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Isn't that ironic?

When interests rate are low, debt is cheap, so you can take on debt.
But when interests rate are low, if you have too much debt and the interests start rising, then you are in a bad position, so you should reduce your debt.

People reduce their debt only when they are forced to, when interests are truly rising.

At the moment, we are just in the usual volatility of a down trend with lower highs and lower lows. Not sure what will be the cataclysm required to reverse that trend.

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I'm no expert but I don't think rates will keep moving higher and higher.
Then you probably don't want to be in stocks or real estate.

I thought you were very bullish on stocks though, especially on the high risk growth ones? How can you simultaneously be projecting stocks going up, and interest rates going up too?
 

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Then you probably don't want to be in stocks or real estate.

I thought you were very bullish on stocks though, especially on the high risk growth ones? How can you simultaneously be projecting stocks going up, and interest rates going up too?
I don't think.

Sorry, that's a bad habit from Quebec french-speaking people, we always use negative syntax.
 

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Will the Fed control rates ? Keep them at certain thresholds ??? Or let things just go - we will see...
Central Banks control short term and overnight rates. Influences other parts of the curve by intervening through actions such as buying bonds. As long as a country is part of the integrated global financial system, market forces will prevail over this influence. The bankers know this. They are letting the 10(s) come up to take the froth off speculative assets. If it gets out of control they will act as expected to bring stability.
 

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Central Banks control short term and overnight rates. Influences other parts of the curve by intervening through actions such as buying bonds. As long as a country is part of the integrated global financial system, market forces will prevail over this influence. The bankers know this. They are letting the 10(s) come up to take the froth off speculative assets. If it gets out of control they will act as expected to bring stability.
Stability isn't the only goal, it's one of many factors.


"Doctor Doctor, how's the patient"
"Don't worry, he's stable"
"Can we talk to him?"
"Of course not, he's dead"
"But you said he was stable"
"He is"
 

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"Doctor Doctor, how's the patient"
"Don't worry, he's stable"
"Can we talk to him?"
"Of course not, he's dead"
"But you said he was stable"
"He is"
😂
 

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N'est-ce pas
And sometimes we make it even worse with double negatives. I could've said "I don't think that rates won't keep moving lower and lower" to mean "I think that rates will keep moving lower and lower".
 

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Can someone explain this to me. Look at the prime rate of Canada from 2009 - 2021 the lowest it was is 2.25% (2009) up to 3.95% (2019). It was at 3% between 2010 and 2015 and then at 2.7% till 2017. See here: Canada Prime Rate History | Prime Rate vs. Overnight Rate

With that being said how can the 10 years go much higher than what we have seen from 2009-2021?

Depending on the answer to that, isn't it likely that Canada's prime rate won't go above 3%? Most variable mortgages have a discount of 1.15 right now so if prime hits 3%, it'll be 1.85%. Are people really going to default on their mortgages at 1.85%?

I must be missing something.
 

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Will the Fed control rates ? Keep them at certain thresholds ??? Or let things just go - we will see...
In case anyone is curious, I outlined a worst case scenario here (bond carnage) in bond ETFs


If something like that happens, people will really feel the pain. There are many investors holding bond funds who believe they are quite stable... and they are, compared to stocks... but there is still the potential for sharp volatility.

My own guess... I don't think the drawdown would be as severe as 15%. We are currently a bit under 6% loss.

The American fund IEF, which is kind of 'ground zero' for what's happening now, is around 7% loss.
 

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Discussion Starter · #52 · (Edited)
The other problem with bonds is fear. In stocks I tend to find people begin the irrational process around -10% but it usually requires around -20% to get the more experienced investors to act irrationally. Bonds however, tend to draw the more conservative risk averse investors. Many of these people have the wrong belief that a bond etf or fund that invests in only guaranteed bonds cannot go down. As we know, that is not correct. So these people tend to get spooked at a much lower drawdown level causing a little more volatility in the investment then what should be there. Luckily they make up only a small component of the people investing in these underlying securities, but at the margin, they can cause some price gyration.

Two things that do help a bond investor. The first one is fairly obvious, and it is the coupon interest continuously being paid. This helps soften the losses on the capital to some degree. The 2nd is time. Over time the bonds maturity date decreases. In a normal yield curve, that means as time goes by the interest rates on any bond tends to go down, driving its price up. The steeper the curve the more the rates go down. So in a rising interest rate environment you also have this natural declining rate environment superimposing itself and also offsetting some of the losses that would otherwise have happened.

That said, when you see rates rise, like the 10 yr has in the last 6 weeks or so, very little is available to soften that loss into a gain. But once that increase levels off the other two natural gainers kick in to make the results for the year considerably better, then what appears is going to happen when looking at only the short term result.

Lastly, most bonds are an asset allocation to give some form of offset or dilution to ones stock portfolio. So when one is loosing money in bonds, they usually are making it hand over fist in the stocks. It is probably a good thing. A lot better then the reverse where one is making money in bonds, but with no hope of that offsetting the large losses they are experiencing in the stock market.
 

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Lastly, most bonds are an asset allocation to give some form of offset or dilution to ones stock portfolio. So when one is loosing money in bonds, they usually are making it hand over fist in the stocks. It is probably a good thing.
I agree with all your points @OptsyEagle and it's very true that risk-averse investors are spooked more easily by volatility. Bond investors get nervous at normal volatility. I actually think that the financial media tries to exploit this, because you will notice that they do a lot of fear mongering when bonds decline a little bit. I suspect it's a trick fund managers use to attract money away from conservative investors.

Your last point about the role in asset allocation is really worth emphasizing. This is so important, and took me quite a few years to grasp ... the goal in a diversified portfolio (asset allocation) is NOT to constantly make money in everything you hold. That's an unreasonable expectation. Instead, the goal is to have some asset that's performing well, when another is performing poorly.

In the last 6 months, stocks are up about 14% and bonds are down 4%. This is perfectly normal and it's desirable. It's good to see that these assets are uncorrelated, because this is the key trait which makes diversification and asset allocation work.
 

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Should equity investors be worried of rising interests rates?

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Should equity investors be worried of rising interests rates?
Now try an analysis of the forward 10 year return of a bond fund from each of those dates. e.g. from 6/2003 (the longest rate rising cycle shown in that table) IEF returned 5.3% CAGR

I think you'll find that the forward 10 year return is quite good, even when you start during those "prolonged periods of rising rates"

The way rising rates tend to hit a bond fund is, initial volatility and maybe no returns for a while, until the bonds roll over at higher yields and boost the returns.
 

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I think you'll find that the forward 10 year return is quite good, even when you start during those "prolonged periods of rising rates"
Undoubtably - it's a 30 year bull run. Each upswing in rates stopped at a lower high for 28 years (the '18 run-up only just surpassed '14). Then the trend down continues through to 2021. Unless one sold their bonds at precisely the wrong time they only had to hang in and sell at a higher price, or get par, and all along receive their coupon rate.
 

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Should equity investors be worried of rising interests rates?
This is an excellent chart and I saw similar data trucked out in both 2013 and 2017. I am sure there is an increase in volatility though. And I also note that 2014 and 2018 were two of my worst investing over that period as they were bear markets. Not caused immediately after rates rose, but it definitely happened, although not necessarily because of only that factor.
 

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The more serious "rising rate" scenario was in the 1970s. The analysis posted above looks at a period where interest rates were trending downward, with only short stretches of rising rates.

Here's the period we should worry about more.

Rates went up significantly from 1972 (start of available data) to 1983. Stocks did absolutely terribly, first crashing with a 46% drawdown, and had a 6 year stretch of 0% nominal returns (with very negative real returns).

Even 10 years later, in 1982, stocks still had a 0% real return... had actually lost in real terms, even after a decade.

People conveniently forget about stocks in the 70s. Bonds had a negative real return too, but as you can see in the chart, were much more stable and in fact, bonds outperformed stocks during the high inflation 70s. On a risk-adjusted basis, bonds were a much better investment while rates shot up in the 70s.

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The more serious "rising rate" scenario was in the 1970s.
The main cause of the stock market crash in 1973-1974 was not the rising rates, it was the oil crisis. Oil price jumped from $20 to $55.

In the 1980s though, there was 2 bear markets due to real interests rates rising above 5% in 1981 to mid-1982 and then mid-1983 to mid-1984.


So, do you believe we are about to have interests rates rising 5% higher than inflation, causing a bear market for the stock market?

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