Tactical Bonds

[ochotona]

On his public blog, Paul Novell has been updating his old Tactical Bond portfolio somewhat (or backpedaling from it?), and talking about a different way to enhance bond performance.

FYI, the older Tactical Bond set-up is described here at Allocate Smartly.

In a nutshell, the new set-up is an even-weight BNDX, EMB, HYG, LQD during risk-on times, or purely US Treasuries during risk-off. He proposes the use of the exact same risk switch he uses to switch equities, his SPY-COMP signal, which is behind a pay-wall. However, there is public domain signal, called SPY-UI, which is an earlier version of SPY-COMP and almost as good.

With SPY-UI, you're looking at the 10 month simple moving average of SPY, and going risk-on if above, or risk-off if below, in the usual manner, but you ignore the risk-off signal while the US Unemployment Rate is below it's 12 month simple moving average. You can use that as a risk controller. Read more here.

This is a way to go bungee-jumping with riskier bonds, but with a strong bungee (the risk switch) which will put you into Treasuries.

My implementation is different, I think it's dumb to own BNDX right now due to the low coupon, so I swapped it out for Preferred Stock (PFFD). Another choice is PGX.

But you have to know... four slices of risky bonds behave significantly like stocks at times. On a buy and hold basis, my HYG / LQD / EMB / PFFD has a maximum drawdown about the same as a 50%-50% S&P 500 and aggregate bond portfolio (but with a significantly larger coupon). That's why you need to use the risk switch, or else just know that you have something like the Couch Potato portfolio in terms of risk, and don't do that if you're not happy with it.

WHY FOR GOD'S SAKE am I doing this? It all has to do with my personal situation. I win if I can book a 4% return reliably on my portfolio until I retire in 2026. So while we're in this this confused, sideways trending stock market, I'm content to take on risk by owning riskier bonds, and not a whole lot of stocks, and booking the gains in cash, on a monthly basis instead of "hoping" for Jerome Powell to do something and give me capital gains, which could go away fast. Disclosure... I still have TLT, and gold, which have done well. I haven't measured the %, but I have the Four Tactical Bonds, TLT, GLD, SPY, Cash, I-Bonds... smorgasbord.

[Kbg]

I’ve been doing bond momentum for I think 4 years now. My approach is a group of bond ETFs that perform uniquely based on what interest rates and the macro economy are doing. It works well and the CAGR is high 6ish.

[ochotona]

Today I'm thinking about what my "safe bonds" would be since someday markets will be risk-off again.

Classically, the go-to safe bond ETFs are IEF or AGG.

But the 10 year is already below 2%. That makes you want to go to longer durations like to TLT, but that's kind of a singular bet. Great while it works. Hope you enjoy volatility.

Forget barbells with cash on one end. Cash is going to zero again. So one end of the barbell could be IEF, the other TLT... but you get better yield and the duration is the same if you sub AGG for IEF (yes AGG is 7.75 yrs).

Half AGG half TLT has a duration of 12 years. Long, but not in the extreme. Corporate bond exposure only 12.5%. BBB exposure limited to 5%. Better yield on the short end. Drawdown in GFC was fine.

Those are my risk-off bond thoughts for the day.

[Kbg]

To me a bond index mixed with something else bonds doesn’t make a whole lot of sense if you’re trying to trade bonds. If you are so inclined then roll the bones with the big boys and play yield curve movements...or invest.

[dualstow]

WHY FOR GOD'S SAKE am I doing this? It all has to do with my personal situation. I win if I can book a 4% return reliably on my portfolio until I retire in 2026. So while we're in this this confused, sideways trending stock market, I'm content to take on risk by owning riskier bonds

If you need income during a sideways stock market, maybe you could just write options on SPY. Call options + dividends.

[ochotona]

Paul Novell has another twist to his Tactical Bonds portfolio... the "risk-off" bond portfolio could be, if you wanted, 75% US Treasuries, 25% gold. In other words, an equity-free Permanent Portfolio.

Equal-weight SHY, IEF, TLT, and Gold. In other words, sample the entire yield curve, then add some gold. But when I model it, TLT 37.5%, SHY 37.5%, and Gold 25% is the same or a tiny bit better.

Read it here:
https://investingforaliving.us/2019/08/ ... trategies/

[dualstow]

Paul Novell has another twist to his Tactical Bonds portfolio... the "risk-off" bond portfolio could be, if you wanted, 75% US Treasuries, 25% gold. In other words, an equity-free Permanent Portfolio.

Hey, you can slap the word "Permanent" on anything and hang it outside on a shingle, but equity-free sounds very of-the-moment.
Equities have done so well for so long, the Najarian brothers were actually thin the last time stocks were losing.