RetireJapan

Hi,

It seems that if the inflation keeps on growing at the current pace and the US 10-Yr Bond passes the 2%, neither bonds nor stocks are going to be a good idea. My portfolio is basically 30% world bonds and 70% world stocks:

* eMAXIS Slim 先進国債券インデックス
* eMAXIS Slim 全世界株式(オール・カントリー)

Bonds used to be the hedge when stock market was down, but this time with the world low interest rates and going up, the bonds prices will go down. I was thinking about two strategies now.

First is selling the bond funds, or at least half of them, as I have them in my iDeCo account. Then I can keep the cash within iDeCo and wait for lower stock prices to buy more world stocks later on (not trying to time the market here, but just kind of switching funds, but trying to do it in 2 operations rather that use the switch one, to keep the cash waiting for a deeper down market).

The second one is starting trying to protect against the inflation using Inflation Indexed Bonds. However I am a bit lost in this kind or products. I think the Japanese name for it is インフレ連動債. Is it the same thing as Treasury Inflation-Protected Security (TIPS)? Do you know if they can be purchased through Rakuten / SBI / Monex? Could it be a good idea buying a fund / ETF with an inverse relation to treasury bonds like TMV (Direxion Daily 20+ Year Treasury Bear 3X Shares ETF)?

What about this ETF?
iシェアーズ 米国物価連動国債 ETF
https://www.blackrock.com/jp/individual ... s-bond-etf
https://www.blackrock.com/jp/individual ... -ja-jp.pdf

Anyone with experience or ideas on the topic?

My understanding is that bond funds (as opposed to individual bonds) will not suffer as badly from inflation, because the bonds they contain are constantly coming due and being redeemed, while new bonds with higher coupons are bought to replace them.

As inflation rises, the yield on the bonds in the fund also rises, cushioning the blow. This is more true of funds containing bonds with a shorter duration, so you might want to check out the duration of the bonds in that eMaxis Slim fund before selling it prematurely.

Or I could be completely wrong

Anyone else?

ivanpgs wrote: ↑Mon Feb 14, 2022 1:26 pm
First is selling the bond funds, or at least half of them, as I have them in my iDeCo account. Then I can keep the cash within iDeCo and wait for lower stock prices to buy more world stocks later on (not trying to time the market here, but just kind of switching funds, but trying to do it in 2 operations rather that use the switch one, to keep the cash waiting for a deeper down market).

Interesting strategy.
Isn't the part I put in bold the definition of trying to time the market?

If this is a scheduled, regular activity I suppose you could get away with calling it rebalancing

Anyway, agreed that the options for bond funds are pitiful at the moment. I don't keep any in my iDeCo or NISA.
I am inclined at the moment to sell my bond funds and just put cash at Aeon Bank or Rakuten Bank or something. The guaranteed interest there seems a better bet than bond funds.

beanhead wrote: ↑Mon Feb 14, 2022 3:33 pm

ivanpgs wrote: ↑Mon Feb 14, 2022 1:26 pm
First is selling the bond funds, or at least half of them, as I have them in my iDeCo account. Then I can keep the cash within iDeCo and wait for lower stock prices to buy more world stocks later on (not trying to time the market here, but just kind of switching funds, but trying to do it in 2 operations rather that use the switch one, to keep the cash waiting for a deeper down market).

Interesting strategy.
Isn't the part I put in bold the definition of trying to time the market?

If this is a scheduled, regular activity I suppose you could get away with calling it rebalancing

Anyway, agreed that the options for bond funds are pitiful at the moment. I don't keep any in my iDeCo or NISA.
I am inclined at the moment to sell my bond funds and just put cash at Aeon Bank or Rakuten Bank or something. The guaranteed interest there seems a better bet than bond funds.

Yes, actually I was thinking about rebalancing half of the position in bonds to world stocks performing two isolated operations. Firstly selling the bonds and second purchasing the world stocks fund at a latter moment, thinking that the market could go cheaper this year. Having said that, even though is rebalancing the portfolio, you can say that I am trying to time the market anyway. Let's just say that I wanted to get some cash out of the bonds to wait for a better opportunity to buy world stocks. (I could also do a switch funds operation, but that would be a different strategy)

RetireJapan wrote: ↑Mon Feb 14, 2022 1:43 pm My understanding is that bond funds (as opposed to individual bonds) will not suffer as badly from inflation, because the bonds they contain are constantly coming due and being redeemed, while new bonds with higher coupons are bought to replace them.

As inflation rises, the yield on the bonds in the fund also rises, cushioning the blow. This is more true of funds containing bonds with a shorter duration, so you might want to check out the duration of the bonds in that eMaxis Slim fund before selling it prematurely.

Or I could be completely wrong

Anyone else?

By checking the fund docs here:
https://emaxis.jp/fund/252667.html

運用報告書(全体版) 2021.04.26
https://emaxis.jp/pdf/zenunyou/252667/2 ... 210426.pdf

They have some info in the above PDF, page 19, where it seems that 55.9% of the treasury bonds are 5 years or more, 30.3% between 5 and 2 years and only 12.5% have a duration of less than 2 years. So it seems that only the minority of the bonds are short term duration.



Perhaps I am wrong, as I did not really now how to proper read the document. Just sharing that snapshot here in case.

Besides, it seems the maxis fund has a negative correlation with the US and Europe bonds with the 2022 year to date comparison of the TNX (10 years treasury note) and the maxis fund:




In the end, 47.3% of the bonds held by the fund are from US and around 40% from Europe.



最新の月報 2022.01
https://emaxis.jp/pdf/geppou/252667/252667_202201.pdf

That is why I was thinking trying the インフレ連動債, Inflation Indexed Bonds (still do not know if they are the same as Treasury Inflation-Protected Security (TIPS)).

TIPS only protect your from unexpected inflation, not expected inflation.

US treasury bonds can also be bought directly through brokers in USD, so you are not limited to American and Japanese funds.

You should also consider currency risk. Buying bonds/ETFs in USD allow you to keep the coupon payments/principle in USD if their is a downturn in the currency market, allowing you to wait for a more favorable climate. (Or simply to reinvest your USD).

Ishares has great US etfs such as TLT, and other that focus on long - medium or short durations.

Ishares also has Japanese list ETFs that do the same, and come in hedged and unhedged flavors.

Or you can by a total market bond product like 楽天・全世界債券インデックス（為替ヘッジ）ファンド, a hedged version of a US ETF or ETFS in a Japanese mutual fund format.

Bonds get complicated.

....................

For the love of god and all that is wholly do not buy and hold TMV.

Leverage etfs should not be held overnight unless they are part of some risk parity strategy. And leveraged Bear funds offer extra danger.

Generally speaking;

When you (or the Fund operator) buy a Bond, you pay the Net Present Value of the Bond Value at Maturity discounted by the expected interest rate between purchase and maturity, or if there are interim Coupon Payments, the Net Present Value of the Cashflows of the Coupon Payments and Bond Value at Maturity discounted by the expected interest rate between purchase and maturity, subject of course to the Bond not defaulting.

If you hold the Bond to maturity, you get the Bond Value at Maturity that you signed up for when you purchased the bond, subject to the bond not defaulting; i.e. you get the money you signed up for when you bought the Bond. Therefore the value of the bond will be very close to its face value.

The problem comes if you have to liquidate the bond before maturity, which might be a higher possibility for longer maturity bonds than short maturity bonds.
Lets say you bought a 10 year bond at the current very low interest rate, but then you had to liquidate the bond part way through the life of the bond; say at 5 years.
Because of the current very low interest rate, you would have to pay close to the face value of the Bond, as discounting that back to current value at the very low current interest rate would not produce much of a discount, and therefore a low yield.
But, if interest rates rise, as seems pretty certain, and inflation rises, as seems pretty certain, then potential buyers would be able to buy new bonds at a much greater discount, due to the higher interest rates used to work out the current 'Present Value' of the cashflows of the new Bond to maturity at that time. You will only be able to sell your bond at a comparable yield, and so you will have to discount the selling price of the bond to match the yield return to those other comparable bonds. Therefore, you will not be able to sell the bond for what you paid for it, and you will 'lose' money.

As Interest Rates and Yields go up, the present prices of Bonds must go down.

Bond prices have gone up and up as interest rates and inflation rates have come down and down over the decades. This is going to change as Central Banks reduce and reverse Quantitative Easing, and start to raise interest rates to counter emerging inflation that was caused by their loose monetary policies.

Therefore, the current value of longer duration bonds outstanding will go down, impacting the value of funds that hold the paper.

For this reason, I personally do not believe that bonds are currently a (good) (any kind of) hedge against stocks in a portfolio, as they are now moving in lock step with, and not in contradiction to equities.
For this reason, I personally do not currently hold bonds in my portfolio. There may be a time in the future when the rationale for holding an Equity/Bond Portfolio split returns, but I do not think it will happen for some time...


On switching funds in your iDECO, I don't know which iDECO provider you are using, so I don't know the specifics, but I think you will find there is no way to just hold Cash in your iDECO. I think you can only switch between a Bond or Equity (or REIT or Commodity, etc....) Fund and a Cash equivalent Guaranteed Principal instrument (iDECO 定期預金), and back again. This is the equivalent of holding Cash, at the equivalent of Japanese Bank interest rates, but does take time to switch and clear, so it might take 5 business days to Switch out of a Fund to the Guaranteed Principal instrument and another 5 business days to Switch out of the Guaranteed Principal instrument to another Fund; i.e. not possible to switch in real time...

Tkydon wrote: ↑Fri Feb 18, 2022 6:47 am...
For this reason, I personally do not believe that bonds are currently a (good) (any kind of) hedge against stocks in a portfolio, as they are now moving in lock step with, and not in contradiction to equities.
For this reason, I personally do not currently hold bonds in my portfolio. There may be a time in the future when the rational for holding an Equity/Bond Portfolio split returns, but I do not think it will happen for some time...

No bonds for me, either.

Tkydon wrote: ↑Fri Feb 18, 2022 6:47 am
For this reason, I personally do not believe that bonds are currently a (good) (any kind of) hedge against stocks in a portfolio, as they are now moving in lock step with, and not in contradiction to equities.

I disagree with with this statement. You cannot treat all bonds as similar, the bond market is vast, much larger and complex than the equity market.

Take VOO and TLT. (S&P500 and 20 year treasuries). There is little positive correlation here.
https://g.co/finance/VOO:BMV?window=YT ... DAQ%3ATLT

On switching funds in your iDECO, I don't know which iDECO provider you are using, so I don't know the specifics, but I think you will find there is no way to just hold Cash in your iDECO. I think you can only switch between a Bond or Equity (or REIT or Commodity, etc....) Fund and a Cash equivalent Guaranteed Principal instrument (iDECO 定期預金), and back again. This is the equivalent of holding Cash, at the equivalent of Japanese Bank interest rates, but does take time to switch and clear, so it might take 5 business days to Switch out of a Fund to the Guaranteed Principal instrument and another 5 business days to Switch out of the Guaranteed Principal instrument to another Fund; i.e. not possible to switch in real time...

You can hold cash. Many firms have a fixed-deposit as their default. It depends on the broker.

https://diamond.jp/articles/-/170201

I stand corrected. You'll see I mentioned the iDECO 定期預金...



https://finance.yahoo.com/chart/VOO#eyJ ... J0In19fX0-


I stand corrected.


If you shift the TLT data by just 5 days, the Correlation for the last 12 months is over 0.74... and the last 2 months, over 0.84...


And today is the 3 Year Anniversary of the Inversion of the Yield Curve in the US.