TLT considered harmful

Discussion of the Bond portion of the Permanent Portfolio

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rickb
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TLT considered harmful

Post by rickb » Mon Mar 04, 2013 8:59 pm

We've edged around this on various threads.  I think it's time for a direct discussion.

Is TLT an appropriate holding for the PP?

Main argument for:

* It is pretty much the only fund/ETF which holds only 20+ year treasuries

Main argument against:

* It loans out the bonds it buys (>40% currently1, even though it claims no more than 1/3 of its assets will be loaned out2) for cash collateral which it invests in a Black Rock non-treasury backed MM1  (which is more than half3 short term loans to "too big to fail" banks like Morgan Stanley, Credit Suisse, JP Morgan, etc).  So even though the claim is TLT holds "only" 20+ year treasuries, it actually holds about 60% 20+ year treasuries and 40% IOUs backed by cash reinvested in its own MM, which in turn is more than half IOUs from TBTF banks backed by nothing.

In my book, what they're doing seems pretty darn close to fraud.  In a perfect storm (sharp downward spike in interest rates, or global economic system collapse like what was narrowly averted in late 2008), I think it's quite conceivable TLT investors could take up to a 20% haircut. 

1 See Semi Annual Report, pages 19 and 38

2 See Statement of Additional Information, page 8

3 See Holdings of SL Agency Fund
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smurff
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Re: TLT considered harmful

Post by smurff » Mon Mar 04, 2013 9:15 pm

Besides directly  holding LT bonds, what other options are there?
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Re: TLT considered harmful

Post by dualstow » Mon Mar 04, 2013 9:35 pm

Interesting. I remember Harry Browne's excitement upon first hearing about TLT, but I don't recall the follow-up. I would never dare to speak for him, but it seems like the lending shenanigans perpetrated by BlackRock go against the whole pp philosophy. I still have some TLT, and if i ever have the chance to rebalance out of some bonds, I'll keep the real ones and jettison TLT. For now, I don't mind holding a bit of it.
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Re: TLT considered harmful

Post by Pointedstick » Mon Mar 04, 2013 10:20 pm

smurff wrote: Besides directly  holding LT bonds, what other options are there?
EDV, TLO, BTTRX
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Re: TLT considered harmful

Post by rickb » Mon Mar 04, 2013 11:08 pm

Pointedstick wrote:
smurff wrote: Besides directly  holding LT bonds, what other options are there?
EDV, TLO, BTTRX
See http://gyroscopicinvesting.com/forum/ht ... ic.php?t=2, i.e.

TLT, VBLTX, EDV, VGLT, FLBIX, ZROZ, VUSTX, PRULX, FLBIX
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Re: TLT considered harmful

Post by rickb » Mon Mar 04, 2013 11:25 pm

rickb wrote:
Pointedstick wrote:
smurff wrote: Besides directly  holding LT bonds, what other options are there?
EDV, TLO, BTTRX
Here's the list from http://gyroscopicinvesting.com/forum/ht ... ic.php?t=2, i.e.

TLT, VBLTX, EDV, VGLT, FLBIX, ZROZ, VUSTX, PRULX, FLBIX
I haven't looked into any of these in as much detail as TLT.  VUSTX seems reasonably straight -  there's a small amount (6% or so) of US Government Agency debt, i.e. Fannie Mae and Freddie Mac, but nothing like the shenanigans TLT engages in.  Several in this list are zeroes rather than coupon bearing long term treasuries (at least EDV and ZROZ).

The main point here is that on close examination, TLT is not very similar to directly buying long term bonds.  If you can buy bonds directly, then definitely do so.  If you can't, look very closely at what you're buying instead.  Perhaps we should all look very closely at each of these and report what we find.
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Re: TLT considered harmful

Post by MachineGhost » Tue Mar 05, 2013 12:52 am

Just to add to this topic, all of Schwab's ETF's do not return the profits made from lending out shares back to the fund as Vanguard does, so the expense ratios will likely be higher than stated.  That is semi-fraud as well.
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Re: TLT considered harmful

Post by Tyler » Tue Mar 05, 2013 12:00 pm

Thanks for starting this thread, rickb.  Great summary on TLT.  When you put it that succinctly, it really makes one question just how risk tolerant they are. 

Truthfully, I've been back and forth on the convenience/risk argument for TLT for a while now, and have argued both sides.  But the more I educate myself on the inner workings of wall st., the more I realize that direct treasuries really are the safer path (by far) that are likely worth the tiny amount of additional effort required to maintain them.  I'm still not sold on selling my SCHO, as the convenience/risk ratio there is still quite a bit higher, but am perhaps coming around even on that for a portion of my money. 
Mechanical engineer, history buff, treasure manager... totally not Ben Gates
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Re: TLT considered harmful

Post by clacy » Tue Mar 05, 2013 2:26 pm

50% VFITX + 50% EDV moves lock stock with 100% TLT.  Rebalanced yearly, it was nearly identical (even had a slightly better sharpe and lower DD).

For those that aren't familiar, VFITX is Vanguard's intermediate treasury mutual fund and EDV is Vanguard's zero coupon treasury ETF.  EDV has some liquidity issues however.  Not too big of a concern for a treasury product though, IMO.

BTTRX is another good option, or maybe 40% VFITX + 60% BTTRX. 
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Re: TLT considered harmful

Post by Xan » Tue Mar 05, 2013 2:32 pm

clacy wrote: 50% VFITX + 50% EDV moves lock stock with 100% TLT.  Rebalanced yearly, it was nearly identical (even had a slightly better sharpe and lower DD).
Clacy, how far back did your analysis go?  Are we sure that this 50/50 split will behave like TLT, or has it happened to do so recently?  This is an intriguing idea and I would like to do it in my Vanguard account, if it works out.
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Re: TLT considered harmful

Post by clacy » Tue Mar 05, 2013 2:42 pm

I tested 01/29/08- to current, which was when EDV began trading.  I also tested it from 12/19/08- 04/06/10 which was peak to trough for treasuries after the big run up during the credit crisis and it beat 100% TLT slightly with a little out-performance, better sharpe and lower DD (albeit very close). 

From what I can tell a 50/50 split is negligible from 100% TLT however, with maybe a slight advantage picked up from rebalancing.
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Re: TLT considered harmful

Post by clacy » Tue Mar 05, 2013 2:54 pm

From the testing I've done, the same principal works with stocks too. 

I've tested 50% VWEHX (Vanguard junk bond fund) with 50% IJS (small cap value ETF) and blending a less volatile fund with a more volatile fund almost always wins across any time frame. 

It always produces a more favorable drawdown, sharpe and volatility.  Depending on the time frame it usually beats the pants off of 100% VTI in total return as well.
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