it for awhile.

In the journals area I mentioned an investment in two inverse bond funds back on March 4th, but not TTT, so I'm guessing that wasn't me.  I invested about 1/25th of my portfolio and got +26% gains, or roughly +1% overall for the entire year in a few weeks (and I'm back in inverse bonds now).

---

The market views current conditions as "peak inflation", which is driven by a belief that supply side problems will be resolved and resolve inflation with it.  They would point to inflation becoming more stable and showing signs of falling.  And that's happening in a backdrop of China's zero Covid lockdowns, which could end at some point and help supply chains recover.

Since Dec 2021, the market seems to put undeserved certainty in estimates.  When inflation falls a little, calling it a downtrend ignores the fraction that is normal fluctuations.  Oil prices fell, but that doesn't rule out future volatility (like EU sanctions on Russian oil being discussed this week).  Demands for higher wages are increasing, and already above the 3% level the market calls peak inflation.  This is also shaping up to be the biggest year for worker unions in decades.  If 3% bond yields really are a historical average, we should have higher yields when we have historically high inflation - but that hasn't happened.  In my view, the case for higher yields is much more likely than the case for peak inflation, so that's how I'm investing.

[franklin4]

Then it must have been you, thanks! I had never heard of inverse bonds. I think I looked up the ones you mentioned and that led me to others.

[Radagast]

Q: did ZROZ lose 3x it's yield 2 days ago?
A: no, the bonds in ZROZ are yielding higher than 3% even after 0.15% expenses. The yield numbers you are seeing are very old. It lost more like 1.5X its yield.

Q: Is Radagast still buying ZROZ?
A: Yes. I can't predict future interest rates, inflation, and bond yields, and ZROZ is a part of my asset allocation which is well below its target.

Q: Is Radagast sad that ZROZ is dropping?
A: No, I sincerely wish it's yield would go to 12% to stay above inflation. I would love to buy at early 1980's prices! Right now it's price is still quite a bit over its 5 year low.

[vand]

Anyone taken a peek at their bonds today? Ouchie..

[habanero]

Market now pricing about 70 bps hike at the next Fed meeting. And 300 bps cumulative hikes including the early Jan 2023 meeting.

These moves are pretty darn rare to behold.

And so much for bonds being negatively correlated to equities.

[PDXTabs]

And so much for bonds being negatively correlated to equities.

I posted this somewhere before, but they aren't really.

From 1927 to 2012, the correlation between the S&P 500 and long-term Treasuries – as calculated by calendar year based on monthly data – has changed sign 29 times, and has ranged from −93% to +86%. - PIMCO: The Stock-Bond Correlation.

[habanero]

I posted this somewhere before, but they aren't really.

From 1927 to 2012, the correlation between the S&P 500 and long-term Treasuries – as calculated by calendar year based on monthly data – has changed sign 29 times, and has ranged from −93% to +86%.

Yeah, but I think that this time it was fairly easy to predict - or at least it seemed so - that if/when bonds go south, equities will do the same - and in that order. As iin bonds driving equities Didn't mean it would happen, but if it did, equities have a lot of room to fall from lofty valuations.

A lot has been written about the (now officially ended) bull market in equities, but extremely low interest rates has been one of the more frequently cited explanations. Does not mean it is the correct explanation for what has happened recently, but at least it shouldn't come as a very big surprise when it did. Bonds had very, very little upside but a lot of potential to fall. Historically speaking interest rates are still low, the aggressive Fed hiking priced in so far won't take rates very high by historical standards and real rates are very, very low and deeply negative in the very short term.

As mentioned upthread I've slowly started to dip my toes into bonds, but due to low yields and a lot of potential to fall, I've focused mostly on shorter-term bonds now and most of my bond holdings are domestic (Norway) where the rate hiking cycle had already started and more to come was priced in and inflation (so far...) is significantly lower than in most of the western world .And due to the nature of the domestic market our central bank probably won't need to hike as much as pretty much all consumer debt is floating rate so the pass-through should be much more powerful than where almost all retail borrowing is long-term fixed rate like in the US. Consumers here are gonna feel it if/when mortgage rates start going up. Along with Denmark and The Netherlands we are apparantly also the most indebted households in the world. But only on the private site, the government has a fuckton of money and don't really need to borrow anything - they own 1.3% of all listed equity in the world.

But we shall see. I'm not pretending to know what will happen or that I predicted this would happen. But the risk-reward for longer-term bonds has been fairly abysmal in my opinion so I've pretty much avoided owning any until very recently. I have plans to buy more, but I'm not in a big rush to do so.

[HPstache]

Anyone taken a peek at their bonds today? Ouchie..

I-Bonds are looking excellent

[vand]

Yield curves inversions are coming back again:

3yr/10yr is spread negative, as well and others

https://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treasury_yield_curve&field_tdr_date_value_month=202206

Short term rates have climbed dramatically in the last couple of days; surely a sign that we're going to get a .75bp hike

[Radagast]

Bonds haven't been crashing recently, but as a result of inflation gold miner stocks have been crushed (contrary to expectations). Per my asset allocation I will now be buying RING miner ETF instead of ZROZ for a while. Since autumn 2020 I have actually been buying RING about 1/4 the time, and ZROZ 3/4 the time, depending on which has been doing worse.

[JupiterGreen]

Anyone taken a peek at their bonds today? Ouchie..

I-Bonds are looking excellent

Yup, I just opened an account. Current I-bond rates are 9.62%

From Treasury Direct:

KEY FACTS: I Bonds can be purchased through October 2022 at the current rate.  That rate is applied to the 6 months after the purchase is made.  For example, if you buy an I bond on July 1, 2022, the 9.62% would be applied through December 31, 2022.  Interest is compounded semi-annually.

[tooqk4u22]

The 60/40 portfolio is between a rock and a hard place.

The only way bonds do well from here is if we have a very bad deflationary recession to relieve the inflationary pressure - and the deflation would almost certainly have to come from higher unemployment to reduce demand.  Demand tends to collapse when the workforce is being laid off.

But then.... I don't see how that that scenario doesn't totally crush stocks, just like the GFC.

The US will revert back to low inflation or borderline deflation in 1-3 years due to the nature of how our economy is structured, low birth rates, poor immigration policies.  The inflation from supply chain issues and pent up demand will work itself out too. 

This is basically what the yield curve is telling with short term at or above long term bc it is pricing in FED rate hikes. The 10 yr UST will probably top out at 3-3.5% then head back down - It has more to go bc the Fed has to start offloading its balance sheet which will hit onger term rates harder.   After all that rates will fall back to the 2% range. 

Housing will likely be down/flattish over the next several years.

As for your comment about unemployment causing deflation....that horse has let the stable withbthe pandemic.....the politicians and fed won't be able to help themselves and will throw excessive funds to people if unemployment is high (big reason for the inflation btw) as it worked last time.  So high unemployment might be worse for inflation.

So for now keep bond allocation in short duration bc yield is same without duration risk, but if 10 yr hits 3% and 2yr/10yr spreads widen then start transferring to longer duration.  This way you capture the yield and capital appreciation when rates come back down a bit.   Again this will be 1-3 years

Well. 10yr UST was at 2.48% when I wrote this, topped out at 3.48% mid June and now down to 2.78% as Fed goes and recession fears increase.   Happened a little quicker than expected.  I did move some into longer duration at 3.25-3.50%, but not too much as 2yr-10yr spread never really widened.   Short term rates are still good here.  I do think long term rates will go higher again as this cycle of finding normal and fighting inflation continues so still sticking short and waiting for spread to widen.

Also eyeing CDs (1 yr and 5 yr) as rates are getting attractive and can always just pay the penalty to break the cd if rates go much higher (sort of 10 yr rate with option trade rates up with no capital depreciation risk).

[vand]

Bond bounce done/new lows ahead?

I am still very bearish on bond.. but nothing goes down in a straight line.

We have fallen out of the corrective pattern. The path of least resistance is now to head back down.

[ChpBstrd]

Somebody please talk me out of buying puts on ZROZ.

[tooqk4u22]

While a too agree rates are going back up (with a ceiling like I have said before) I am not sure buying puts in zroz will be worth the squeeze but you may be able to grab a few % with in the short term.

[vand]

While a too agree rates are going back up (with a ceiling like I have said before) I am not sure buying puts in zroz will be worth the squeeze but you may be able to grab a few % with in the short term.

I agree. It's far from a gimme.

The easy money has probably been made shorting bonds. While they can go lower it may well take longer for the next leg to play out.

[vand]

As warned... Long term bonds are getting pushed to new low and yields are breaking out. The next stage of the bond bear market has arrived.

[vand]

Bond bloodbath in progress?

At this juncture, the bond market is raising some important questions

- Risk premia across most other asset classes is getting narrowed, making harder to justify riskier assets. Equities have to justify higher expected returns to keep them attractive

- what will it mean for 60/40 portfolios? Investors with classic portfolios would have accepted softening in bonds as long as stocks were doing a moonshoot over the last few months, but now we have selloffs in both asset classes.. this isn't how it was meant to work.

- What is the chance that bonds will outperform stocks over the next decade? Last summer with yields at 0.5% and stocks still in recovery mode I would have said no chance, but today with stocks now looking horribly expensive and bonds offering 1.5% the chances of that must have risen from the <5% possibility to at least >25% possibility, and maybe even higher than that.

- Is inflation really about to make a comeback? We've all been conditioned in a disinflationary environment for so long now that it it will undoubtedly come as a shock to most people when the price of living starts increasing more noticeably year on year.

- How will the balance between growth and value stocks change? Everything suggests that in a world where the far end of the yield curve is steepening most quickly, then projects with long lead times will be the most sensitive to those changes (ie growth stocks).

2021 is shaping up to be an interesting year..

Looking back, these were great questions to consider at the time.

[ChpBstrd]

While a too agree rates are going back up (with a ceiling like I have said before) I am not sure buying puts in zroz will be worth the squeeze but you may be able to grab a few % with in the short term.

(Wipes tears from eyes)
:(  : (  : (
I failed to buy the puts. Guess something else came up that deserved my attention.

[vand]

While a too agree rates are going back up (with a ceiling like I have said before) I am not sure buying puts in zroz will be worth the squeeze but you may be able to grab a few % with in the short term.

(Wipes tears from eyes)
:(  : (  : (
I failed to buy the puts. Guess something else came up that deserved my attention.

Well like I have (probably) said... being right, and making money from it, are two entirely different things ;)

[vand]

If you want further evidence that investing during inflationary times is hard, I present exhibit T: Treasury Inflation Protected Securities, or TIPS for short.

Who would have thought that an asset class that is supposed to protect you against unexpected inflation ends having the worst year one record  under the event of the highest levels of unexpected inflation in 40 years??

"TIPS - not what it says on the tin."

[ChpBstrd]

If you want further evidence that investing during inflationary times is hard, I present exhibit T: Treasury Inflation Protected Securities, or TIPS for short.

Who would have thought that an asset class that is supposed to protect you against unexpected inflation ends having the worst year one record  under the event of the highest levels of unexpected inflation in 40 years??

"TIPS - not what it says on the tin."

Isn't their average bond duration something like 7.5 or 8 years? Apparently the increase in principal due to inflation fell short of the decrease in market value of long-duration bonds due to to higher rates. This raises questions about exactly what type of inflationary environment one expects when one uses TIPS to hedge against inflation - one in which rates don't rise? Too bad the treasury only sells TIPS in 5-year minimum durations. If they sold a 1 or 2 year TIPS they'd get more info about inflation expectations too!

[HPstache]

Pulling the plug on my 401K bond fund allocation and switching to iBonds has been a great decision.

[dividendman]

Pulling the plug on my 401K bond fund allocation and switching to iBonds has been a great decision.

I did that too, but the iBond allocation is so small compared to my bonds... which are down >10% this year :(

[tooqk4u22]

The 60/40 portfolio is between a rock and a hard place.

The only way bonds do well from here is if we have a very bad deflationary recession to relieve the inflationary pressure - and the deflation would almost certainly have to come from higher unemployment to reduce demand.  Demand tends to collapse when the workforce is being laid off.

But then.... I don't see how that that scenario doesn't totally crush stocks, just like the GFC.

The US will revert back to low inflation or borderline deflation in 1-3 years due to the nature of how our economy is structured, low birth rates, poor immigration policies.  The inflation from supply chain issues and pent up demand will work itself out too. 

This is basically what the yield curve is telling with short term at or above long term bc it is pricing in FED rate hikes. The 10 yr UST will probably top out at 3-3.5% then head back down - It has more to go bc the Fed has to start offloading its balance sheet which will hit onger term rates harder.   After all that rates will fall back to the 2% range. 

Housing will likely be down/flattish over the next several years.

As for your comment about unemployment causing deflation....that horse has let the stable withbthe pandemic.....the politicians and fed won't be able to help themselves and will throw excessive funds to people if unemployment is high (big reason for the inflation btw) as it worked last time.  So high unemployment might be worse for inflation.

So for now keep bond allocation in short duration bc yield is same without duration risk, but if 10 yr hits 3% and 2yr/10yr spreads widen then start transferring to longer duration.  This way you capture the yield and capital appreciation when rates come back down a bit.   Again this will be 1-3 years

Well. 10yr UST was at 2.48% when I wrote this, topped out at 3.48% mid June and now down to 2.78% as Fed goes and recession fears increase.   Happened a little quicker than expected.  I did move some into longer duration at 3.25-3.50%, but not too much as 2yr-10yr spread never really widened.   Short term rates are still good here.  I do think long term rates will go higher again as this cycle of finding normal and fighting inflation continues so still sticking short and waiting for spread to widen.

Also eyeing CDs (1 yr and 5 yr) as rates are getting attractive and can always just pay the penalty to break the cd if rates go much higher (sort of 10 yr rate with option trade rates up with no capital depreciation risk).

Two months later and position still stands stay short and wait for spreads to turn.   I still believe the 10 year won't go too much higher but at 3.5% moving some of your bond AA out of short into intermediate may be ok but really mo hurray with 2 year at 4% 

But when the Fed starts signaling a pause, 3-6 months from now, is when to lock in longer duration rates as economy slows, unemployment rises and fed starts cutting again.   

[vand]

TIP or TRAP?

A great article from PFcharts:
https://portfoliocharts.com/2022/09/27/all-about-tips-real-returns-and-inflated-expectations/

"TIPS are subsets of bonds. All bonds are sensitive to interest rate changes. And when rates rise, capital losses can outpace any inflation protection."

You know how the Federal Reserve actively fights inflation by hiking interest rates? Due to that intervention, TIPS have a nasty habit of getting kneecapped right when they’re needed most.

[bacchi]

TIP or TRAP?

A great article from PFcharts:
https://portfoliocharts.com/2022/09/27/all-about-tips-real-returns-and-inflated-expectations/

"TIPS are subsets of bonds. All bonds are sensitive to interest rate changes. And when rates rise, capital losses can outpace any inflation protection."

You know how the Federal Reserve actively fights inflation by hiking interest rates? Due to that intervention, TIPS have a nasty habit of getting kneecapped right when they’re needed most.

"Going back to the TIPS mechanics we discussed, if you hold a bond to maturity then you get the full original principal back. And in the case of TIPS, that principal is also adjusted for inflation. But — and this is a really important point — bond index funds don’t do that."

Luckily, buying TIPS of varying lengths is easy both at auction and on the secondary market.

There are phantom taxes to worry about if there's deflation. If the interest payment gives you 10% one year, and -5% the next, you never get the taxes paid in the first year back. Bonds are, of course, best held in a tax-advantaged account.

[clifp]

There is virtually no reason to buy a TIPs mutual fund or ETF. Buying individual bonds isn't that hard nor expensive , and I think if you buy them at auction with Schwab or Fidelity you pay almost no market up.

[vand]

If all you want to do is hold onto them to maturity to gauarantee purchasing power then fair enough, but a large part of the reason to hold bonds is to act as a diversifier to the riskier holdings in your portfolio - holding to maturity removes the option to use them for rebalancing when you would most likely want to (ie when stocks crash).

[dividendman]

There is virtually no reason to buy a TIPs mutual fund or ETF. Buying individual bonds isn't that hard nor expensive , and I think if you buy them at auction with Schwab or Fidelity you pay almost no market up.

Maybe I have a misunderstanding, but if I hold a bond ETF for it's average maturity shouldn't it be the same as holding one bond (of equal length) until maturity?

[mistymoney]

If all you want to do is hold onto them to maturity to gauarantee purchasing power then fair enough, but a large part of the reason to hold bonds is to act as a diversifier to the riskier holdings in your portfolio - holding to maturity removes the option to use them for rebalancing when you would most likely want to (ie when stocks crash).

If you buy all at once. So for tips, there is 5 and 10 and 30 years. If you just go for 5 years - they are offered quarterly through the year. so if I was doing this I'd likely do only 5 years. Buy quarterly over 5 years. Then you have a them maturing down the line on a quarterly basis. Sound perfect for rebalancing.

More flexible would be the notes that come in 2 and 3 year maturities (as well as 5,7,10). They are issued monthly. Super simple!

[mistymoney]

There is virtually no reason to buy a TIPs mutual fund or ETF. Buying individual bonds isn't that hard nor expensive , and I think if you buy them at auction with Schwab or Fidelity you pay almost no market up.

I know there is increased liquidity in this approach, but I prefer to buy through treasurydirect.gov. Once you get the hang of it, super easy, no mark up, and no worries.

If you are chasing yeild or doing big AA changes all the time, likely not the place for you. But if you are trying to line up a 5 year bond tent a few years prior to fire, super easy to line it up. If you want all TIPS, you need to start 5 years before hand, for notes, more flexible with the 2-3- and 5 year maturities, could do it in about 2 years I think. Haven't puzzled that out as yet! Although - I likely should!

In the changing market, I have addressed AA with the allocation of new money, rather than rebalancing. A bit slower to make changes, but I feel like it is working for me. Lower on the angst-o-meter. ymmv.

[mistymoney]

TIP or TRAP?

A great article from PFcharts:
https://portfoliocharts.com/2022/09/27/all-about-tips-real-returns-and-inflated-expectations/

"TIPS are subsets of bonds. All bonds are sensitive to interest rate changes. And when rates rise, capital losses can outpace any inflation protection."

You know how the Federal Reserve actively fights inflation by hiking interest rates? Due to that intervention, TIPS have a nasty habit of getting kneecapped right when they’re needed most.

Interesting! Thanks for posting this. I have some tips via treasury direct, but prefer the relative transparency of the notes, bills, and bonds. I say relative because you can ballpark off of recent auctions, but you don't know your price/rate until you purchase. Pretty bizarre to my thinking!

[mistymoney]

TIP or TRAP?

A great article from PFcharts:
https://portfoliocharts.com/2022/09/27/all-about-tips-real-returns-and-inflated-expectations/

"TIPS are subsets of bonds. All bonds are sensitive to interest rate changes. And when rates rise, capital losses can outpace any inflation protection."

You know how the Federal Reserve actively fights inflation by hiking interest rates? Due to that intervention, TIPS have a nasty habit of getting kneecapped right when they’re needed most.

"Going back to the TIPS mechanics we discussed, if you hold a bond to maturity then you get the full original principal back. And in the case of TIPS, that principal is also adjusted for inflation. But — and this is a really important point — bond index funds don’t do that."

Luckily, buying TIPS of varying lengths is easy both at auction and on the secondary market.

There are phantom taxes to worry about if there's deflation. If the interest payment gives you 10% one year, and -5% the next, you never get the taxes paid in the first year back. Bonds are, of course, best held in a tax-advantaged account.

To be more accurate, I think what you get back is the par value, not principal. Most treasuries that I have looked at are selling at a par rate slightly discounted, like 99.81 for a 100 par.

Tip is trickier. So you buy and get the par value - which has inflation based adjustements so you don't know what your maturity amount might be. Plus a small amount of interest paid biannually.

BUT - everyone got their unders in so many bunches over the inflation that TIPS have been selling way over par value. 5 year tips issued 4/30/2021 auctioned at 109.406 per 100 par. But that is not the value you get to start with. you get 100 par and then adjust from there. So an entire year at the high inflaiton only brings you back to your principal, and you've lost an entire year to inflation.

[clifp]

There is virtually no reason to buy a TIPs mutual fund or ETF. Buying individual bonds isn't that hard nor expensive , and I think if you buy them at auction with Schwab or Fidelity you pay almost no market up.

Maybe I have a misunderstanding, but if I hold a bond ETF for it's average maturity shouldn't it be the same as holding one bond (of equal length) until maturity?

Well according to the link Vand posted it did not exactly work out that way for TIPs ETFs.  It is like the recent discussion on SEC yield, that was held recently on bogleheads.org and early-retirement.org on SEC yield vs distrbution yield. There are a lot of subtleties in how bond funds work, that are lost on most of us (Definitely including myself in this.)

I also think these super low expense ratio on ETFs and funds are also a bit misleading, since they don't account for things like orderflow. Still, overall the discount brokers like Vanguard, Schwab, and Fidelity provide a good service to their customers.

However, my general view of all financial firms, brokerages, banks, insurance companies, is they are generally quite profitable organization, who employ a legion of bright highly paid individuals who's are quite skilled at convincing you that their financial products, are something you desperately need and are excellent values.  I'd prefer to hire as few of these people as possible to manage my money.

Unlike corporate bonds, treasury bonds are a completely a commodity, duration and interest rates are the only variable. If I want to set up a 5 or 10 year bond TIPs ladder, I can buy 5 different bonds, and then when one matures buy a new bond. It takes me 30 minutes to set up and then 5 minutes every year or two to maintain. I'm not sure why I need 1/2 dozen managers/trustee with million $ paychecks, plus support staff to assist me.

When I first retired I bought quite a lot of 10 year TIPS (along with iBonds) which had a 3.6-3.9% coupon rate.  I market timed/rebalanced and sold some during 2008/9 to buy stocks. By the time the last ones matured in 2010/2011.  There were better bonds to buy, and several years latter, I felt no bonds was best  Although my TIPs bond didn't go up as much as anticipated in 2009, any green in sea of red was welcomed.  As bonds go TIPs and iBond are arguable the best, but zero real return, less after taxes, isn't a good investment, and funds are worse.

[habanero]

To be more accurate, I think what you get back is the par value, not principal. Most treasuries that I have looked at are selling at a par rate slightly discounted, like 99.81 for a 100 par.

This is correct, and goes for most bonds issued (i.e corporate bonds as well). More so by convention/tradition than by some law of nature. The bond is issued at a very specific yield to maturity, like i.e 2.943%, but the coupon payable is rounded down to the neareast 1/8 percentage point. So a 10y bond at said yield would get a copon of 2.875% and a issue price of 99.415.

So if you buy the bond and hold to maturity you pay 99.415 to buy it, get 100 back at maturity and get a coupion of 1.4375 every 6 months up to and including  maturity date. As you buy the bond at a slight discount, the yield to maturity is bit higher than the actual coupon the bond pays you.

T-bills (1y or shorter) pays no interest at all, you buy at a discount, get 100 back at maturity and the effective yield is a function of how much discount you bought at.

[HPstache]

Woo Hoo!  iBonds starting to show interest now that I am past 3 months.

[ChpBstrd]

Long duration corporate bonds are starting to catch my eye. There's lots of BBB and A stuff out there yielding 6%-8%. A lot of this is BDC's or office/theatre properties - neither of which I would touch - but there are some interesting ones too. What do you all think about the following?

Viatris (formerly Mylan Inc), pharmaceuticals & generics, maker of the EpiPen,
rated Baa3/BAA-, stable by Moody's
Debt/Equity = 1.58
Bond maturity: 4/15/48
Yield-to-Worst: 8.172%
CUSIP: 628530BJ5

National Health Investors, senior living and nursing home REIT
rated Baa3/BAA-
Debt/Equity = 0.87
Bond maturity: 2/1/31
Yield-to-Worst: 7.949%

British American Tobacco (formerly Reynolds), tobacco
rated Baa2/BBB+
Debt/Equity = 1.05
Bond maturity: 6/15/37
Yield-to-Worst: 7.834%

Paramount Global, media
rated Baa2/BBB
Debt/Equity = 1.55
Bond maturity: 7/1/42
Yield-to-Worst: 7.616%

[SilentC]

It would be helpful to know the net leverage and call dates. I’m not a huge fan of the super long dated bonds because if rates go up you get murdered and if rates fall you get refinanced, but they become very interesting in distressed situations.  But I agree they do look interesting and with the S&P CAPE still very elevated and some risk of a lost decade for stocks I’m mostly buying bonds these days.

Edit - that BATS one looks pretty interesting, thanks for sharing.  Good call protection. I wonder how much ESG weighs on this issue.

[vand]

Long dated bonds are still scraping new lows, which is pressuring alternative income plays, but at these sort of yields they are more interesting...

Just a few things I'm watching:

TIP fund may have been hammered, but the flipside of that is now a 7.6% yield
Preferred stock have been hammered too UK:AV.A yields 7.7%
Income fund UK:HFEL is yielding 9.2%
Somewhat risker, but UK:NRR reit 10.5%

And it is not difficult now to find common stock paying 7%+

[mistymoney]

It would be helpful to know the net leverage and call dates. I’m not a huge fan of the super long dated bonds because if rates go up you get murdered and if rates fall you get refinanced, but they become very interesting in distressed situations.  But I agree they do look interesting and with the S&P CAPE still very elevated and some risk of a lost decade for stocks I’m mostly buying bonds these days.

oh - I did not know about this! So if you buy a corp bond at 6% and rates drop, they just pay you off and refinance themselves to a 3% bond?

And then that is happening within all the bond funds, makes treasuries more attractive than I was thinking. And I was thinking they were getting pretty attractive, lol!