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the most widely owned bond fund category, intermediate term funds, often called "core" funds, have generally averaged more than 6% annualized over the last two years. Not bad, especially as compared to money market funds which barely returned more than 1%.But just as for stocks, future bond fund performance is very hard to predict. Therefore, rather than trying to guess which way interest rates will now be headed, it makes sense to merely try to invest in the best bond funds one can find based on a variety of important criteria. But searching out such bond funds can be tedious. So, in this article, I have done my best to simply the process for investors.
Many of us are familiar with the VIX Index, commonly referred to as the “Fear Index”. The VIX Index is a measure of “fear” as that relates to equity markets and typically rises during periods of falling prices, sometimes sharply during more precipitous declines.Did you know that there is a similar index that measures fear within the bond market? That index was developed by Merrill Lynch and is referred to as the “MOVE” Index. The index rises as concerns grow that interest rates are on the march higher. The index will rise more sharply when there are fears in the market that rates may be headed significantly higher as was the case during the 2013 Taper Tantrum.
Mark Cabana, head of U.S. rates strategy at BofA Securities, wrote recently in favor of bringing back Operation Twist, saying "the Fed is simultaneously losing control of both the U.S. front end and back end rates curves." Operation Twist Part 3 "kills three birds with one stone: It pulls up front end rates, it stabilizes back end rates, and it does so in a reserve neutral way that lessens bank (statutory liquidity ratio) pressure to hold more capital."
is the Fed trying to engineering higher inflation?
Many believe that the recent rise in US treasury yields has crept up on the Fed policy radar and that the natural next step for the Fed is to hint at and eventually deliver a yield curve control (YCC) policy, just as it has been forced into so many easing moves in the past, once the market is sufficiently distressed to provide the excuse. Here, we look at why comprehensive YCC is not on the way any time soon.
My favourite way to keep tabs of all of this remains the Gold price. If YCC was really on the way, gold would be $1,000 higher (as capped interest rates and emerging inflation would force real rates even deeper into the negative.) Instead, gold is losing altitude quickly as right now, real rates remain stubbornly bid, and this even before the incoming, monster $1.9 trillion Biden fiscal spending and $2-3 trillion in infrastructure spending to come later, before the EU starts allocating its new budget, and before China reverses its current tight monetary stance. In other words, we have only just started on this move higher in yields as the physical world is way too small for the fiscal spending on infrastructure, the green transformation, and supporting incomes for the lower half of the “K” in the K-shaped recovery.Gold is your indicator for yield curve control and real interest rates. Speculative equities and those valued at nosebleed multiples of even the steadiest of free cash flow yields could be another.
A K-shaped recovery occurs when, following a recession, different parts of the economy recover at different rates, times, or magnitudes. This is in contrast to an even, uniform recovery across sectors, industries, or groups of people. A K-shaped recovery leads to changes in the structure of the economy or the broader society as economic outcomes and relations are fundamentally changed before and after the recession. This type of recovery is called K-shaped because the path of different parts of the economy when charted together may diverge, resembling the two arms of the Roman letter "K."
The Merrill Lynch Option Volatility Estimate (MOVE) Index is a yield curve weighted index of the normalized implied volatility on 1-month Treasury options which are weighted on the 2, 5, 10, and 30 year contracts. This Volatility Index shows the market's expectation of 30-day volatility. It is constructed using the implied volatility of a wide range of S&P 500 index options. This volatility is meant to be forward looking, is calculated from both calls and puts, and is a widely used measure of market risk, often referred to as the "investor fear gauge."
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I can understand why you don't like bonds since the Fed has made them unattractive with low yields and thus reduce their downside protection. Not sure if the traditional 60/40 allocation will be the initial target for retirement or it has to change to something like 70/30 or higher allocation.
How do you managed on the bond portion of the equation as a retiree?
I've never yet actually USED any of my bond funds' dividends. I'm still reinvesting all of that. ... Luckily, we don't need that money. What I take from the IRA, I've been taking from my biggest holding--- which is PRWCX. It's a balanced fund, though. Because of its size in my portfolio, it's easier to grow back the chunk I take. I plan for that chunk-taking to be an annual ritual. Done it only twice, so far. And what am I talking about? Just $4-5K. The bond dividends help keep the portf. stable in weird, "interesting" times.
Interested in reading other perspectives.
@AZRph, I think many target dated fund investors may take a longer view perspective and not worry about the rising yield on bonds.
@Crash : To my thinking you are receiving part of your distribution from bonds as you're removing the funds from a balanced fund.
I was wondering if you'd had a chance to wet a line lately.
The Merrill Lynch Option Volatility Estimate (MOVE) Index: https://raymondjames.com/davidolnick/david-chart-of-the-week/2016/11/18/the-move-index
ICE buys Bank of America Merrill Lynch fixed income volatility indices:
VFIAX (=SP500)...YTD=2.6%...1 year=29.3%...3 year=14.3%
It's pretty known for months already that value is finally doing better. YTD SCHD=9.4%
The usual, the stock market fluctuates, the rest is noise
Don’t put all your eggs in the yield curve control basket just yet home.saxo/content/articles/macro
K- Shaped Recovery: k-shaped-recovery
Thanks @bee - I’m guessing that the government’s capping, controlling or limiting long term rates would work about as well as capping wages and prices did some years back. Inflation was at only 9% in ‘73 when the caps were imposed. Later in the decade it soared to well over 12%.
Nixon’s Wage & Price Freeze - 1973
The Fed and other central banks might achieve some control over longer rates by buying up large quantities of long dated bonds. That would push rates down temporarily. But how long could they keep it up?
- During WW II (at 2.5% on long bond)
- 2011 & 2012
I don’t have time to dig deeper into above, but thought in interest of accuracy I should mention them here. Others may wish to dig deeper.
Forsyth cites skeptics who see any attempt by the Fed to hold down long rates artificially as an effort to limit the amount of interest the government pays on its growing debt. He also notes that Australia’s central bank has been aggresdively buying up long term bonds with some success (at holding rates down).
For whatever reason, it’s a sea of red today. Noteworthy is a 8.5% drop in NYMEX - currently below $60. But the major equity indexes look sick as well.
The MOVE Index climbed 5%, but is making new 52 week highs: https://raymondjames.com/davidolnick/david-chart-of-the-week/2016/11/18/the-move-index
Financial Times charts the MOVE Index over the last 12 months or so here:
*Notice the spike in the MOVE in March 2020*
After peaking at 1.778% March 30, the 10-year Treasury bond has steadily declined, dipping below 1.54% this evening. The rapid reversal has baffled many observers - especially in light of generally “hot” economic indicators (retail sales, commodity prices, employment numbers) and a roaring stock market.
Theories as to what, if anything, the reversal portends abound. I’ve seen suggestions some big players (like hedge funds) are bracing for a stock market sell-off later in the year, The WSJ speculates today that the rate reversal portends a strengthening European economy relative to the U.S. in coming months.
I believe you are a holder of PRPFX...a worthy all weather portfolio... that is better explained here:
Using PRPFX's components as a guide (YTD):
Comparing PRPFX against its components TLT, CEF, and VTI
VTI - Rising - YTD up 6%
TLT - Falling - YTD down almost (-14%)
CEF - Falling - YTD down almost (-10%)
Cash - Flat
Look's positive short term for equities
While financial stocks (like banks) have soared this year on the expectation longer term interest rates would rise substantially, the circuitous path of 10-year tells a different story. Peaked near 1.7% about a month ago, but falling since.
(Schwab apparently called attention to the above inconsistency in an advisory of some sort today.)
The retrenchment of bond yields may be a short term aberration. Many market observers still expect the 10 year bond to hit 2% by year’s end. Some of the decline might be due to Fed meddling at the long end.
This does have some implication for value oriented funds, since they’re often loaded with banks and other financials. However, I wouldn’t make too much of it yet.
This chart is a permanent chart-link I set a number of years ago, for a quick reference; whenever I want to take a peek at U.S. gov't. yields.
The default at the bottom of the chart is "200 days". You may double click this number to change the "days", or right click to pull up a default range list; or you may drag the "200 day" or whatever date range you have set, to look at various year periods going backwards. You may stretch or shrink the "days" box by pulling or pushing either end of the box.
Also, you may hover the cursor over any line to discover the yield on a given day. Keep in mind, this is not a performance chart; although the percentage of change in the yield is indicated along the right edge of the chart.
Side note: bond investors and traders who are skilled at their observations, may make a decent living. The "take a walk on the wild side" (not the Lou Reed song) for a bond trader/investor could be the buys/sells of TBT and TMF etf's. There are other products in this investing sector, too.
One year chart here.
--- TBT is a choice for levered bets on rising interest rates. Using a combination of swaps and futures, TBT gives investors -2x exposure to daily moves in T-bonds with more than 20 years left to maturity. ... As a levered product, TBT is not a buy-and-hold ETF, it's a short-term tactical instrument.
--- TMF provides daily leveraged (3x) exposure to the ICE U.S. Treasury 20+ Year Bond Index. Using a combination of swaps and futures, TMF gives investors 3x exposure to daily moves in T-bonds with more than 20 years left to maturity. The daily reset means investors shouldn't expect the leverage factor to hold constant over investment horizons greater than one day. In short, the fund is a valid option for tactical positioning/hedging against rising interest rates, but it's important to keep in mind that the 3x leverage results in greater impact from the effects of compounding. As a levered product, TMF is not a buy-and-hold ETF, it's a short-term tactical instrument.
Hey, set up a paper trade game and discover your skills. One may find another method of making some extra money on the side with a few 1,000's of cash. NOTE: I personally wouldn't do real trading in a taxable account. I don't want to think about the "tax time" and how much fun that accounting would become.