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I'd like to know if this seems like a good short term strategy for a declining market:

In my IRA, I've been liquidating equity based index funds and moving their proceeds into MMF. If I believe the market averages are going to go down rather than up over the next few months or year. Aren't bond funds the ideal place to be? Not junk but Aaa.

For example, Vanguard Intermediate-Term Treasury Fund Investor Shares (VFITX) https://flagship.vanguard.com/VGApp/hnw/funds/snapshot?FundId=0035&FundIntExt=INT. It's fund price runs opposite of the S&P500. If the S&P500 is up as it has been, I'll be buying VFITX low. When the S&P500 goes down, VFITX will be high. If I sell VFITX as the market bottoms, there's a profit to be had on the bond fund.

Interest rates may get cut and that will affect my monthly payout. Overall though, with the increasing bond price and monthly payouts, I'll do better than most socks and MFFs.

I understand it is all market timing but if the market declines, should the bond fund do better? I'm an newbie when it comes to investing in bond funds and using this scenario will help me understand them better.

Thanks,
Brett
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I'd like to know if this seems like a good short term strategy for a declining market:

In my IRA, I've been liquidating equity based index funds and moving their proceeds into MMF. If I believe the market averages are going to go down rather than up over the next few months or year. Aren't bond funds the ideal place to be? Not junk but Aaa.

For example, Vanguard Intermediate-Term Treasury Fund Investor Shares (VFITX) https://flagship.vanguard.com/VGApp/hnw/funds/snapshot?FundId=0035&FundIntExt=INT. It's fund price runs opposite of the S&P500. If the S&P500 is up as it has been, I'll be buying VFITX low. When the S&P500 goes down, VFITX will be high. If I sell VFITX as the market bottoms, there's a profit to be had on the bond fund.

Interest rates may get cut and that will affect my monthly payout. Overall though, with the increasing bond price and monthly payouts, I'll do better than most socks and MFFs.

I understand it is all market timing but if the market declines, should the bond fund do better? I'm an newbie when it comes to investing in bond funds and using this scenario will help me understand them better.


Yes this is market timing, and market timing has a bad track record.

With bonds/bond funds, even if the stock market crashes, what will happen is a big question mark. There is a lot of belief that when stocks crash bonds do well, but it is more complicated than that, and to the extent to which stocks and bonds going in opposite directions has historical validity, current circumstances are different. And short term flight to bonds (which we have been seeing) may only be short term.

If you do want to play market timing with stocks and bonds, the bond fund you want to be in is long term treasury fund, not intermediate. Of course, this is also more dangerous if you gues wrong. Long bonds have most to gain if interest rates fall, even if yields on intermediate bonds change more than on long bonds (which happened when stocks crashed in 2000-2002). Long Treasuries should be the preferred flight to safety over long AAA corporates, because risk premiums, even on AAA corprotes, tend to increase during recessions (and most AAAs now are financials, which are having problems).

Wall Street expects the Fed to cut rates and to ignore inflation. However, oil futures are at a record high and the dollar is down, both of which are inflationary. Also, the impact of the Fed on intermediate and long bonds is unclear, other than day trading.

And, don't forget, both stocks and bonds are now heavily dependent on foreign investment, and a weak dollar doesn't help.
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If I believe the market averages are going to go down rather than up over the next few months or year. Aren't bond funds the ideal place to be? Not junk but Aaa.
______________________________________
If by "ideal", you mean the absolute safest place to be, a short-term Treasury bill or an insured money market account in a bank is safer than just about anything. Everything else is relative.

If you firmly believe that stocks will continue to go down, then yes, bonds would be a smarter thing to buy than stocks.

BUT -
1. Long-term bonds also come with more risks than short-term bonds. If interest rates go up from here, the current market value of bonds will go down. This is true of AAA and even Treasury obligations.

2. Funds have some additional risks in addition to the bonds in them; i.e., you never know when the fund managers will decide to, or be forced to, sell bonds.

Bill
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Long Treasuries should be the preferred flight to safety over long AAA corporates because risk premiums, even on AAA corprotes, tend to increase during recessions...

How do Treasuries benefit from rate cuts?

Even so, the intermediate bond fund increases in price. You can see this with an overlay of the SP500. When sold near a market bottom, you take a gain even if interests get cut because the bond fund is sold at a higher price than what you purchased. Where does profit come from on Treasury bond funds in this case?

I'm referring to short term. So the bond will be sold.

Lastly, if bond funds have such issues as both of you have mentioned, what do you consider good places to be in this type of market?
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And, don't forget, both stocks and bonds are now heavily dependent on foreign investment, and a weak dollar doesn't help.

I saw a comment on the tube in the past couple of weeks that one of the biggest problems in dealing with the current problem is that the USD has slid so much against the Euro. Lowering the funds rate (and probably more on the discount rate to stimulate inter-bank lending) will tend to push the dollar down more. The question is: what happens to the long bond if the ROW (Rest Of World) decides they've had enough of US inflation? Do interest rates go down for a few months, then skyrocket when there's trouble with the next long bond auction? That's kinda my feeling, but I'm not willing to bet money on it.

Hedge
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Do interest rates go down for a few months, then skyrocket when there's trouble with the next long bond auction?

Why would would the Fed skyrocket interest rates if the economy is still struggling?
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Why would would the Fed skyrocket interest rates if the economy is still struggling?

My bad. I meant long-term interest rates, as in not enough people want the long bond. Maybe we wind up with a 4% short rate and a 7% long rate over the election. Of course, those are just numbers pulled out of my..., and not based on any real calculation.

Hedge
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<Why would would the Fed skyrocket interest rates if the economy is still struggling? >

The Federal Reserve controls the federal funds rate, which is a short-term interest rate. It is the rate that banks charge each other for overnight loans.

The Federal Reserve does not control long-term interest rates. The long-term interest rates fluctuate, based on the supply of, and demand for, long-dated debt instruments, including Treasury bonds.

The Treasury auctions bonds, to raise money for the government. About half of auctioned Treasuries are bought by foreigners. If the dollar falls, the interest on the bond is worth less, when converted into a foreign currency. Foreign buyers would have to build the risk of future dollar drops into their bids.

This could cause the long-term bond interest rate to rise.
Wendy
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This could cause the long-term bond interest rate to rise.

The big unknown is how dependent ROW is on the US consumer to keep their factories pumping. If they remain desperate for US consumer money, then they keep buying our bonds, regardless of the inflation rate.

Hedge
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If the dollar falls, the interest on the bond is worth less, when converted into a foreign currency. Foreign buyers would have to build the risk of future dollar drops into their bids.

This could cause the long-term bond interest rate to rise.


Isn't this a good thing? The Teasury bond will pay out more with a higher interest rate, meaning a larger yeild. In addition, as markets decline, the bond fund price increaes, which is also good for the holder.

Sorry for needing the 101. But it still seems like bond funds are a good bet in a declining market. Even if foreigners hold a large portion of bonds, jumping into an international index fund certainly is going to help, as they are currently off their peaks and declining.

Just to reiterate a question: What do most here see as the optimal investment over the next few months to 1.5 years or so?
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Isn't this a good thing? The Teasury bond will pay out more with a higher interest rate, meaning a larger yeild. In addition, as markets decline, the bond fund price increaes, which is also good for the holder.

Sorry for needing the 101. But it still seems like bond funds are a good bet in a declining market. Even if foreigners hold a large portion of bonds, jumping into an international index fund certainly is going to help, as they are currently off their peaks and declining.

Just to reiterate a question: What do most here see as the optimal investment over the next few months to 1.5 years or so?


It does sound like you are confused. Take a look at the FAQs on how bond values and yields go in opposite directions and why the same change in yield in longer maturity bonds affects values more than on shorter maturities.

In this case, if yields go up on long bonds, because there are not enough buyers (lack of foreign investors), the tradable value of existing long bonds would decline. This would mean a loss of NAV in a long bond fund that would be significantly greater than the increase in yield on the fund. (The opposite happens if long bond yields go down: your NAV gain on a fund would outweigh the declining fund yield.)

As to what would be the best investment in the near future: pure guesswork. As Hedge and Wendy have noted, there are a lot of x factors out there. The basic advice of diversifying and making sure you have a solid emergency fund always applies.
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I guess the part that is most confusing is that there is a gain when the price goes up and I'm not sure how yeild or NAV affects that. Maybe using numbers will help explain it. For example:

Buy: 100 @ $10.00
Sell: 100 @ $11.00

That results in a gain for your portfolio plus any monthly payouts that were accumulated. If during the time I'm holding that fund, buyer demand decreases, are you saying the price is not likely to reach $11.00 and could in fact go below $10.00? In that case, it's clear there will be a loss. It also means the bond trails the market decline. Bonds and stocks declined together in other words.

If the only affect is that the monthly payments decrease, it doesn't matter so much because there is still a gain to be had from the price increase.

Where is the FAQ for this board located?
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Where is the FAQ for this board located?

Over there: ------------------------------------------->
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guess the part that is most confusing is that there is a gain when the price goes up and I'm not sure how yeild or NAV affects that. Maybe using numbers will help explain it. For example:

Buy: 100 @ $10.00
Sell: 100 @ $11.00

That results in a gain for your portfolio plus any monthly payouts that were accumulated. If during the time I'm holding that fund, buyer demand decreases, are you saying the price is not likely to reach $11.00 and could in fact go below $10.00? In that case, it's clear there will be a loss. It also means the bond trails the market decline. Bonds and stocks declined together in other words.

If the only affect is that the monthly payments decrease, it doesn't matter so much because there is still a gain to be had from the price increase.


I'm not sure I understand your example.

Let's look at a real example, using Treasuries, not a fund. (A fund holds a portfolio of bonds, so it is more complicated, but ultimately works the same way.)

On May 15, 30-year Treasury bonds were auctioned with a 5% coupon. Right now a $1000 face value 30-year bond from that auction can be sole for approximately $1050 (ignoring commission). That's a 5% gain, if you chose to sell. The current yield on the bond is 4.68%, which is how much interest you would be paid each year if you bought the $1000 bond for $1050. The yield is 32 basis points lower than the coupon (the actual dividend the bond pays each year).

On May 15, 3-year Treasury Notes were auctioned with a 4.5% coupon. They are currently trading for about $1010 for $1000 face value with a yield of 3.98%. So, there is a 1% gain in value on the bond with 52 basis points difference between coupon and yield.

See Bloomberg for #s (which will likely have changed by time you look, but not by too much).

http://www.bloomberg.com/markets/rates/index.html

This example is with interest rates going down. If interest rates go up, the opposite will happen: the tradable value of the bond will go down (e.g., if you paid $1050 for $1000 face value, you might sell for $1000) as the yield goes up.

A fund's NAV is its share price. If the value f the bonds owned by the fund goes down, the share price goes down. You can approximate his by multiplying change in the fund's yield by the fund's duration (which you will find listed for Vanguard on the link for the fund's holdings).

https://flagship.vanguard.com/VGApp/hnw/funds/snapshot?FundId=0083&FundIntExt=INT

CUrrently for Vanguard's long Treasury fund, the yield is 4.6% and the duration 10.4%. So if Hedge guessed correctly at next May's 30-year auction the new coupon is 7%, the fund's would lose approximately 27%. Now, you would end up getting a somewhat higher dividend, but it is going to take an awfully long time to make up for a 27% loss.
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I'm not sure I understand your example.

Which part? I think you clarified it here:

On May 15, 30-year Treasury bonds were auctioned with a 5% coupon. Right now a $1000 face value 30-year bond from that auction can be sole for approximately $1050 (ignoring commission). That's a 5% gain, if you chose to sell.

Seems like the same sort of example except I'm referring exclusively to bond funds. In my example, it is a 9.09% gain. If I only watch the bond fund price and sell before it goes below my purchase price, I'll have a gain. From all the replies, I don't know if others agree or disagree.
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The way the bond fund I'm referring to behaves, it is more like a short fund and maybe that is how it should be viewed.

Over there: ------------------------------------------->

???
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That results in a gain for your portfolio plus any monthly payouts that were accumulated. If during the time I'm holding that fund, buyer demand decreases, are you saying the price is not likely to reach $11.00 and could in fact go below $10.00? In that case, it's clear there will be a loss.

When rates go up, NAV goes down. When the NAV for a bond fund goes down, the price of the fund follows. I believe this is covered in the FAQ, over there on the right -------->

Hedge
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When the NAV for a bond fund goes down, the price of the fund follows.

Exactly. So you sell when the bond price starts dropping or at the point you'll accept minimal profits. This bond fund behaves in a similar manner to a shorted stock.

I believe this is covered in the FAQ, over there on the right -------->

We must have two different types of accounts.
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The way the bond fund I'm referring to behaves, it is more like a short fund and maybe that is how it should be viewed.

If you are looking at an intermediate fund, it will behave like an intermediate fund. That means it will gain or lose less than a long fund and more than a short term fund as relevant interest rates change.

If you want to play the market, you will get the biggest gain playing a long fund, not an intermediate fund. But you are also taking more of a chance if you guess wrong.
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<This could cause the long-term bond interest rate to rise.

Isn't this a good thing? The Teasury bond will pay out more with a higher interest rate, meaning a larger yeild. In addition, as markets decline, the bond fund price increaes, which is also good for the holder.>

If you are continually laddering bonds, rising rates are good, because you will rollover your maturing bonds into higher-yielding bonds.

If you have a bond fund, rising interest rates will cause the Net Asset Value (NAV) of the bond to fall, because the fund's older, lower-yielding bonds wouldn't be worth as much. Bond funds never mature. The lower NAV would be bad for the fund investor.

What do most here see as the optimal investment over the next few months to 1.5 years or so?

Personally, I have a ladder of CDs and TIPs. If the stock market has a serious drop, I will buy dividend-yielding stocks and index funds.
Wendy
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I believe this is covered in the FAQ, over there on the right -------->
_______________________________________________
We must have two different types of accounts.
_______________________________________________

On the right side of your screen, is there a bold heading "Announcements"?

And under that, is there an item about opening of the Bond FAQs?
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I will buy dividend-yielding stocks and index funds.

In a declining market, I don't see how index funds aren't much better than holding stocks. A bond fund's price that consistently moves opposite the SP500 is more ideal.

I agree with CD laddering though.
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Isn't this a good thing? The Teasury bond will pay out more with a higher interest rate, meaning a larger yeild. In addition, as markets decline, the bond fund price increaes, which is also good for the holder.

Let's try this again. Yes, it's true that if long bond rates go up, then long bond yield increases. BUT, that only applies to those bonds bought at the higher rate (lower price). The yield on existing bonds will not change, BUT their value will decrease to that of newer bonds. Fortunately, you have the option of just hanging onto your bond and waiting till it matures; in which case, your effective price never changed, nor did your yield.

OTOH, in the case of a bond fund, when rates go up, prices go down. However, as has been explained by both Loki and Wendy, you do not own the underlying bonds in the fund. So, you cannot wait for them to mature to get back your purchase price. Instead, you have to wait until/if the price goes back up. And it's no use consoling yourself that the yield has gone up. It may have gone up for new buyers at the higher rate, but your effective yield will continue to be what it was when you purchased; unless the distribution increases, which isn't too likely unless you hang on for a long time.

Hedge
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On the right side of your screen, is there a bold heading "Announcements"?

No.
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Sorry, you're in threaded view. It is there. I never use threaded view.
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On the right side of your screen, is there a bold heading "Announcements"?

No.


Check your screen width. I know TMF changed its format, but it should be there.

I do notice the only time I can see it now is when I click on a message to read it. If I push reply, the stuff on the top right (announcements, FAQs, etc.) disappears. And they have never been there when you just click on the board to see the messages, which has always struck me as, like stupid.
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P.S. After pushing sumbit message after replying, the announcemtns and FAQs were there when it told me I had sumitted successfully.
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Sorry, you're in threaded view. It is there. I never use threaded view.

Actually, I believe it's because you're in whole thread view. It's there in both threaded and unthreaded.
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I believe it's because you're in whole thread view

Yes - that's right. Thanks.
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I will buy dividend-yielding stocks and index funds.

In a declining market, I don't see how index funds aren't much better than holding stocks. A bond fund's price that consistently moves opposite the SP500 is more ideal.

I agree with CD laddering though.


You need to decide on a strategy. When the stock market is down, assuming you have a long term view, buying a Total Market Index fund will be a good choice, if markets do go up eventually. Wendy is betting on high dividend stocks to be a better choice, though an awful lot of those are financials or REITs.

A CD ladder is a good choice if you are investing in fixed-income with the purpose of having steady cash flow. A CD ladder is useless for market timing when to get back into stocks and if it does turn out a stock market crash is accompanied by flight to bonds, a CD ladder will not get you an increase in value (except brokered CDs, and that is not a liquid market).
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a CD ladder will not get you an increase in value

Relative to most everything else that's crashing, they will.
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a CD ladder will not get you an increase in value

Relative to most everything else that's crashing, they will.


But the question is what good that will do you?

You need to decide if you want to market time/trade or be like those of us who are content to use our fixed-income/bond assets as cash for expenses when we need it. A CD ladder will not provide you with ready capital when you think stocks are near the body, which a money market would. And it will not provide you with a boost for rebalancing, which a long bond fund could, unless of course it doesn't.

I'm all in facor of a cautious, fixed-income strategy, but you seemed to be interested in market timing/ getting a boost in return from a bond fund. A CD-ladder is a different strategy.
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...but you seemed to be interested in market timing/ getting a boost in return from a bond fund.

Correct. In general, any fund that tracks opposite the SP500.

A CD-ladder is a different strategy.

It's only part of a the whole picture. There will still be plenty in a MMF fund for rebalancing.
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The question is: what happens to the long bond if the ROW (Rest Of World) decides they've had enough of US inflation?

Are you saying that the ROW historically has *less* inflation than the US? Because that's just flat-out not true. For all the trials & tribulations of the USD, it has never been re-adjusted by lopping off a zero or two---unlike most of the ROW currencies.

You are also, I think, assuming that the ROW puts money into the US to collect interest. This is mostly false. The main truth is that the ROW puts money into the US is because it is the safest place to put it. They are looking at it from the Will Rogers point of view: I AM NOT SO MUCH CONCERNED with the return _on_ capital as I am with the return _of_ capital."
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You are also, I think, assuming that the ROW puts money into the US to collect interest. This is mostly false. The main truth is that the ROW puts money into the US is because it is the safest place to put it. They are looking at it from the Will Rogers point of view: I AM NOT SO MUCH CONCERNED with the return _on_ capital as I am with the return _of_ capital."

I don't think anyone is seriously talking safer anymore when comparing US Treasury, let alone US mortgage bonds, with Western Europe, Canada, or a number of other countries with much better budget pictures.

However, there remains the question of what to do with surplus capital from US trade deficit, and there simply isn't enough borrowing going on by governments or businesses in these other countries to satisfy the need. So, I do think oil exporters, China, Japan, and others will continue to buy US Treasuries. But they may do so in smaller amounts, which would drive up yields.
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Are you saying that the ROW historically has *less* inflation than the US? Because that's just flat-out not true. For all the trials & tribulations of the USD, it has never been re-adjusted by lopping off a zero or two---unlike most of the ROW currencies.

No, I agree with you on this.

You are also, I think, assuming that the ROW puts money into the US to collect interest.

No, I don't. Money isn't like gold. It has no intrinsic value by and of itself. It's value derives from what it can do. In inflationary times, it can do the most in its country of origin by buying hard goods such as real estate, or hard promises, such as treasury bonds. Countries buy US bonds in order to get rid of USD; especially China which buys them to prop down the Yuan. With the US being such an importer, ROW has little choice but to send our money back to us, regardless of what happens to our economy. If US inflation were to get so bad that they didn't want to buy our bonds, chances are it wouldn't be worth their effort to sell us lead-poisoned junk either.

Hedge
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So, I do think oil exporters, China, Japan, and others will continue to buy US Treasuries. But they may do so in smaller amounts, which would drive up yields.

So, what will they do with those surplus USD which are inflating away their value? With them stored in US treasuries, they at least retain their value; assuming our inflation doesn't assume Brazilian or post-war German magnitudes. Hiding them under the mattress insures they will lose value. No, in inflationary times, currency has to go home.

Hedge
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