Help me get over my fear of LTTs

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mdwilson1991
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Help me get over my fear of LTTs

Post by mdwilson1991 » Wed Dec 11, 2019 4:04 pm

Hi folks,

I've been reading here a while, read Best Laid Plans, Rowland's book. I've been trying to pull the trigger and move to the PP or a variation, like GB.

I can't seem to get past my fear (perhaps irrational ) of the long term treasuries.

I know stocks can crash and stay there for ages. But somehow the fact that bond returns are inverse to interest rate movements, coupled with us being in a low rate environment really makes long bonds scary.

I don't currently hold TLT or an equivalent, and the thought of dumping 20+% into it and watching it get crushed for the rest of my life if rates move up...

I try to think of it in terms of stocks - they can move rapidly down as well, but they don't have that direct tie to the interest rate environment we are in.

Can anyone offer some words to help me calm my fears? Thanks---
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Re: Help me get over my fear of LTTs

Post by mathjak107 » Wed Dec 11, 2019 5:16 pm

About the best thing that can be said is hopefully when rates get high enough they slow the economy and rates come down ....

The bad thing is as I showed quite a few times , since the 1980’s we have pretty much had decades of falling rates with a few speed bumps as I call them ...if the ride back up takes decades then you are correct in your worrying ...I know I have been an investor since 1987 and have never experienced the same kind of rate reversal upward that brought us to these low levels downward .


We have had bonds stumble briefly , in what was just about a long 40 year slide .

Despite the fact the pp is supposedly neutral , it really is geared more for falling rates then rising rates and can carry a lot of weight at times when gold and bonds move together downward. Rising bond rates seems to be kryptonite to the pp
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Re: Help me get over my fear of LTTs

Post by Pet Hog » Wed Dec 11, 2019 7:30 pm

Hi mdwilson1991

In my opinion, an important part of investing in the PP or GB is considering the performance of the total portfolio, as a whole, and not that of its individual components -- one or more of which will inevitably be sucking at any one time. Perhaps it will be LTTs that will suck in the next few years. Who knows? Try not to fall in or out of love with any of the assets.

Are we in a low-rate environment? Historically, yes. But in a few years we might look back fondly at LTT rates of 2.25% as the good old days. For decades people have been saying that LTT rates have nowhere to go but up. The "low" rates today reflect the consensus opinion of all the investors in the world. So that means rates are neither low nor high, but just right for today's economic conditions, as best as we can judge.

If, however, rates do go up, that means that the value of existing LTTs will go down, and the PP investor will be buying more of them as the lagging asset (either when adding new funds or rebalancing). The investor will now have LTTs earning a higher rate. That's a benefit going forward.

I like to consider the numbers when thinking about these things. Thirty-year treasuries have a yield of about 2.25% today. They have a duration of about 20 years. There's a rule of thumb that duration can be considered approximately equal to the percentage movement of bond value in response to a 1% move in interest rates. Let's say interest rates go up dramatically -- say by 4% in the next 12 months. That's four 1% moves, each time decreasing the bond value by about 20% (i.e., retaining only 80% of the value). That compounds to about 40% bond value after a year. If you have a PP originally worth $400,000, then the $100,000 in LTTs would go down to about $40,000 when the LTT rate reaches 6.25%. Total portfolio value would be $340,000 (assuming no responses from gold, stocks, and cash -- in actuality I'd expect them to soften the blow). That's a PP loss of 15%. Bad by PP standards, sure, but not that bad by traditional investing standards. You'd rebalance by buying $45,000 of new LTTs; you'd now own $85,000 in LTTs earning 6.25%. If rates go down from there, you'll do well; if they go up further, at least you'll be offset by those juicy coupon payments.
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Re: Help me get over my fear of LTTs

Post by vnatale » Wed Dec 11, 2019 8:19 pm

mdwilson1991 wrote:
Wed Dec 11, 2019 4:04 pm
Hi folks,

I've been reading here a while, read Best Laid Plans, Rowland's book. I've been trying to pull the trigger and move to the PP or a variation, like GB.

I can't seem to get past my fear (perhaps irrational ) of the long term treasuries.

I know stocks can crash and stay there for ages. But somehow the fact that bond returns are inverse to interest rate movements, coupled with us being in a low rate environment really makes long bonds scary.

I don't currently hold TLT or an equivalent, and the thought of dumping 20+% into it and watching it get crushed for the rest of my life if rates move up...

I try to think of it in terms of stocks - they can move rapidly down as well, but they don't have that direct tie to the interest rate environment we are in.

Can anyone offer some words to help me calm my fears? Thanks---
Have you read this?

Bond FAQ
viewtopic.php?f=3&t=14

Just read it again myself to help resolve my concerns regarding long-term bonds and where current interest rates are now with them.

Vinny
"I only regret that I have but one lap to give to my cats."
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Re: Help me get over my fear of LTTs

Post by boglerdude » Wed Dec 11, 2019 9:04 pm

Japan 30yr .44%

The 1st world is getting richer and older. Savings glut. Start buying in, you could wait till the election to get to 20%, if Trump wins there will be a short boost in rates
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Re: Help me get over my fear of LTTs

Post by mathjak107 » Thu Dec 12, 2019 2:30 am

while coupon rates go up when rates rise , the long duration of a fund like tlt would take about 15 years to see today's rate assuming you are buying in now and assuming a 1% rise in rates . that is how long it would take to offset the drop in nav and just get the rate you had the day you bought in ..

but you would still be getting 2% in a 3% world ... so for me it would take longer to forge ahead again then i likely have left in time if rates rise and trend upward ..

right now the fed stated that they will let inflation even go over 2% so odds are pretty good investors will want more to buy longer term bonds .

in fact i think once some agreement on phase one of the trade deal is announced which is likely in the 11th hour i think we will see a drop in long term bond value and gold ... i am hoping to use that as my re-entry point rebuying what i had sold yesterday for thousands less .

had the fed merely said they are holding rates that would be a positive for bonds , but they coupled it with saying they will allow inflation to creep higher than the 2% target . that is a negative for bonds

yes , i am a dirty lil market timer when it comes to the pp as it is actually my variable portfolio
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Re: Help me get over my fear of LTTs

Post by mdwilson1991 » Thu Dec 12, 2019 6:08 am

Pet Hog wrote:
Wed Dec 11, 2019 7:30 pm
...I like to consider the numbers when thinking about these things. Thirty-year treasuries have a yield of about 2.25% today. They have a duration of about 20 years. There's a rule of thumb that duration can be considered approximately equal to the percentage movement of bond value in response to a 1% move in interest rates. Let's say interest rates go up dramatically -- say by 4% in the next 12 months. That's four 1% moves, each time decreasing the bond value by about 20% (i.e., retaining only 80% of the value). That compounds to about 40% bond value after a year. If you have a PP originally worth $400,000, then the $100,000 in LTTs would go down to about $40,000 when the LTT rate reaches 6.25%. Total portfolio value would be $340,000 (assuming no responses from gold, stocks, and cash -- in actuality I'd expect them to soften the blow). That's a PP loss of 15%. Bad by PP standards, sure, but not that bad by traditional investing standards. You'd rebalance by buying $45,000 of new LTTs; you'd now own $85,000 in LTTs earning 6.25%. If rates go down from there, you'll do well; if they go up further, at least you'll be offset by those juicy coupon payments.
Does this same logic hold regardless if I am buying a bond fund (eg, TLT or FNBGX) instead of direct bonds?

That is, when I rebalance into a fund that has dropped that much over one year due to rising rates, will the fund itself have rebalanced into higher coupon bonds?
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Re: Help me get over my fear of LTTs

Post by mathjak107 » Thu Dec 12, 2019 8:26 am

yes , it is the same .

hypothetically lets suppose you bought a treasury bond fund and to keep it simple lets say the funds duration is 5 years ...

so you buy at 10 bucks a share and 5% interest ...rates climb to 6% so nav falls to 9.50 but for 5 years now the fund pays 6% not 5% ... the extra 1% interest over 5 years give\s you back the deal you had the day you bought ..

but remember you are getting 5% in a 6% world .
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Re: Help me get over my fear of LTTs

Post by Pet Hog » Thu Dec 12, 2019 1:19 pm

I agree with mathjak that it's the same. TLT holds 38 different bonds in a ladder. See the Portfolio/Holdings section here. Buying that ETF is akin to you holding the same ladder. It shouldn't make a difference if you rebalance your PP by buying treasuries directly or buying them through TLT.

There is, however, a difference between you rebalancing your PP and the fund itself rebalancing into higher-coupon bonds. The latter is a slow process, a decade long, where they sell the 20-year maturity bonds and buy new 30-years (maybe more complicated than that if we consider inflows and outflows). In my example, TLT would presumably lose approximately 60% of its value, bringing its yield up to 6%-ish, so you would buy $45,000 of it in one go and get that yield for your LTT holdings.
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Re: Help me get over my fear of LTTs

Post by Kbg » Sun Dec 15, 2019 5:06 am

Buy ITTs, skip the cash.
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Re: Help me get over my fear of LTTs

Post by mathjak107 » Sun Dec 15, 2019 5:27 am

Pet Hog wrote:
Thu Dec 12, 2019 1:19 pm
I agree with mathjak that it's the same. TLT holds 38 different bonds in a ladder. See the Portfolio/Holdings section here. Buying that ETF is akin to you holding the same ladder. It shouldn't make a difference if you rebalance your PP by buying treasuries directly or buying them through TLT.

There is, however, a difference between you rebalancing your PP and the fund itself rebalancing into higher-coupon bonds. The latter is a slow process, a decade long, where they sell the 20-year maturity bonds and buy new 30-years (maybe more complicated than that if we consider inflows and outflows). In my example, TLT would presumably lose approximately 60% of its value, bringing its yield up to 6%-ish, so you would buy $45,000 of it in one go and get that yield for your LTT holdings.
an individual bond has a fixed value and fixed yield , a fund has a variable value but a variable yield that can offset the same difference ..

you must hold a long term bond until maturity to see the deal you originally bought if rates rise , that is no different then holding a fund for its duration to see the deal you bought in at .

hypothetically a 5 year 1k bond paying 5% , will fall to 950 with a 1% rise in rates if you sell early . so you need to hold 5 years to see 5% ..

a bond fund will do the same thing , 100 shares at 10 bucks a share and a duration of 5 years will fall to 9.50 a share but rates will go to 6% from 5% . over the 5 years the extra 1% makes you whole again .. it is the same as the bond .

stretching things out longer has the same relationship . a funds duration is pretty much like maturity in a bond .
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Re: Help me get over my fear of LTTs

Post by Pet Hog » Sun Dec 15, 2019 11:44 pm

mathjak107 wrote:
Sun Dec 15, 2019 5:27 am
Pet Hog wrote:
Thu Dec 12, 2019 1:19 pm
I agree with mathjak that it's the same. TLT holds 38 different bonds in a ladder. See the Portfolio/Holdings section here. Buying that ETF is akin to you holding the same ladder. It shouldn't make a difference if you rebalance your PP by buying treasuries directly or buying them through TLT.

There is, however, a difference between you rebalancing your PP and the fund itself rebalancing into higher-coupon bonds. The latter is a slow process, a decade long, where they sell the 20-year maturity bonds and buy new 30-years (maybe more complicated than that if we consider inflows and outflows). In my example, TLT would presumably lose approximately 60% of its value, bringing its yield up to 6%-ish, so you would buy $45,000 of it in one go and get that yield for your LTT holdings.
an individual bond has a fixed value and fixed yield , a fund has a variable value but a variable yield that can offset the same difference ..

you must hold a long term bond until maturity to see the deal you originally bought if rates rise , that is no different then holding a fund for its duration to see the deal you bought in at .

hypothetically a 5 year 1k bond paying 5% , will fall to 950 with a 1% rise in rates if you sell early . so you need to hold 5 years to see 5% ..

a bond fund will do the same thing , 100 shares at 10 bucks a share and a duration of 5 years will fall to 9.50 a share but rates will go to 6% from 5% . over the 5 years the extra 1% makes you whole again .. it is the same as the bond .

stretching things out longer has the same relationship . a funds duration is pretty much like maturity in a bond .
Perhaps I'm misunderstanding, but doesn't this argument hold only if the bonds in the fund are held to maturity? What does it mean to hold TLT for its duration when the fund managers sell any bond of maturity less that 20 years?
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