Longer term that is. I have a delima. I have some CD's and bonds coming due this month. The bonds are tax free muni's. I am thinking that maybe I should hold the cash in my money market account for six month or so until the long term rates increase. I would like to see above six percent. Do you think I should hold the money and hope the rise? Anyone have a crystal ball that is in good working order? Thanks.
Anyone who tries to predict the trend interest rates are going will be wrong more than half of the time. What would you do if in six months interest rates are even LOWER?
jrr7,Is your pronouncement that "Anyone... will be wrong more than half the time" the product of extensive research and scholarship, or merely a bit of divine inspiration that you feel compelled to share?Think about what you are saying. If such a claim were true, then "anyone" would merely have to make a prediction and do the opposite to have a viable trading system for trading interest rates.No one claims interest rates are easy to predict and a lot of smart traders/investors don't even attempt, prefering merely to react to what the market is doing rather than guess what it will (or should) be doing. But that doesn't obviate the need to make plans and decisions, which I'm assuming was the intent of the original question, to which your second sentence was a very astute reply, and might be translated this way: Map out what you see are the likely events and plan your investments accordingly. If you're wrong, as you're going to be a good portion of the time, then make the necessary corrections. The goal isn't to be right, but to make money. It's how you handle mistakes and losses that determines whether you survive long enough to eventually learn enough to be able to win more than you risk.But, since you asked, I'll hazard a guess as to the direction of interest rates. Lower then flat then higher then flat then lower, as the intermediate cycle repeats itself again, as it will. And when the Fed starts raising again, as they eventually will, then will be the time to lengthen maturities and make massive commitments. For now, stay tentative and flexible.Charlie
Think about what you are saying. If such a claim were true, then "anyone" would merely have to make a prediction and do the opposite to have a viable trading system for trading interest rates.In the polls and such I've seen, usually the allowed predictions are "higher", "lower" and "stable", with "stable" meaning within certain limits from the current rates. So, assuming the actual results are evenly distributed, sheer guesswork should only win 1/3 of the time. The three-tier system boots out the possibility of simply switching your choice.I'd seen one case where "experts" had a 22% success rate, for a one-year prediction.But, since you asked, I'll hazard a guess as to the direction of interest rates. Lower then flat then higher then flat then lower, as the intermediate cycle repeats itself again, as it will."Lower then flat" is pretty obvious. Near-term interest rate picking is relatively easy, since there are a lot of known factors. This is similar to weather: 5-day forecasts can be remarkably accurate, but trying to predict a few months out is basically futile. Of course, for bond investing, near-term forecasts aren't very useful, as most of your relative performance will be based on what happens much farther down the line.
foobar73,Another factor that might be mentioned with regard to predicting interest rates is that, if one's intention is to hold to maturity and the issue meets one's risk/reward profile, then the direction of future interest rates are irrelevant to a purchase made today except for some wishful, regretful, retrodictive opportunity losses that are always going to be the case and can never be captured, because investing is always a case of trading information risk against price risk, meaning, if one is pursuing better than average returns, one either has to be right more than average or able to correct mistakes better than average. 22% for the "experts"? That's an interesting result and the sort of number that makes for a useful contrarian indicator.Thanks for your thoughtful reply. Charlie
Although it is impossible to exactly predict where interest rates are going, one can successfully discern long term trends from historical research. Interest rates are at a modern low right now. I don't have the exact figures in front of me, but I believe we're at least at a 10-year low, with the last time interest rates hitting this low being the Gulf War and 91 recession. And that was relatively brief; to find the last period of sustained interest rates this low, you have to go back to the 73-74 bear market and recession.Now, this doesn't tell us when interest rates are going to go back up, nor if they will first continue to decline a or stay flat. But I think one can quite successfully conclude from the historical trends that now is probably not the best time to sock away a lot of money in intermediate or long term bonds.
I'm referring to research done at Vanguard and other places saying that active management of bond mutual funds does not add value (references available on request; I'd have to dig it up). You'd think that it would since it should be possible to do research to predict which bonds are likelier to default than the market thinks. But most bond mutual funds make the wrong interest rate bets time and time again.There are not two instances of interest rate possibilities, but three. Rates can go up, go down, or stay the same at any point along the yield curve. If you guess rates are going up, there are two ways you could be wrong: they could go down, or they could stay the same. That's what I was referring to with my original reply.But I agree 100% with your advice. It's essential to have a plan for what to do if your predictions don't pan out.
You'd like tax free munis above 6% in 6 months? Lotsa luck. You can't even get 6% on a federally taxable treasury. I'm using this time period to pay down the mortgage on my house as bonds mature or get called. I'd rather not have money tied up in the house, but investing the money currently doesn't give a decent return without risk. More risk than I'm comfortable with. Best wishes, Chris
jrr7, Thanks for the offer to dig up the research, but no need to do so, now that you explain that the guessers were given three choices, not just two. Also, I strongly dislike Vanguard and think nearly everything they publish under the guise of "research" is mostly a self-serving infomercial designed to win converts to indexing [which might be a viable strategy in a bull market but is poor religion when things turn downwards and not my cup of tea.]As for most bond managers consistently making the wrong bets about interest rate, I'd quarrel with that and say instead that it is most investors who make the wrong bets by throwing money at bond funds near their tops, forcing mangers to put excess cash to work at the very worst time, and then panic when things get tough and yank their money out of the fund at market bottoms, forcing managers to make untimely redemptions. From what I read in their reports and hear from them in their interviews, I'd conclude that most bond managers know their market well, love what they are doing, and are smart, tough investors. I would be very hestitant to bet against them if just the two of us were put into an investing/trading contest over a representative timeframe and asked to invest/trade for our own accounts, especially if they still had access to their research and trading departments, which are serious advantages that the typical retail bond investor/trader can't ever match. What kills the performance of bond funds is investors and their bad timing, not the judgment of the managers. Fund managers have the nearly insurmountable handicap of having to put money to work at the worst time and must make redemptions on demand. That's what kills their performance and makes them so easy to beat. And, yes, is it easy to beat them. On a personal note, I'm 90% in junk in a $250,000 (face value) bond account and E*Trades reports that I'm up ~28% year to date. Brilliant? Not likely. Lucky? Yes, because I don't have to deal with investors and can hold to maturity if and when I have to, meaning I can ride out downturns and wait for a workout from the bankruptcy courts when issues default on me, as they will if the reward/risk envelope is being pushed. That's the advantage a small investor has over the big boys,they can choose their issues and time their trades, and why people, if they are inclined and it is appropriate to their investment skills and objectives, should buy their own bonds rather than depend on funds. The conventional wisdom is that one should have $50,000 to work with if one wants to buy his or her own bonds, which I think is self-serving nonsense on the part of the fund companies who are the chief beneficiaries of such an arbitrary entry barrier. IMHO, $50k is both too much and too little, depending one what one is attempting to do, but self-directed bond investing is both very doable and a lot easier than stock investing and just as profitable, whether or not one can predict interest rates, which is where this thread began. And if anyone is looking for some fat and virtually safe returns from bonds, simply wait patiently until the Fed goes on a raising tear again to cool an overheating economy. Buy a ton of the 2 and 5 year notes, then wait patiently until the Fed overshoots and the economy tanks and the Fed reverses itself and rates bottom out. Then sell. You'll capture a fat coupon plus fat capital gains for a total return of 15% upwards, which isn't bad for a nearly risk-free investment. This is a nonce trade, not an everyday event, that happens every 4-5 years or so. But it is indicative of the fixed-income opportunities that exit for the patient and the prepared. Charlie
I'm referring to research done at Vanguard and other places saying that active management of bond mutual funds does not add value (references available on request; I'd have to dig it up). You'd think that it would since it should be possible to do research to predict which bonds are likelier to default than the market thinks. But most bond mutual funds make the wrong interest rate bets time and time again.Given that the Vanguard bond indezes aren't completely indexes, and that their bond indexes have consistently beat the index would tend to argue that active management can make a small difference.
Reference point: I don't think the Fed can go on lowering interest rates forever. I don't think interest rates of zero or negative numbers are likely. There is a floor value, which maybe will get tested this time around. Personally I suspect we are near that floor.Most of us believe the economy is fundamentally sound. The major inflation factors, ie high energy costs, seem to be coming under control. Weak dollar will be a factor. Jump starting the economy when the rest of the world seems to be in recession will be a bit more difficult.Major investors with millions to invest, probably want to know where interest rates are going to the penny. Most individual investors can be happy knowing within a percent or so.I think there is every reason to believe interest rates will be approximately stable for the next two to three years--unless the unexpected happens like for example war in the Mideasts. As always there is uncertainty, but it is nothing like the stock market.
Fund managers have the nearly insurmountable handicap of having to put money to work at the worst time and must make redemptions on demand. That's what kills their performance and makes them so easy to beat. It occurs to me that a bond ETF would handily surmount these obstacles. I wonder, are there any such things?
It occurs to me that a bond ETF would handily surmount these obstacles. I wonder, are there any such things?I recall Vanguard indicated that they would do this for one of their new ETFs they have planned. Other than this, I don't believe there are any bond ETFs in the US.
I'd quarrel with that and say instead that it is most investors who make the wrong bets by throwing money at bond funds near their tops, forcing mangers to put excess cash to work at the very worst time, and then panic when things get tough and yank their money out of the fund at market bottoms, forcing managers to make untimely redemptions. ...What kills the performance of bond funds is investors and their bad timing, not the judgment of the managers. Fund managers have the nearly insurmountable handicap of having to put money to work at the worst time and must make redemptions on demand. That's what kills their performance and makes them so easy to beat.Don't most mutual funds allow the portfolio manager to say "1 week delay on redemptions" and "no new deposits allowed" in an attempt to prevent this?I agree, a lot of what Vanguard puts out is propaganda, plain and simple. Some of the propaganda is designed to communicate "It would be bad for the fund if investors piled in money right now." For the past year or so they have been warning that the S&P500 is way overvalued. Their propaganda also communicates "Don't pull your money out just because the fund had a sudden drop." And it seems to work well, too--vanguard has much less of a drop in shares than other funds do during market downturns. [That's for their stock funds; I'm not sure if it's the same for their bond funds.]
Some mutual fund prospectuses go even futher than saying they can delay making redemptions and allow themselves the possibility of making redemptions in kind, but I've never heard of a case, likely because of the negative publiclity it would generate.Imagine this scenario: [Fund company to an investor wanting to redeem shares.]"Loook, pal. If you're stupid enough to want to sell at the bottom of this market, we aren't going to eat the loss, you are. Here is your 10.619 shares of Wonder Widgets, your 25.445 shares of Wacko Mfg, etc. You sell them and Have a nice day." But, in fact, that's what fund managers, particularly bond managers need to do. I was a long time shareholder in NorthEast Investor Trust, a high-yield fund with a good track record. Like all funds, it had its up's and down's but I was content to average in and buy more shares when the NAV dropped rather than bail along with others panicky investors. But following the Asian crisis, junk was hard hit and the redemptions just kept escalating and I was faced with the prospect of being the last one holding the bag. So, I liquidated and cashed out of the half dozen other bond funds I also owned and haven't been back that way since. If I'm going to own bonds, I want to control when the redemptions are made so I'm not buying at tops and being sold at bottoms.In general, the recent tech crash has made me a bit cynical about whose interests are being served by mutual funds. In the old days, when the small retail investor couldn't get access to markets and information, funds were a legitimate and cost-effective portal. And that is still the case for some specialized funds, e.g., the Merger Fund [MERFX], which is a wonderful way to get exposure to M&A arb, besides being a steady performer and an excellent portfolio diversifier. [Disclaimer: I'm a shareholder.] But for the most part, I think the "average investor" is better served by learning to do her/his own investing/trading, mistakes and all, and I think what drives the fund comapies isn't concern for their sharholders in the sense that a fund company is a co-operative composed small capitalists and experienced financial managers, but mainly a vehicle for gathering assets against which fees can be accessed that served to pay outrageous salaries. The shareholder is thrown a few crumbs that they could greatly improve upon *if* they are willing to take on the work and responsibity that investing/trading admittedly is. So, I'm suspicous of their "research" and communications and their often belated and half-hearted efforts to monitor the inflows and outflows of cash.Charlie
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