Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.
A buy/sell strategy I am trying to implement has me holding shorter duration bonds just before rates raise, wait for the longer duration bond fund to adjust downward and then hold the longer duration bond fund as it recovers.
This can be accomplished with USATX (longer duration) mentioned in the article and USSTX (shorter duration) muni funds. Longer duration munis are more sensitive to interest rate and so I monitor USATX downward movement as it absorbs losses from an interest rate hike.
The last time interest rates moved upwards (April 2013) USATX adjusted downward 4% and it took about a year for it to make up those losses. I try to strategically hold USSTX prior to a rate hike and then buy USATX at the point where USATX starts to recover from its losses.
Here's an illustration of the last year using these two funds. USATX gained four percent over the last 6 months and it is potentially time right now to exchange USATX back into USSTX netting the a four percent gain.
Long term, its hard to beat USAA muni funds USSTX, USATX, and USTEX:
@bee: "A buy/sell strategy I am trying to implement has me holding shorter duration bonds just before rates raise, wait for the longer duration bond fund to adjust downward and then hold the longer duration bond fund as it recovers".
How will you know when rates are going to rise? And how will you know when to buy the longer duration bond fund, i.e., how will you know when rates will fall again?
The basic logic (my logic) is that longer duration bond funds will "fall and settle" at a greater magnitude than shorter duration bond funds. Timing doesn't have to be perfect, but to trigger this trade longer duration bonds need to first "fall through" shorter duration bonds.
I use short term charts to monitor this dynamic. Hold the shorter duration bond fund or cash until the longer duration fund "falls through" the the shorter duration fund and the two funds "settle". Part of this settling process involves the bond fund manager buying newer muni issues at hopefully higher interest rates. Depending on where the FED targets interest rates hikes (Short), (Intermediate), or (long) will impact the rates on new bonds.
@bee: I'm quite impressed with your graphics. Can you give a little tutorial on how to do that? Even if in a PM to me if you don't want to do a public post on that? So more specifically, 1) How do you post a chart or graph? 2)How do you add the 'words', and the boxes "Both funds bottom"/USIBX rises more quickly, if intermediate rates raise"/"USIBX falls through USSBX" 3) How do you add the arrows, etc
Thanks for the correction fundalarm. Looks like long term rate did raise, but was this "market induce" rather than "FED induced" ?
From this article date June 2013:
"For the sixth week in a row, the popular 30-year, fixed-rate mortgage rose closer to 3.98% this week, bringing the rate closer to the 4% mark, according to mortgage finance company Freddie Mac. That compares with 3.91% last week and 3.71% a year ago.
The article suggests LT bond investors were repositioning or selling their bond holdings (worried about the FED starting to taper). This selling caused LT rates to rise for these six weeks last spring.
My take away: An eventual FED taper (buying fewer bonds) could cause rates to raise in much the same way.
I am obviously no bond expert, just an investor interested in understanding how this ship (bonds) reverses course after 30 years of moving in the opposite direction.
Fed directly controls overnight lending rates which affect mostly short term rates. When this failed to affect long term rates needed to kick start the housing market and the econony, the Fed started purchasing the long term bonds to manipulate those rates. Their actions and expectations on future actions affect longer term rates as it did in this case.
Comments
This can be accomplished with USATX (longer duration) mentioned in the article and USSTX (shorter duration) muni funds. Longer duration munis are more sensitive to interest rate and so I monitor USATX downward movement as it absorbs losses from an interest rate hike.
The last time interest rates moved upwards (April 2013) USATX adjusted downward 4% and it took about a year for it to make up those losses. I try to strategically hold USSTX prior to a rate hike and then buy USATX at the point where USATX starts to recover from its losses.
Here's an illustration of the last year using these two funds. USATX gained four percent over the last 6 months and it is potentially time right now to exchange USATX back into USSTX netting the a four percent gain.
Long term, its hard to beat USAA muni funds USSTX, USATX, and USTEX:
How will you know when rates are going to rise? And how will you know when to buy the longer duration bond fund, i.e., how will you know when rates will fall again?
I use short term charts to monitor this dynamic. Hold the shorter duration bond fund or cash until the longer duration fund "falls through" the the shorter duration fund and the two funds "settle". Part of this settling process involves the bond fund manager buying newer muni issues at hopefully higher interest rates. Depending on where the FED targets interest rates hikes (Short), (Intermediate), or (long) will impact the rates on new bonds.
Regards,
Ted
Using Jing to add images to your discussion thread
From this article date June 2013:
"For the sixth week in a row, the popular 30-year, fixed-rate mortgage rose closer to 3.98% this week, bringing the rate closer to the 4% mark, according to mortgage finance company Freddie Mac. That compares with 3.91% last week and 3.71% a year ago.
So why are rates rising?"
finance.fortune.cnn.com/2013/06/14/rising-interest-rates/
The article suggests LT bond investors were repositioning or selling their bond holdings (worried about the FED starting to taper). This selling caused LT rates to rise for these six weeks last spring.
My take away: An eventual FED taper (buying fewer bonds) could cause rates to raise in much the same way.
I am obviously no bond expert, just an investor interested in understanding how this ship (bonds) reverses course after 30 years of moving in the opposite direction.