13 Replies Latest reply on Dec 9, 2010 1:23 PM by JerryD

    Bond bubble

    Trafton
      How does everyone view this bond buble stuff we are hearing about?
        • Re: Bond bubble
          JerryD
          The only way for existing bonds to pay higher interest is to experience a capital loss - it's worth less than you paid for it and appears to pay higher interest to the person who buys it from you. One can take the TIAA approach and buy a newly released bond and hold it to maturity - 30 years is a long time - and short of default know exactly what one gets in return.

          Should you be asking yourself whether our current situation of unbelievably low interest rates and inflation can last much longer?  Would that help to answer your bond question?

          I have always had a hard time with the reverse logic of bonds (compared to stocks). Price goes up and interest paid goes down and vice-a-versa.
          • Re: Bond bubble
            zebra87

            I have some fears but I am still buying individual, intermediate term municipal bonds and adding to an intermediate term, tax free bond fund. The value of the individual bonds may go down if interest rates rise. Howver, the steady flow of dividends is nice. The bond fund is a little bit more troubling but it is still the best place to park money at the moment. Together, these bond investments represent 30% of my portfolio.

            DFW Age 58

             

             

             

              • Re: Bond bubble
                charadrius
                If you are a TIAA-CREF customer and have one of the accounts where you can move money in and out of the TIAA annuity (IRAs and a few other vehicles, you can get 3% interest right now and not have to fear what might happen to a bond fund.  This sure beats the virtually non-existent rate on the money market account.
              • Re: Bond bubble
                jkom51

                I'm keeping an eye on the bond market. We're fortunate that we don't need to take any distributions from our portfolio, and the majority of our investible assets are run by an extremely large pension fund manager whose choice of bond funds is limited but very select.

                I've probably made more changes to the portfolio between mid-2009 and early 2010, than I previously did in the six years prior. We have recouped all our losses and are currently on track for an 8% gain in 2010. But who knows what might happen in the next month, LOL!

                Because of the 'warning articles' I've been seeing, I'm comfortable with having (what is for us) an extremely unusual allocation for 2010: one third equities, one third Dodge & Cox's short- and medium-term fixed income fund, one third in PIMCO's Real Return Strategy Option fund. I've always had a high regard for PIMCO funds and I was very pleased when  one of the best ones was finally offered as a fund choice.

                The US GDP is starting to grow on target, which means inflation is not far behind. Whether we can continue what seems to be a winning Keynesian strategy in a world where Europe seems determined to plunge itself into a double-dip recession, is a true wild card. I think it's inevitable some EU members are going to have to default on bank debt within the next two years, which may eliminate the euro as a currency.

                Inflation is murder on bonds. I would not be comfortable holding any long-term bonds, and would restrict any medium-term bonds to a modest percentage, preferring to hold short-term bonds instead. But as we are restricted to funds, I'm comfortable using D&C's fund, as it's one of the most well-regarded income funds with an excellent long-term ROI, meaning it's well managed. PIMCO's fund is one of their 'fund of funds' offering, so it's considered more of a 'balanced' fund than a straightforward bond fund (e.g., it holds emerging market bonds, etc.).

                  • Re: Bond bubble
                    charadrius
                    Whatever the situation with bonds, the word "bubble" is simply the wrong word to use in regard to them.  If bonds do go down in value over the next few years, they will go down in a fairly systematic way -- in proportion to a rise in the interest rate of newly issued bonds.  Unlike such things as tulip bulbs, baseball cards, beanie babies, dot.com stocks, and real estate where prices began to go up based on the expected value of further price increases rather than any intrinsic value, the value of older bonds and bond funds has gone up based very realistically on and proportionately to the low interest rate of current issues.

                    It might also be mentioned that the very fact that people are talking about "a bond bubble" would indicate that it is not in the offing.  In a real bubble, virtually nobody recognizes or names it as a bubble until it bursts.  I mention these things because if you want to escape the next bubble, it pays to understand very clearly what a bubble is so you can recognize it before it bursts.
                      • Re: Bond bubble
                        JerryD
                        I refer to our friend Allen Greenspan: "But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions ..." To me the word "bubble" implies almost a herd mentality with little knowledge, perhaps, of the consequences of piling on, only the greed or fear of not doing so. I believe that the flight to bonds seems to continue even though interest rates can almost not go down any further which leaves unsuspecting or unprepared investors in for a significant loss (or "contraction" as Allen says).  After all the only way interest rates for existing bonds can go up is for their principal value to go down due to fixed interest payments over the life of the bond. That's called a loss or contraction and it can be significant depending on the maturity of the bonds held.

                        I ask: Are investors, especially those investing for retirement, prepared for a big loss in bonds immediately following a HUGE loss in stocks?
                          • Re: Bond bubble
                            charadrius
                            If your not paying attention, the end result of a slow contraction can be the same as a bursting.  My point is only that we don't have to worry about the value of bonds plummeting over night, but we certainly might need to worry about them contracting considerably over a period of several months.

                            In my first foray into the world of investments in the mid-80s, I purchased a bond fund that gained 25% in four months.  That was a  very positive experience.  Then we had high inflation that came down rapidly.  If we went from the current low inflation up to the levels of inflation we then had, bonds could lose more than half their value.  I don't think that is going to happen.  There is still a lot of downward pressure on inflation.  I am slowly decreasing my exposure to bonds though.  One move I am particularly happy with is having moved a chunk of stocks and bonds to buy the TIAA Real Estate Fund last spring.  I have gained over 10% since on that move.

                            I have also been cashing out some bonds and moving it to the TIAA Guaranteed fund.  The 3% it offers is looking very good right now.
                              • Re: Bond bubble
                                JerryD
                                charadrius, if you like T-C REA there is a T-C forum on Morningstar with some REA guru's that watch that account very closely because of its unique real estate approach. I too have watched and used this account for years and love it. I however violate every allocation recommendation for real estate in your portfolio. Just an FYI, March 2010 was a 2+ year low for the REA so you must be a market timer, no? LOL!
                                  • Re: Bond bubble
                                    charadrius
                                    In general I'm not a market timer, but I'm also not a passive investor.  I'm always looking for an opportunity to sell high and buy low.  I'm also very patient.  On average I might find one such opportunity a year, and I never try to force it.  I believe the Taoist concept of Wu-Wei is the best strategy for an investor -- highly alert non-action.  I was aware of the arc of the curve of the Real Estate for months.  My timing was no accident.
                                      • Re: Bond bubble
                                        JerryD
                                        I like that. I watched the REA for 2+ years waiting for it to bottom and then confirm an upside. At this stage I too am very patient and my return expectations are overridden by principal preservation. Hopefully, gone are the weekends where I looked closely at the investment ups and downs and swallowed hard on bad news. My opportunities may be well beyond one a year with the one before the REA being averaging into stocks starting in late 2008 with a 4-5 year horizon on an 80-100% gain - note that time frame does NOT mean a buy-and-hold strategy.

                                        I hope that you understand the investment rules associated with the REA with a major one going into effect in March 2011. If you have made a major commitment, I do suggest that you surf the Morningstar T-C forum to educate yourself. I don't think that this board would appreciate specific discussions although I could take it off-line via an email from the Inbox sent to my ID JerryD.

                                        Enjoyed!
                                          • Re: Bond bubble
                                            charadrius
                                            Jerry,

                                            If you are referring to the March 2011 change that has a $150,000 threshold, I'm not concerned with that -- I'll never have that high of a threshold.  I'm not familiar with any other upcoming changes to the account.

                                            Thomas
                                              • Re: Bond bubble
                                                JerryD
                                                That's the big one for many serious REA investors. If not a concern, great. However, T-C seems to be accelerating the investment rule changes recently making it harder to know how to manage accounts. Other examples would be frequent trader rules (which I approve of but am not sure I understand when it wrapped up in legalize), the reduction of guaranteed rates in the TIAA Account for new IRA's and the one I still get angry about that took place a few years ago the reduction in the rate paid to Supplemental versus Traditional TIAA accounts. Just a heads up to keep up with the changes that are rarely explained before OR after they take place.