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Post by retiredat48 on Mar 23, 2022 17:19:28 GMT
I have a goodly amount of money in cash/short term investments, awaiting deployment. Patience is the code word for this money.
A couple days ago, bond fund manager Jeff Gundlach recommended the two year Treasury bond as a good buy. Rate then was about 1.92%...yesterday close was 2.158%, partly in reaction to fed stating may go 50 basis points up in fed funds rate at next meeting.
So is this a good buy...and is timing now? Also, what is a good Fund or ETF owning 2 year Treasuries?
Gundlach had a graph showing historically, the fed funds rate and the 2 year Treasury followed very closely. Since the fed plans to increase rates 6 more times, and assuming one is 50 basis points, then the fed funds rate gets to 2% this year. Expect a two year treasury to be slightly higher rate.
I also expect the ten year Treasury to peak around 2.6%...and note the 2/10 spread is very low; about 0.21% now.
Over several decades, when I exited funds, in lieu of parking monies in MM Funds, I mostly bought long term corporate bond funds, taking a higher yield, and accepting that NAV fund price would float. Most of the time, I exited with small price gains, as well as higher interest received. Occasionally not so. But I captured more yield.
So going out to two years is not a great risk to me. Like, I'll take the 2.16% interest for a year, and live with a floating fund price. That compares to a money market fund that may be 0.5% yield, and no price change.
Your thoughts? Timing now?...a good Fund/ETF?
TIA
R48
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Post by Fearchar on Mar 23, 2022 17:38:28 GMT
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Post by chang on Mar 23, 2022 18:01:23 GMT
SHY dist yield 0.22% … what’s the point?
Does the risk justify the yield?
I have pencilled into my diary to consider whether bonds have a place in my portfolio … in the year 2032.
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Post by Fearchar on Mar 23, 2022 18:06:49 GMT
chang, 0.22% is the trailing yield. SEC yield is current or future expected yield; it's at 1.43% Share price could easily contract that much. So, yes I agree that it's difficult to make a strong case here.
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Post by Fearchar on Mar 23, 2022 18:08:47 GMT
opps; my bad SGOV SEC yield is 0.22%
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Post by fishingrod on Mar 23, 2022 18:10:32 GMT
VGSH
Average duration 2 years Treasury SEC yld. 1.60%
Looks pretty beaten down. 52 week NAV difference negative -3.72%
IGSB 2.69% SEC yld. mix of investment grade bonds. Duration 2.73 yrs.
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Post by Chahta on Mar 23, 2022 18:42:41 GMT
It will most likely take a while for the yield to work into funds or the NAV will drop to match the yield. Treasury direct may be better.
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Post by fishingrod on Mar 23, 2022 22:11:49 GMT
Not treasury but a unique corporate bond ETF.
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Post by FD1000 on Mar 23, 2022 22:14:23 GMT
Easy choice = NO. The trend is down, down and more down. Attachments:
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Post by retiredat48 on Mar 24, 2022 16:30:11 GMT
Thanks Fearchar...SHY fits the bill! But I note the expense ratio is 0.15%...I would lean towards the Vanguard fund at lower ER. See some comments below. R48 |
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Post by retiredat48 on Mar 24, 2022 16:40:52 GMT
It will most likely take a while for the yield to work into funds or the NAV will drop to match the yield. Treasury direct may be better. I want to reply generally to this comment. Yes, sometime bond funds take awhile to have yield catch up. But consider this...in a defacto way, the yield has caught up. Consider bond fund SHY cited above. Per M* info, SHY has an AVERAGE WEIGHTED PRICE of 98. Bonds are quoted in terms of "par"...par being 100, as when issued. So an AWP of 98 means its bonds are at an average discount to par (below par) by 2%. So, if the fund manager does nothing but hold all bonds to redemption, this means a built in gain of 2%, as bonds are redeemed at par. IOW holding such a fund means a built-in cap gain...about 1% a year.. This is reflected in a yield of let's say 1.6%, while 2 yr treasuries are yielding 2%. You get close to that. Put another way, if a 7 year maturity bond fund is selling at 107 to par, this means a built-in loss of about 1% a year for seven years. Usually a premium is with very low rates. So the fund manager can sell at 107, but now must reinvest at lower coupon bonds. It all averages out. So SHY will have a total return approximating 2%, if held two years. Is this rationale wrong? R48 |
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Post by retiredat48 on Mar 24, 2022 16:41:56 GMT
Not treasury but a unique corporate bond ETF.
Yes...a unique fund. Not sure why I would need a fund that dissolves in one year, though?? R48 |
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Post by retiredat48 on Mar 24, 2022 16:45:16 GMT
VGSH
Average duration 2 years Treasury SEC yld. 1.60%
Looks pretty beaten down. 52 week NAV difference negative -3.72%
IGSB 2.69% SEC yld. mix of investment grade bonds. Duration 2.73 yrs.
VGSH looks like best choice so far. 0.04% ER attractive. R48 |
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Post by shipwreckedandalone on Mar 24, 2022 16:54:28 GMT
Regardless of your decision, it is a good idea to go back and look at the Fed Fund year by year rate history from early 70's to early 80's. Inflation was a many year problem.
It was a roller coaster FAST moving market. Investors today have not seen volatile interest rate movements in their lifetimes and the effects on equity markets (if that happens... and I have no opinion on that).
I can't imagine being a bond fund manager back in those days.
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Post by fishingrod on Mar 24, 2022 16:55:18 GMT
Just figured I mention the Bullet shares BSCN. They have a line of them maturing in different years. It would serve kind of like a single bond where you know what the matured value will be. I am not recommending just mentioning.
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Post by retiredat48 on Mar 24, 2022 17:02:48 GMT
Easy choice = NO. The trend is down, down and more down. This is the heart of the matter, and perhaps where FD and I see it differently. I am a big believer and user of momentum...FOR STOCK FUNDS. Not so for bond funds. Bonds are contractual instruments and do nothing more than , barring default, pay back an interest rate/dividend, for a set period to maturity, when a specific borrowed sum is returned. Thus, downward prices usually head towards better value for each bond. A "compelling value" price becomes the goal. The fact that momentum is now downward, simply means a march to more compelling value. So re FDs chart... --First, note while a large decline seems apparent, the y axis is only a 3% loss over almost a year. --Second, if Gundlach considered the 2 year a "buy" at 1.92%, then at 2.16% it is likely even a better buy (as the market bakes in a (new info)50 point rise in ff rate in May). --I am OK starting to buy at "compelling value" prices. --Sure, prices may go even lower to an absolute eventual bottom, but if I buy now at 2.15%, hold for up to 2 years, the odds are above 50% that the bond fund price will have stabilized and likely be HIGHER. This is because fed is likely to cause a recessions or stagflation (here now), and yields simply stop rising. History of bonds is yields do not go up/down in straight lines. Changes have an impact...like current mortgage rate of 4.75% is starting to adversely affect housing market...etc. --Lastly folks, remember the BOND RULE OF THUMB. Which is: If you buy a bond fund and hold to its duration (linked to maturity), your total return will closely approximate the starting yield, REGARDLESS OF THE DIRECTION OF INTEREST RATES. Meaning whether rates go up or down from here, ones total return will be close to 2.15%. It is like, if rates continue up, the fund buys more higher coupon bonds, offsetting the decline in bond prices; if rates go down, the bond prices go up, but one cannot buy higher coupon bonds. It all averages out! Enough for now... R48 |
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Post by Chahta on Mar 24, 2022 17:02:54 GMT
The current yield based on the 3/1 distribution is .36%. The SEC yield is 1.4%. Not sure why a big difference. Is the SEC so much higher due to factoring the recent increase of rates during March? The SEC yield usually makes no sense to me. retiredat48, your explanation makes sense. But where is the higher yield? |
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Post by retiredat48 on Mar 25, 2022 0:09:30 GMT
Regardless of your decision, it is a good idea to go back and look at the Fed Fund year by year rate history from early 70's to early 80's. Inflation was a many year problem. It was a roller coaster FAST moving market. Investors today have not seen volatile interest rate movements in their lifetimes and the effects on equity markets (if that happens... and I have no opinion on that). I can't imagine being a bond fund manager back in those days. Hi s and alone... I invested during the 1970's. Two comments...the period in question was a decade long, so the rates were not rising that fast as it appears. Second...investors did not lose much in "nominal terms"...meaning in actual dollars. Most had gains over various periods. However, with the inflation factor, they lost in REAL returns...they lost in purchasing power. Norbertc had a chart, from 1960s to 1981, that shows about a 1% annual negative REAL Return owning bonds back then. That is, slow death by a thousand needles. Here is an interesting thread on Bogleheads.org discussing history of BOND BUBBLES by poster Nisiprius...hint: There aren't any. One seldom loses holding bonds...but you can lose greatly in purchasing power. Link here: (later) R48 |
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Post by shipwreckedandalone on Mar 25, 2022 2:20:21 GMT
Hi R48, yes we can armchair quarterback the 70's and look back and say if an investor had the fortitude to buy and hold then everything would be alright. The problem is people in retirement had to make investment decisions each day back then day by day in this roller coaster environment:
Interest rates: Fed funds rate started out 5.5% in 12/72 went to 11% in 8/73, went to 13% in 7/74, back down to 4.75% in 1/76, back up to 15.5% in 10/79 and eventually 20% in 3/80. At this point, people had no idea how high rates would go. Fed Funds did not go below 6% until 1986. 14 years from the start. I cannot imagine managing bonds back then.
Equities: S&P 500 was almost cut in half from peak in 72 to the bottom in late 74 while EPS went up 50% from 72 to 74.
If inflation is out of control, it can create havoc on financial markets.
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Post by fishingrod on Mar 25, 2022 15:23:18 GMT
Wow!!
Another day, another 1% down for the total bond market!
Cash is looking better and better.
Maybe it is one of those,
Just don't do something, Sit there, times.
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Post by Chahta on Mar 25, 2022 16:55:17 GMT
fishingrod, It is hard rationalizing trading in and out of all my bond funds. A trader is that and it’s OK. But most of us just will never be able to time. Why are equity funds any different? Investing is an up and down thing at times. It is the long term that counts. Those that rely on their portfolios to provide cash to live need a plan to do that. Hoping I can put the rest of my bond cash in when markets bottom. Maybe MM next year. We are a fairly active bunch on these investing sites but 99.9% of the rest of the investors are B&H. Think of galeno.
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Post by uncleharley on Mar 25, 2022 17:03:21 GMT
fishingrod , It is hard rationalizing trading in and out of all my bond funds. A trader is that and it’s OK. But most of us just will never be able to time. Why are equity funds any different? Investing is an up and down thing at times. It is the long term that counts. Those that rely on their portfolios to provide cash to live need a plan to do that. We are a fairly active bunch on these investing sites but 99.9% of the rest of the investors are B&H. Think of galeno. To that end I would like to point out that the 2 yr treasurey rate is higher than it was prior to the 1st Covid wave when inflation was acceptable. We are very close to a sell off in the S&P that would cause the Fed to once more exclaim that they cannot reduce their balance sheet and return to QE forever. It is probably too early to enter the bond market today, but a long term investor would probably look pretty smart in a yr if they bought now or soon. JMHO |
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Post by Chahta on Mar 25, 2022 17:30:34 GMT
uncleharley, I agree on the bond purchase. I’m not sure about the equity sell off.
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Post by Fearchar on Mar 25, 2022 18:15:51 GMT
to uncleharley's point: | Time Period | 2 Year Treasury | 30 Year Fix Mortgage | | May-Dec 2017 | 1.30% | 3.90% | | Nov 2018 | 2.80% | 4.90% | | Oct-Dec 2019 | 1.60% | 3.60% |
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| | March 2022 (current) | 2.13% | 4.42% |
Short term rates are greater now than they were immediately prior to the pandemic and the May-Dec 2017 stretch. Possibly, those time periods were near "normal". They are approaching, but not at the November 2018 peak levels. That was the most recent "tightening period". Hard to say if they will have to rise to the Nov 2018 levels or not to get inflation under control. fred.stlouisfed.org/series/DGS2fred.stlouisfed.org/series/MORTGAGE30US  |
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Post by fishingrod on Mar 25, 2022 18:26:24 GMT
I am also waiting not so patiently to add to muni bond funds VWIUX, VWALX, and PRVAX also. I might start today on adding a little. I will let you know.
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Post by anitya on Mar 25, 2022 21:26:49 GMT
fishingrod , It is hard rationalizing trading in and out of all my bond funds. A trader is that and it’s OK. But most of us just will never be able to time. Why are equity funds any different? Investing is an up and down thing at times. It is the long term that counts. Those that rely on their portfolios to provide cash to live need a plan to do that. We are a fairly active bunch on these investing sites but 99.9% of the rest of the investors are B&H. Think of galeno. To that end I would like to point out that the 2 yr treasurey rate is higher than it was prior to the 1st Covid wave when inflation was acceptable. We are very close to a sell off in the S&P that would cause the Fed to once more exclaim that they cannot reduce their balance sheet and return to QE forever. It is probably too early to enter the bond market today, but a long term investor would probably look pretty smart in a yr if they bought now or soon. JMHO Hi, My personal take is, based on currently available info, the Fed is not going to throw in the towel unless S&P 500 is about 25% below where it is currently, which is part of the reason why the rates market is freaking out. With the relentless dip buying, not sure when we will hit those levels. There is not going to be a quick pivot like in 2018. (Fed is going to be flexible with its communication / talk but it is on a set path until it reaches at least some of its goals of tightening. Needless to say, markets react in anticipation of future events.) |
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Post by Chahta on Mar 25, 2022 21:39:34 GMT
anitya, that is a dire thought that the Fed would cause the S&P to drop 25%. Why are we holding anything but cash now?
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Post by anitya on Mar 25, 2022 21:40:29 GMT
to uncleharley's point: | Time Period | 2 Year Treasury | 30 Year Fix Mortgage | | May-Dec 2017 | 1.30% | 3.90% | | Nov 2018 | 2.80% | 4.90% | | Oct-Dec 2019 | 1.60% | 3.60% |
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| | March 2022 (current) | 2.13% | 4.42% |
Short term rates are greater now than they were immediately prior to the pandemic and the May-Dec 2017 stretch. Possibly, those time periods were near "normal". They are approaching, but not at the November 2018 peak levels. That was the most recent "tightening period". Hard to say if they will have to rise to the Nov 2018 levels or not to get inflation under control. fred.stlouisfed.org/series/DGS2fred.stlouisfed.org/series/MORTGAGE30US<button disabled="" class="c-attachment-insert--linked o-btn--sm">Attachment Deleted</button><button disabled="" class="c-attachment-insert--linked o-btn--sm">Attachment Deleted</button> Thanks. I personally would use real yields for comparison. See if this works - fred.stlouisfed.org/graph/?id=DGS5,DFII5,DGS7,DFII7, If not, you know what to do. Edit: Fearchar , The link I added does not work. Not sure how to fix it but I included 5 and 7 yr constant maturity and inflation indexed. My hope is the second set gives real rates (while the first set gives nominal rates). |
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Post by Fearchar on Mar 25, 2022 22:27:59 GMT
Real rates are negative across durations; but that's the problem. They have been too negative for an over long time.... are we addicted? The "new" normal used to be near zero for real rates. During the Nov 2018 tightening, 5 year TIPs were almost 1%. Economy didn't tolerate that for very long. Bill Gross's point is that it won't take much of rate increases to slow down the economy (or break it if they aren't careful).  fred.stlouisfed.org/series/DFII5I'm a little surprised at how quickly nominal rates have increased. As inflation lessens, real rates will moderate. But there will be a lag between nominal and real. Nominal rate are leading indicators, real rates lag. At least that's my impression. |
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Post by anitya on Mar 25, 2022 23:23:16 GMT
Just a small digression.
FWIW, I do not listen or read Bill Gross for investment guidance since the 2013 taper tantrum. But I used to read them for a few more years after that because he writes incredibly well - I am a shitty writer and so admire his writing even more. These days data is so freely and easily available and so it is a lot easier to form an investment view without relying on so called talking heads. One never knows what the motive of the talking head is - humans just are just faulty (i.e., not as objective as they could be).
Also, any historical discussion of Fed tightening actions or interest rates could be incomplete without looking all the way back to post GFC ( at least 2013?). In my personal research, I go back to at least 2013.
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