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the bond market marches to it's own drum regardless of what the fed does on the short end .
the farther out you go the more bonds trade like stocks with greed , fear and perception being the guide .
in fact from mid-2004 to mid-2006 the fed raised the short-term rates from 1.0 percent to 5.3 percent. the 30 year bond had a lower yield than the short term bonds .
we had an inverted yield curve because the bond market disagreed with popa fed about the perception of what was coming up . the bond market bid rates lower while the fed tried to raise the shorter end .
the bond market was right .
i will throw a prediction out that once stocks falter , money will flow in to long term bonds because of the effect outside of interest rate moves that they can have in a flight to a safe harbor . intermediate term and short term bonds need a whole lot more money allocated to it to undo the damage equity's can do .
all these balanced funds hold them for a reason , they just don't buy short and intermediate term bonds when rates rise on the short end . . i bet most balanced funds hold at least 20% in long term bonds , i know the ones i spot checked off the cuff do . there is certainly a reason they want them in a rising rate environment on the short end -think about this fact when you have ideas about shunning them ..
in fact look at the results since interest rate fears started and the short end was raised .
ytd TLT the long treasury bond fund up .43 , shy the 1-3 year is up .10 . however last week when rates were raised TLT shot up 2.27% , shy .21%
and there was no flight to safety either .
looking at the 7-10 year fund IEF that is up .45% ytd but only moved up 1.22% last week when rates were raised .
splitting the bond budget 50% in short term /cash and 50% in long term bonds will likely out perform 100% in intermediate term bonds in a down turn as well as have a higher yield . it would be no contest in a down turn as far as supporting up your portfolio .
you need roughly 3x the dollars in intermediate term bonds as you do in stocks to over come losses in stocks . you need roughly dollar for dollar in long term bonds to do the same thing .
there is a whole lot more going on in portfolio construction than just buy short and intermediate term bonds when the feds funds rate rises . if you are buying bonds for protection you need to properly weight the risk parity .
that means 3x the money in intermediate term bonds as stocks according to research by larry sweedroe. dollar for dollar is all you need in long term bonds .
I would like to use Long term bond mutual fund to mitigate the fluctuations of stocks mutual fund. Are all LT bond funds similar in this respect? I would use 4 to 5 star Morningstar rated funds only.
Morningstar's stars are not a good way to choose a fund especially if you are looking for something to balance volatility. Stars are awarded for past performance, not for safety, or lack of correlation to equities and certainly not for future performance.
It's not meaningful to compare movements with the exact date of policy changes since they're often telegraphed well in advance. Longer-term bonds started to sell off three months before the meeting where the Fed raised the rate to 0.75%.
It's the same with QE. They're telegraphed three to six months ahead.
That's why the market responses to FOMC speeches and impromptu announcements are important to follow. It's also useful to see changes in the market's expectation of pending changes in the Fed funds rate. It backed the June date all the way back to September and bonds rallied.
Morningstar's stars are not a good way to choose a fund especially if you are looking for something to balance volatility. Stars are awarded for past performance, not for safety, or lack of correlation to equities and certainly not for future performance.
Thank you.
Where do I get the data on the MIN correlation, please?
How would you choose a LT bond fund to compensate for volatility?
It's only been in the last two years that bonds have become less correlated with stocks. Anything that looks at correlation is looking at the recent past, just as before 2010 they were less correlated.
Thank you.
Where do I get the data on the MIN correlation, please?
How would you choose a LT bond fund to compensate for volatility?
The longer the term is for a bond, the more volatility. The recommended strategy to combat volatility is therefore to go to shorter term bonds. But that means less yield. Basically, chasing yield with bonds defeats their purpose of providing stability. You have to find the right balance.
So, one approach is to have a combination of short-intermediate term US Treasuries (which will be very low volatility but low yield) and high-quality intermediate term corporate bonds (which will be a bit less stable than Treasuries but will have higher yield). Maybe 50/50 ratio, or 60/40 (UST : Corporates).
If you want higher gains, then own less bonds and more equities rather than take on risky bonds (like LT bonds).
or you can barbell bonds . if you take your bond side budget and put 50% in cash or short term bonds and 50% in long term bonds , that has pretty much the same interest rate sensitivity as 100% in an intermediate term, bond .
there is a reason most balanced funds do it that way . the yield is higher and the fighter coverage in a flight to safety can be far greater on the ladder combo .
you would be hard pressed to find balanced funds that do not hold long term bonds as a significant part of their bond side portfolio and then balance it out with more in the short end . .
wellesley has 28% in bonds between 15-30 years
fidelity balanced 27%
vanguard balanced 35%
there is a reason they do not avoid long term bonds
or you can barbell bonds . if you take your bond side budget and put 50% in cash or short term bonds and 50% in long term bonds , that has pretty much the same interest rate sensitivity as 100% in an intermediate term, bond .
there is a reason most balanced funds do it that way . the yield is higher and the fighter coverage in a flight to safety can be far greater on the ladder combo .
you would be hard pressed to find balanced funds that do not hold long term bonds as a significant part of their bond side portfolio and then balance it out with more in the short end . .
wellesley has 28% in bonds between 15-30 years
fidelity balanced 27%
vanguard balanced 35%
there is a reason they do not avoid long term bonds
Interesting.
How do you pick the good LTB? Or are they all the same (I doubt that).
Volatility in long bonds is not necessarily a bad thing if it is balanced out by volatility in equities.
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