Author Topic: Transitioning to short-term bonds?  (Read 3763 times)

Mr. Green

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Transitioning to short-term bonds?
« on: April 28, 2021, 08:35:16 PM »
I'm a two fund portfolio (Vanguard Total Stock and Total Bond) guy, for the sake of ease. We have just over 100k in bonds in our taxable accounts because we'd been considering a home purchase over the past 12-18 months. I'm not sure if that's going to happen now with the lumber and RE market insanity but I'd like to keep the option on the table.

I have some concerns that inflation is/will be stronger than forecast in the near term and bonds may not fare so well. Admittedly, bonds are my weakest subject. I think I've seen it mentioned on the forum that if this type of situation occurred, intermediate-term bonds would bear the brunt of it, and that short-term bonds like Treasuries would offer better down-side protection. Is that correct?

I have no idea what kind of drop the Vanguard Total Bond fund might experience if interest rates would need to rise to combat inflation but I wouldn't want to see too much of our potential down payment disappear. I don't think a 10% decline would be a problem but could it get worse than that? We're down a few percent already.

I've been debating whether moving into short-term bonds might be a better position for this money right now.

Radagast

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Re: Transitioning to short-term bonds?
« Reply #1 on: April 28, 2021, 09:19:41 PM »
Make your duration match your duration. Total bond has a duration of something like 6.5 years, so is safe if you plan to hold that long. If you plan to hold longer, longer bonds have longer duration and more yield and so are better choices. Short term bond has a duration of about 2.5 years, so is suitable for money then. Then there is ultra short and money market. At some point you can get better results in a high yield savings account for something like 1.6% right now.

That said so far total bond has never been down for much more than a year, though admittedly rates have been generally falling over that time.

vand

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Re: Transitioning to short-term bonds?
« Reply #2 on: April 29, 2021, 02:56:39 AM »
Short duration bonds act more like cash, they are not as sensitive to changes in inflation, but they pay sod all coupon yield.

TIPS will in theory protect you from real purchasing power loss, but only on condition that you hold them to maturity, and they can still fall in the years while you wait


If you are worried about inflation then any fixed income instrument is really not where you want to have your money. Much better to buy a natural inflation hedge, which classically have been hard assets - and particularly commodities - that naturally thrive in inflationary environments. Even a tiny 2-3% allocation to commodities would have made a noticeable improvement in the survivability of traditional portfolios during the few periods of inflation that we have historically seen.

chasesfish

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Re: Transitioning to short-term bonds?
« Reply #3 on: April 29, 2021, 04:23:30 AM »
I'm going to take the other side of this debate....

I hold mainly long term treasuries.  Some via BND, some I buy directly, and some held through Vanguard's Wellington Fund.   I'm 21% bonds and cash now.

I want / need the growth that equities can provide for the next 30+ years, but want to own the only asset that goes up if we get back into a panic/margin call scenario.  Admittedly that only happens a couple times a decade, but I'm okay losing 1-2% on the upside to protect my assets.

I also hear you on housing...ugh.  Are you still in the same area?  If so, I'll just say pricing on the coast three hours south of you has equal problems.   

All signs are the government is intent on overheating the economy, but there's so much interference everywhere I just can't see far enough past that to predict what the outcome is going to be.  There's massive housing inflation thanks to low interest rates yet the fed is completely supporting these 3% mortgages (plus eviction/foreclosure stalling) causing prices to explode.  But I'm also not predicting some collapse in price, the pandemic and ability to WFH has created a new generational demand for *more space* when the trend was to more urbanization over the last five years.   Who knows.

All I can do is own equities that can keep up with inflation/deflation then hedge that with 20-25% long term bonds.  At least the market has been outpacing housing.
« Last Edit: April 29, 2021, 04:25:45 AM by chasesfish »

cool7hand

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Re: Transitioning to short-term bonds?
« Reply #4 on: April 29, 2021, 04:54:17 AM »
Have you considered a portfolio that is designed to account for inflation? As I recall, Golden Butterfly and All Seasons do so: https://portfoliocharts.com/portfolios/.

ChpBstrd

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Re: Transitioning to short-term bonds?
« Reply #5 on: April 29, 2021, 07:46:52 AM »
As a general rule, more duration = bigger loss when interest rates rise. The loss is roughly the duration of the bond, in percentage terms, for each 1% that interest rates rise. So 6.5y duration would lose about 6.5% if interest rates rose 1%. With that risk profile, I'm not sure what the benefit is anymore.

That said, I am an inflation skeptic.

Take a look at how rates have behaved over the past 18 months or so. Believe it or not, despite all the financial press headlines about imminent rising rates, our current interest rates are LOWER than they were in January 2020, before the pandemic. I could make equally valid cases that we are (1) reverting to the pre-pandemic norms which are sill extremely low, or (2) returning to a long-term disinflationary trend of falling interest rates.

https://www.treasury.gov/resource-center/data-chart-center/interest-rates/pages/TextView.aspx?data=yieldYear&year=2020

Also, watch the Personal Savings Rate. It seems mustachianism has caught on with the masses, because we are currently sitting on a savings rate of 13.6% (last read in Feb, '21)! That translates into continued demand for treasuries from the banks and money market funds holding all those deposits. More importantly, it means that monetary velocity is slowing, not speeding up, despite all the stimulus and QE. Tightwad consumers = less pricing power for sellers and employees = lower inflation.

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

Finally, a caveat about TIPS: TIPS are vulnerable to a rare scenario where interest rates rise faster than inflation. This could occur if the Fed jumps the shark in 2022-2023 like they did in 2016-2018 and raises rates prematurely while inflation is still bouncing around the low range. Your TIPS would lose value due to the rise in interest rates and not get much of an adjustment for inflation in return. I can also imagine a scenario where higher rates overseas cause the value of the dollar to drop and the Fed, under political pressure, raises rates to protect the dollar before inflation even starts showing up in the stats that count for TIPS.


MustacheAndaHalf

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Re: Transitioning to short-term bonds?
« Reply #6 on: April 29, 2021, 08:52:15 AM »
Make your duration match your duration. Total bond has a duration of something like 6.5 years, so is safe if you plan to hold that long. If you plan to hold longer, longer bonds have longer duration and more yield and so are better choices.
What happens if the loss arrives after owning Vanguard Total Bond for 5 years?  You plan to wait 6.5 years, but now your break even point becomes 11.5 years of ownership.

An extreme example to make it clear: BND earns 1.3% for 5 years, then yields suddenly go up 4%.  In that extreme scenario, BND would change by -1 x 4 x 6.5 = -26% because of the change in yields.  After that loss, BND has a yield of 5.3%, which is +4% higher.  If you wait another 6.5 years, the increased yield offset the loss.  But if you match your duration to the fund's duration, you would sell 1.5 years after that.
1.3% for 5 years (compounded) = 1.0667
-26% loss x 1.0667 = 0.789
5.3% for 1.5 years (compounded) = 0.853

Holding a 6.5 duration bond fund for 6.5 years can lead to a 15% loss.

MustacheAndaHalf

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Re: Transitioning to short-term bonds?
« Reply #7 on: April 29, 2021, 09:05:17 AM »
... considering a home purchase over the past 12-18 months ...  inflation is/will be stronger than forecast ...intermediate-term bonds would bear the brunt of it, and that short-term bonds like Treasuries would offer better down-side protection. Is that correct?

I have no idea what kind of drop the Vanguard Total Bond fund might experience if interest rates would need to rise to combat inflation but I wouldn't want to see too much of our potential down payment disappear. I don't think a 10% decline would be a problem but could it get worse than that? We're down a few percent already.
If inflation drives up bond yields 1.5%, Vanguard Total Bond should lose 10%:
-1 x 6.5 duration x 0.015 yield change = 0.0975

Short term bonds have less inflation risk.  On the risk/reward curve, they also offer lower rewards: lower bond yields.  For the option of buying a house in 2022-2023, you probably want that safety rather than the bond yield risk.

I'd recommend a 1 year bank CD.  That way your house deposit is FDIC insured while it waits.  But also, Vanguard doesn't allow transfers into an escrow account.  So if you keep the money at Vanguard, you might get a rude shock when you try and use that money for the down payment.  You'll discover it needs to be transferred to a bank or credit union, and then it can become a bank check that you give to the escrow officer.  So if you move that down payment money to a bank CD for 1 year, you'll have your original deposit and can use it on short notice (once the CD has matured).

vand

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Re: Transitioning to short-term bonds?
« Reply #8 on: April 29, 2021, 12:31:12 PM »
Anecdotally, we are currently having a home extension built, and the chatter amongst all the builders is the rocketing price of raw materials.

Lumber is probably the most spectacular, having tripled in price. There is a national shortage of cement - they couldn't get any work done today because they couldn't get hold of any. Its the same for anyone who's undergoing any construction right now.

We were very lucky as we signed our contract at the start of the year, but if we were to restart the project there is no way that anyone would do it for the same price they were working for 6 months ago.

I don't know if this inflation will be contained just to the building industry, but I expect that it will start to show through in other areas sooner rather than later.


https://www.ft.com/content/3744669d-19dd-4460-b326-94351653377d
« Last Edit: April 29, 2021, 12:46:15 PM by vand »

Mr. Green

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Re: Transitioning to short-term bonds?
« Reply #9 on: April 29, 2021, 01:40:48 PM »
Anecdotally, we are currently having a home extension built, and the chatter amongst all the builders is the rocketing price of raw materials.

Lumber is probably the most spectacular, having tripled in price. There is a national shortage of cement - they couldn't get any work done today because they couldn't get hold of any. Its the same for anyone who's undergoing any construction right now.

We were very lucky as we signed our contract at the start of the year, but if we were to restart the project there is no way that anyone would do it for the same price they were working for 6 months ago.

I don't know if this inflation will be contained just to the building industry, but I expect that it will start to show through in other areas sooner rather than later.


https://www.ft.com/content/3744669d-19dd-4460-b326-94351653377d
National Homebuilders Association just announced that the cost of lumber alone is now adding over $36,000 to the cost of an average house. I bet that's 10-15% in a lot of MCOL markets. It's hard to imagine that value isn't going to evaporate at some point. Maybe the the price of lumber will fall so slowly that price gains eat it up but damn, that's crazy.

bacchi

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Re: Transitioning to short-term bonds?
« Reply #10 on: April 29, 2021, 01:45:03 PM »
Why not VTIP? It has about a 3 year duration.

Or even i-bonds, which will pay out 3.5% beginning with the May 1 bonds. The upside is that you'll never lose more than you invested. The downside is that there's a 1 year holding period and a 5 year selling penalty (last 3 months of interest).

ChpBstrd

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Re: Transitioning to short-term bonds?
« Reply #11 on: April 29, 2021, 02:00:19 PM »
Anecdotally, we are currently having a home extension built, and the chatter amongst all the builders is the rocketing price of raw materials.

Lumber is probably the most spectacular, having tripled in price. There is a national shortage of cement - they couldn't get any work done today because they couldn't get hold of any. Its the same for anyone who's undergoing any construction right now.

We were very lucky as we signed our contract at the start of the year, but if we were to restart the project there is no way that anyone would do it for the same price they were working for 6 months ago.

I don't know if this inflation will be contained just to the building industry, but I expect that it will start to show through in other areas sooner rather than later.


https://www.ft.com/content/3744669d-19dd-4460-b326-94351653377d
National Homebuilders Association just announced that the cost of lumber alone is now adding over $36,000 to the cost of an average house. I bet that's 10-15% in a lot of MCOL markets. It's hard to imagine that value isn't going to evaporate at some point. Maybe the the price of lumber will fall so slowly that price gains eat it up but damn, that's crazy.

It's not expected to last long. Look at this backwardization:
https://www.cmegroup.com/trading/agricultural/lumber-and-pulp/random-length-lumber.html#

tooqk4u22

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Re: Transitioning to short-term bonds?
« Reply #12 on: April 29, 2021, 06:09:34 PM »
One of my favorite subjects, wanted to stay away but couldn't. 

Short duration is better right now....and yes you will lose to inflation but that is better than a bigger loss.  The US 10YR is the driver.  But, even BND with a duration of 6.5 may not be a bad place as 10YR would have to go to 2.6% to lose 6.5%.  Can it happen, sure it can, will it....probably not in the next year with the Fed still buying the supply (Fed owns 40% of all US Treasuries) and foreign investors propping up demand considerably given negative yields in their parts.  Stay away from long term like TLT unless you think rates are going down.

inflation will (I mean is) already higher, some like lumber is really supply disruptions with high demand (pure econ) but that should subside as channels catch up (and demand WILL wane bc of costs) along with some actual inflation.  Problem is Fed is looking mainly for wage inflation (hasn't happened) and full employment (hasn't happened) and all the other inflation that the Fed says is transitory (ie not real) doesn't half to be bothered with.   Everything already costs more and will continue to cost more, until a year or so out when everyone has spent all their savings, growth slows and we re-enter a disinflationary environment bc we don't have birth rates or immigration rates that we need and whatever we do have is being canabolized by technology.   

Fine, what does it mean.   Inflation will continue to rise faster than expected and markets will lose faith a bit each quarter that it is transitory and rates will rise.  Fed will be in a bind between having to react (which it will) and maintaining its rhetoric and agenda.   All of this is fine unless it happens late this year or early next year as opposed to end of 2022 or early 2023 as expected. 

I could be wrong and probably am.   


Mr. Green

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Re: Transitioning to short-term bonds?
« Reply #13 on: April 29, 2021, 07:51:47 PM »
@chasesfish Yeah we're still in the Wilmington, NC area. Home prices are up about 40% here In the last two years. Yuck. Our target property has gone from 250k to 350k and I'm uncomfortable going over 300k for a whole bunch of reasons, mainly hurricane related.

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I think the average length of VBTLX is just under 7 years. So moving to something shorter may be worth considering. I-bonds are limited to 10k per year per person and the hold and withdrawal penalty is fairly unattractive.

I suppose there's a decent chance that if bonds are down then stocks are up, in which case it wouldn't really matter. I could just sell equities, though this would leave me with capital gains. I guess a stagflation situation is the big concern? Equities drop, and interest rates rise causing bonds to drop too. Though I suppose if this happened there would likely be repercussions for the housing market and home prices would be in freefall so maybe everything is so correlated now that it's not worth worrying about.

Radagast

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Re: Transitioning to short-term bonds?
« Reply #14 on: April 29, 2021, 10:46:05 PM »
Make your duration match your duration. Total bond has a duration of something like 6.5 years, so is safe if you plan to hold that long. If you plan to hold longer, longer bonds have longer duration and more yield and so are better choices.
What happens if the loss arrives after owning Vanguard Total Bond for 5 years?  You plan to wait 6.5 years, but now your break even point becomes 11.5 years of ownership.

An extreme example to make it clear: BND earns 1.3% for 5 years, then yields suddenly go up 4%.  In that extreme scenario, BND would change by -1 x 4 x 6.5 = -26% because of the change in yields.  After that loss, BND has a yield of 5.3%, which is +4% higher.  If you wait another 6.5 years, the increased yield offset the loss.  But if you match your duration to the fund's duration, you would sell 1.5 years after that.
1.3% for 5 years (compounded) = 1.0667
-26% loss x 1.0667 = 0.789
5.3% for 1.5 years (compounded) = 0.853

Holding a 6.5 duration bond fund for 6.5 years can lead to a 15% loss.
True. Though if you started with 6.5 years and 5 years have transpired, some would say your duration should now be only 1.5 years as that is how long until you need the money.

Either way, just looked and it seems good FDIC savings accounts yield more than BND soooo.... probably no point to bonds for this use right now.

Mr. Green

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Re: Transitioning to short-term bonds?
« Reply #15 on: April 30, 2021, 03:27:01 AM »
Make your duration match your duration. Total bond has a duration of something like 6.5 years, so is safe if you plan to hold that long. If you plan to hold longer, longer bonds have longer duration and more yield and so are better choices.
What happens if the loss arrives after owning Vanguard Total Bond for 5 years?  You plan to wait 6.5 years, but now your break even point becomes 11.5 years of ownership.

An extreme example to make it clear: BND earns 1.3% for 5 years, then yields suddenly go up 4%.  In that extreme scenario, BND would change by -1 x 4 x 6.5 = -26% because of the change in yields.  After that loss, BND has a yield of 5.3%, which is +4% higher.  If you wait another 6.5 years, the increased yield offset the loss.  But if you match your duration to the fund's duration, you would sell 1.5 years after that.
1.3% for 5 years (compounded) = 1.0667
-26% loss x 1.0667 = 0.789
5.3% for 1.5 years (compounded) = 0.853

Holding a 6.5 duration bond fund for 6.5 years can lead to a 15% loss.
True. Though if you started with 6.5 years and 5 years have transpired, some would say your duration should now be only 1.5 years as that is how long until you need the money.

Either way, just looked and it seems good FDIC savings accounts yield more than BND soooo.... probably no point to bonds for this use right now.
What FDIC savings accounts are paying more than 1.3% right now? Best I can find is 0.5%.

chasesfish

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Re: Transitioning to short-term bonds?
« Reply #16 on: April 30, 2021, 04:42:07 AM »
Stagflation is the ultimate concern.....there just isn't much that does well relative to 70s style stagflation, except being an owner in stuff with low rate, long term debt like real estate.   

I've unfortunately been so wrong on housing.   So many of the housing starts over the last ten years were high density urban apartment builds and now we've had a generational shift in demand for more space and some offices will end up permanently at home.

It wrecked my initial plan when moving to suburban Charleston.  Was going to start buying $300,000 3/2s, live in them for a year, then move again.   The numbers don't make sense at $380,000 when rent hasn't moved, especially as a cash buyer.

tooqk4u22

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Re: Transitioning to short-term bonds?
« Reply #17 on: April 30, 2021, 05:14:31 AM »
I don't think we will see economic stagflation but I do envision a market stagflation for a period of time in the next year or two when equities plateau/decline AND bonds decline.  Demographics and Fed raising rates/withdrawing funds from the system I just don't see any other scenario... and then add on tax increases. 

But market can still go up until then.

chasesfish

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Re: Transitioning to short-term bonds?
« Reply #18 on: April 30, 2021, 05:29:04 AM »
I don't think we will see economic stagflation but I do envision a market stagflation for a period of time in the next year or two when equities plateau/decline AND bonds decline.  Demographics and Fed raising rates/withdrawing funds from the system I just don't see any other scenario... and then add on tax increases. 

But market can still go up until then.

The fed pulling back....that's comical at this point.

We're in the wildest housing market in history and they continue to drive 30yr mortgage rates below 3% instead of allowing it to get slightly less hot
« Last Edit: April 30, 2021, 05:31:17 AM by chasesfish »

tooqk4u22

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Re: Transitioning to short-term bonds?
« Reply #19 on: April 30, 2021, 07:23:22 AM »
I don't think we will see economic stagflation but I do envision a market stagflation for a period of time in the next year or two when equities plateau/decline AND bonds decline.  Demographics and Fed raising rates/withdrawing funds from the system I just don't see any other scenario... and then add on tax increases. 

But market can still go up until then.

The fed pulling back....that's comical at this point.

We're in the wildest housing market in history and they continue to drive 30yr mortgage rates below 3% instead of allowing it to get slightly less hot

I agree it's comical and unlikely soon, but it will have to happen (not fully) at some point and possibly sooner than expected if inflation is real...haha, real?

I also wonder if the position will shift slightly once/if Powell is confirmed for another 4 years.   

MustacheAndaHalf

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Re: Transitioning to short-term bonds?
« Reply #20 on: April 30, 2021, 08:55:33 PM »
Make your duration match your duration. Total bond has a duration of something like 6.5 years, so is safe if you plan to hold that long. If you plan to hold longer, longer bonds have longer duration and more yield and so are better choices.
What happens if the loss arrives after owning Vanguard Total Bond for 5 years?  You plan to wait 6.5 years, but now your break even point becomes 11.5 years of ownership.

An extreme example to make it clear: BND earns 1.3% for 5 years, then yields suddenly go up 4%.  In that extreme scenario, BND would change by -1 x 4 x 6.5 = -26% because of the change in yields.  After that loss, BND has a yield of 5.3%, which is +4% higher.  If you wait another 6.5 years, the increased yield offset the loss.  But if you match your duration to the fund's duration, you would sell 1.5 years after that.
1.3% for 5 years (compounded) = 1.0667
-26% loss x 1.0667 = 0.789
5.3% for 1.5 years (compounded) = 0.853

Holding a 6.5 duration bond fund for 6.5 years can lead to a 15% loss.
True. Though if you started with 6.5 years and 5 years have transpired, some would say your duration should now be only 1.5 years as that is how long until you need the money.

Either way, just looked and it seems good FDIC savings accounts yield more than BND soooo.... probably no point to bonds for this use right now.
I don't see where you mentioned constantly switching bond funds to match duration.  Do you think someone will change bond funds every few months?  It also assumes there's a bond fund to match every duration.

But in that case, what happens if the loss appears in the first year?  Now you take a -26% loss in BND, and every few months switch to a shorter duration bond fund.  That locks in some of the loss, because you're earning a lower yield in the shorter duration bond fund.


What FDIC savings accounts are paying more than 1.3% right now? Best I can find is 0.5%.
FDIC savings accounts have lower rates because of their lower risk.  Keeping money in total bond market can incur a 6.5% loss per 1% increase in yields, so investors need to be paid more to accept that risk.  If you find higher returns with less risk, you're probably wrong about the risk.

Radagast

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Re: Transitioning to short-term bonds?
« Reply #21 on: May 01, 2021, 10:55:53 AM »
Make your duration match your duration. Total bond has a duration of something like 6.5 years, so is safe if you plan to hold that long. If you plan to hold longer, longer bonds have longer duration and more yield and so are better choices.
What happens if the loss arrives after owning Vanguard Total Bond for 5 years?  You plan to wait 6.5 years, but now your break even point becomes 11.5 years of ownership.

An extreme example to make it clear: BND earns 1.3% for 5 years, then yields suddenly go up 4%.  In that extreme scenario, BND would change by -1 x 4 x 6.5 = -26% because of the change in yields.  After that loss, BND has a yield of 5.3%, which is +4% higher.  If you wait another 6.5 years, the increased yield offset the loss.  But if you match your duration to the fund's duration, you would sell 1.5 years after that.
1.3% for 5 years (compounded) = 1.0667
-26% loss x 1.0667 = 0.789
5.3% for 1.5 years (compounded) = 0.853

Holding a 6.5 duration bond fund for 6.5 years can lead to a 15% loss.
True. Though if you started with 6.5 years and 5 years have transpired, some would say your duration should now be only 1.5 years as that is how long until you need the money.

Either way, just looked and it seems good FDIC savings accounts yield more than BND soooo.... probably no point to bonds for this use right now.
I don't see where you mentioned constantly switching bond funds to match duration.  Do you think someone will change bond funds every few months?  It also assumes there's a bond fund to match every duration.

But in that case, what happens if the loss appears in the first year?  Now you take a -26% loss in BND, and every few months switch to a shorter duration bond fund.  That locks in some of the loss, because you're earning a lower yield in the shorter duration bond fund.
You don't constantly switch funds, you own 1 bond fund and 1 FDIC account. If you have 50% BND with a duration of 6 years and 50% in savings which is 0 duration, your effective duration is 3 years. Just move more to or from FDIC whenever the whim strikes and you adjust your duration.

It is easy to imagine hypotheticals, but in reality Total Bond's worst ever losing streak recovered in about 10 months - March 1987 to January 1988. That is a factor of safety of like 6. My own short observation has made me think the duration matching rule is far too safe, but ultimately you need to choose between a small risk and a guaranteed low return. I would bet that "match your duration" has had a higher success rate than the 4% rule. https://www.portfoliovisualizer.com/backtest-portfolio?s=y&timePeriod=2&startYear=1985&firstMonth=1&endYear=2021&lastMonth=12&calendarAligned=true&includeYTD=false&initialAmount=10000&annualOperation=0&annualAdjustment=0&inflationAdjusted=true&annualPercentage=0.0&frequency=4&rebalanceType=1&absoluteDeviation=5.0&relativeDeviation=25.0&reinvestDividends=true&showYield=false&showFactors=false&factorModel=3&portfolioNames=false&portfolioName1=Portfolio+1&portfolioName2=Portfolio+2&portfolioName3=Portfolio+3&symbol1=VBMFX&allocation1_1=100

Radagast

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Re: Transitioning to short-term bonds?
« Reply #22 on: May 01, 2021, 10:58:36 AM »
Make your duration match your duration. Total bond has a duration of something like 6.5 years, so is safe if you plan to hold that long. If you plan to hold longer, longer bonds have longer duration and more yield and so are better choices.
What happens if the loss arrives after owning Vanguard Total Bond for 5 years?  You plan to wait 6.5 years, but now your break even point becomes 11.5 years of ownership.

An extreme example to make it clear: BND earns 1.3% for 5 years, then yields suddenly go up 4%.  In that extreme scenario, BND would change by -1 x 4 x 6.5 = -26% because of the change in yields.  After that loss, BND has a yield of 5.3%, which is +4% higher.  If you wait another 6.5 years, the increased yield offset the loss.  But if you match your duration to the fund's duration, you would sell 1.5 years after that.
1.3% for 5 years (compounded) = 1.0667
-26% loss x 1.0667 = 0.789
5.3% for 1.5 years (compounded) = 0.853

Holding a 6.5 duration bond fund for 6.5 years can lead to a 15% loss.
True. Though if you started with 6.5 years and 5 years have transpired, some would say your duration should now be only 1.5 years as that is how long until you need the money.

Either way, just looked and it seems good FDIC savings accounts yield more than BND soooo.... probably no point to bonds for this use right now.
What FDIC savings accounts are paying more than 1.3% right now? Best I can find is 0.5%.
My bad, I haven't been paying attention recently and forgot a 1 :D.

I would definitely use Alliant at 0.55%, and once read something good about Live Oak at 0.6%. Would be interesting to try T-Mobile at 1.0%.
https://www.doctorofcredit.com/high-interest-savings-to-get/

effigy98

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Re: Transitioning to short-term bonds?
« Reply #23 on: May 01, 2021, 11:38:36 AM »
No buy NUSI, gold, and some bitcoin as bond replacement. Bonds are a horrible investment going forward. Ask people who lived thru the 70s. The government is going to cause inflation this time. They are going to discharge student loans (inflation), keep giving free checks out to 90% of people, fuck over 10% of the people still dumb enough to keep working their high paid jobs so they can be taxed to death, force companies to pay more to attract low end workers (major inflation). Protect yourself, bonds are not the way to do it.

The only way bonds might be attractive is if the government issues e-currency and gets cash out of the system so they can go super negative -10% real interest rates or something and force any remaining responsible people left to either die off or gamble their money in growth stocks, cryptos, spacs, sports betting, nfts, etc.
« Last Edit: May 01, 2021, 11:49:42 AM by effigy98 »

vand

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Re: Transitioning to short-term bonds?
« Reply #24 on: May 02, 2021, 02:02:45 AM »
Anecdotally, we are currently having a home extension built, and the chatter amongst all the builders is the rocketing price of raw materials.

Lumber is probably the most spectacular, having tripled in price. There is a national shortage of cement - they couldn't get any work done today because they couldn't get hold of any. Its the same for anyone who's undergoing any construction right now.

We were very lucky as we signed our contract at the start of the year, but if we were to restart the project there is no way that anyone would do it for the same price they were working for 6 months ago.

I don't know if this inflation will be contained just to the building industry, but I expect that it will start to show through in other areas sooner rather than later.


https://www.ft.com/content/3744669d-19dd-4460-b326-94351653377d
National Homebuilders Association just announced that the cost of lumber alone is now adding over $36,000 to the cost of an average house. I bet that's 10-15% in a lot of MCOL markets. It's hard to imagine that value isn't going to evaporate at some point. Maybe the the price of lumber will fall so slowly that price gains eat it up but damn, that's crazy.

It's not expected to last long. Look at this backwardization:
https://www.cmegroup.com/trading/agricultural/lumber-and-pulp/random-length-lumber.html#

There will always be some significant reversion to the mean in the term structure of the  futures when spot prices are moving so far and fast, but that doesn't necessarily give any insight to where the trend is heading. The correct way to interpret is as a reflection of past recent volatility and an indication of expected near term volatility.




Mr. Green

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Re: Transitioning to short-term bonds?
« Reply #25 on: May 02, 2021, 06:52:39 AM »
Anecdotally, we are currently having a home extension built, and the chatter amongst all the builders is the rocketing price of raw materials.

Lumber is probably the most spectacular, having tripled in price. There is a national shortage of cement - they couldn't get any work done today because they couldn't get hold of any. Its the same for anyone who's undergoing any construction right now.

We were very lucky as we signed our contract at the start of the year, but if we were to restart the project there is no way that anyone would do it for the same price they were working for 6 months ago.

I don't know if this inflation will be contained just to the building industry, but I expect that it will start to show through in other areas sooner rather than later.


https://www.ft.com/content/3744669d-19dd-4460-b326-94351653377d
National Homebuilders Association just announced that the cost of lumber alone is now adding over $36,000 to the cost of an average house. I bet that's 10-15% in a lot of MCOL markets. It's hard to imagine that value isn't going to evaporate at some point. Maybe the the price of lumber will fall so slowly that price gains eat it up but damn, that's crazy.

It's not expected to last long. Look at this backwardization:
https://www.cmegroup.com/trading/agricultural/lumber-and-pulp/random-length-lumber.html#
That link would seem to indicate otherwise. Lumber futures a year from now are still over $1,000, which is 3x the pre-pandemic norm.

chasesfish

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Re: Transitioning to short-term bonds?
« Reply #26 on: May 02, 2021, 11:09:42 AM »
I'd also recommend you read Mr. Buffett's comments about inflation yesterday....

Mr. Green

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Re: Transitioning to short-term bonds?
« Reply #27 on: May 02, 2021, 11:55:02 AM »
I'd also recommend you read Mr. Buffett's comments about inflation yesterday....
I saw that. You have to wonder if this is just a short-term rise or if this is a trend that is going to become alarming. With $2-3 trillion savings people have accumulated over the last year and their impatience to get back to normal, I suspect there will be quite a bit of tolerance to rising prices. Housing is a perfect example. You'd think $36,000 in extra lumber costs on a 250-300k house would be enough to give plenty of people pause but we just can't get enough so far. The cascading scarcity of products brought on by the Texas deep freeze isn't helping either. If 12 months from now it's apparent that true inflation is approaching 10% the Fed may not have much choice but to raise rates or risk things really getting out of hand.

vand

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Re: Transitioning to short-term bonds?
« Reply #28 on: May 03, 2021, 09:42:58 AM »
Buffett has sounded the warning bell on inflation.

Lumber up another 6% today.

I think it has actually outperformed bitcoin so far this year...


ChpBstrd

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Re: Transitioning to short-term bonds?
« Reply #29 on: May 03, 2021, 12:19:54 PM »
I'd also recommend you read Mr. Buffett's comments about inflation yesterday....
I saw that. You have to wonder if this is just a short-term rise or if this is a trend that is going to become alarming. With $2-3 trillion savings people have accumulated over the last year and their impatience to get back to normal, I suspect there will be quite a bit of tolerance to rising prices. Housing is a perfect example. You'd think $36,000 in extra lumber costs on a 250-300k house would be enough to give plenty of people pause but we just can't get enough so far. The cascading scarcity of products brought on by the Texas deep freeze isn't helping either. If 12 months from now it's apparent that true inflation is approaching 10% the Fed may not have much choice but to raise rates or risk things really getting out of hand.
Before raising rates, the Fed could try reducing the $120 billion in assets they are purchasing every month to keep inflation propped up.