TLT considered harmful

[goodasgold]

This is bad news about TLT's vulnerability. Just goes to show once again the PP book is correct in urging minimal exposure to counterparty risk.

In my case, the bond portion of my PP is invested 100% in a TLT traditional IRA.

It would be a pain to remove it and invest in other ETFs. Knowing what is known now, I would prefer to invest all of it via TD, but this is not possible for an IRA, according to my understanding.

Advice would be appreciated.

[Pointedstick]

goodasgold, you should be able to transfer your IRA to any other brokerage company. I did it a while back when I moved a Roth IRA from Scottrade to Vanguard.

If you're saying that the IRA itself is with BlackRock and consists of 100% TLT, you should still be able to do it, even if you have to go the roundabout way of liquidating the TLT position and transferring the resulting cash to a new IRA with another company.

[goodasgold]

Although shifting a traditional IRA from TLT to another ETF provider is workable, there is still the amount of research needed to ensure the new one isn't engaging in the same shenanigans as BlackRock.  Another minus is the possibility that a low-risk ETF will arbitrarily change its policy after you buy into it.

In order to buy LT treasurys from TD, I could liquidate a lot of I-bonds, but I would hate to do this, since some of mine are paying 1.2% over the inflation rate.

[Bean]

I am still not too worried. I guess in the scenarios we are talking about that would destroy TLT, would probably make my 25% of gold go parabolic.

[goodasgold]

I am still not too worried. I guess in the scenarios we are talking about that would destroy TLT, would probably make my 25% of gold go parabolic.

I'm not sure about this. In rickb's scenario, TLT's problematical MM investments could be compromised by a sudden drop in interest rates. Gold typically responds poorly to a drop in interest rates, such as during a recession.

[steve]

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.

In my Vanguard taxable account I have VGLT/EDV 50/50 split or at least it started that way now its more like  46.55 VGLT/53.45 EDV after more then two years.

[KevinW]

There are different dimensions of risk here. There's the counterparty/shenanigan risk introduced by the fund sponsor, and there's the volatility risk introduced by using something other than 25-30 year nominal treasury bonds. IMO, bond alternatives listed from riskiest to safest:

- not investing in a PP
- one-fund PP (PRPFX or PERM)
- DIY PP with something other than true long term nominal bonds (e.g. BND or EDV)
- fund that holds bonds to maturity instead of selling them early (e.g. Vanguard or Fidelity's mutual funds)
- TLT
- individual 25-30 year bonds

Yes, BlackRock is doing problematic stuff with some of TLT's assets, which *might* cause problems down the road. However if change the asset allocation away from true long-term treasury bonds, you will *certainly* have something that works differently, and probably less safely, than a vanilla PP. Individual bonds are best, absolutely. But if those are not an option for whatever reason, IMO a fund that holds only long-duration nominal treasury bonds is best, and right now TLT is the only one that exists.

[Ad Orientem]

TLT, VBLTX, EDV, VGLT, FLBIX, ZROZ, VUSTX, PRULX, FLBIX

I just did some quick checking and every one of those funds deviates to varying degrees from the ideal of holding 20-30 yr Treasuries. Of those listed TLT comes pretty close but it does have the risk factors that RickB raised and which he pointed out to me in another thread dealing with cash options. It is troublesome but I guess you have to ask what the realistic risk is and how much of a hit could you take if TLT blew up? Then you need to weigh that against the convenience factor.

After looking at the other funds I think they fail to meet minimum standards for the LTT component of a PP. So for now my view is it's either TLT with its admitted shortcomings or direct ownership of your LTTs.

[MachineGhost]

It doesn't matter whether its TLT, EDV, or some other intermediate bond as long as the combined duration of that and your cash is equivalent to the current average AAA corp bond new issue.  With that, you can utilize whatever etf structure you feel safest with and can ignore targeting any specific maturity amounts.

Um, why?

[Khisanth]

I'm out of TLT today, and I will be purchasing the next 30 year bonds at auction next week May 9 2013. I talked to the bond desk at Vanguard and already have my order in.

+ Reduce that 0.15% expense ratio to Zero
+ Stop lending my assets to the big banks
+ Diversify out of iShares (I also have IAU)

[Bean]

I thought Vanguard charged some fees?  Is that not the case?

[Khisanth]

https://personal.vanguard.com/us/whatwe ... ommissions

For US bond auctions it looks like No commission.
For secondary market bond purchases it seems like it could get pricey.

[Reub]

What happened to Slotine?

[Bean]

What happened to Slotine?

I think the one of the other forum threads got to him, based on his last few post my guess is the one on Boston.

[MachineGhost]

I think the one of the other forum threads got to him, based on his last few post my guess is the one on Boston.

Immigration.

[foglifter]

I hope my question justifies bringing this thread back to life (temporarily).


Part of my bond allocation is in a tax-deferred TD Ameritrade account, hence both TLT and EDV are available commission-free. Since TLT has been deemed problematic I've been buying EDV over the last few years. Now that the balance grew up I would like to bring the volatility down so it's closer to TLT. I looked at the list of zero-commission ETFs and found IEI, which is a 3-7 years intermediate bond ETF with average duration 4.55 years. It's an iShares product, which is probably bad, but maybe less bad than TLT. I was contemplating using an EDV/IEI mix as a substitute for TLT. ETFreplay tells me that a mix of ~58/42 EDV/IEI would behave pretty much like TLT.


Am I over-engineering here? Should I just sell EDV and simply buy TLT? 

[sophie]

After reading this thread (finally) I'm more convinced than ever that buying 30 year treasuries via brokerages is the way to go.  All the major brokerages allow you to buy either new issues or secondaries, although there may be fees and inconveniences incurred when you sell.  Goodasgold could you just transfer that IRA to a brokerage that allows you to buy the bonds directly?

I do keep some money in TLT in each of my PP accounts (except taxable) but it's mainly to accumulate funds in between Treasury bond purchases.

Of note, you can buy bonds at Treasury Direct, but you're limited to new issues and you have to transfer to a brokerage to sell them.

[Greg]

After reading this thread (finally) I'm more convinced than ever that buying 30 year treasuries via brokerages is the way to go.  All the major brokerages allow you to buy either new issues or secondaries, although there may be fees and inconveniences incurred when you sell.  Goodasgold could you just transfer that IRA to a brokerage that allows you to buy the bonds directly?

I do keep some money in TLT in each of my PP accounts (except taxable) but it's mainly to accumulate funds in between Treasury bond purchases.

Of note, you can buy bonds at Treasury Direct, but you're limited to new issues and you have to transfer to a brokerage to sell them.

I bought TLT today because I'm doing tax loss harvesting between TLT and individual 30 year bonds. If TLT goes up in 30 days, I'll keep it for the year and then sell it since I'm still in the 0% long-term capital gains group. If it goes down in 30 days, I'll switch back to a 30 year bond again and pocket that tax loss as well.

[foglifter]

I'm aware of the goodness of individual bonds and I do buy them directly in my other account, which is a Fidelity IRA. This account has limitations as it acts as a brokerage window in my HSA account. I can't move the money from it anywhere and I don't want to use it for anything but Treasury bonds to avoid state taxes (yes, CA doesn't recognize HSAs). So, my question is pretty much limited to choosing between ETFs. Either 100% TLT, or EDV/IEI.

[dualstow]

After reading this thread (finally) I'm more convinced than ever that buying 30 year treasuries via brokerages is the way to go. 
...

I bought TLT today because I'm doing tax loss harvesting between TLT and individual 30 year bonds. If TLT goes up in 30 days, I'll keep it for the year and then sell it since I'm still in the 0% long-term capital gains group. If it goes down in 30 days, I'll switch back to a 30 year bond again and pocket that tax loss as well.

I'm in the 0% bracket for long-term gains, which means I don't do any harvesting at all.
Does that make sense? I assume you mean, Greg, that you're in 0% because you haven't overdone it with gains, but maybe you mean you're in a low bracket. In which case, do you need to do any tax loss harvesting ever?

[Xan]

Right, dualstow.  It seems to me that if you're in an income bracket where your capital gains rate is 0%, this is the time to capture GAINS, not losses.

[Greg]

After reading this thread (finally) I'm more convinced than ever that buying 30 year treasuries via brokerages is the way to go. 
...

I bought TLT today because I'm doing tax loss harvesting between TLT and individual 30 year bonds. If TLT goes up in 30 days, I'll keep it for the year and then sell it since I'm still in the 0% long-term capital gains group. If it goes down in 30 days, I'll switch back to a 30 year bond again and pocket that tax loss as well.

I'm in the 0% bracket for long-term gains, which means I don't do any harvesting at all.
Does that make sense? I assume you mean, Greg, that you're in 0% because you haven't overdone it with gains, but maybe you mean you're in a low bracket. In which case, do you need to do any tax loss harvesting ever?

Unless I have something incorrect, I do tax-loss harvesting for long vs. short. I'm currently in the 15% tax bracket. If I sell at a loss within the first year, I can claim that for the 15% capital gains short-term loss. If I know I'm going to have a gain, I hold it for over a year, let it turn into a long-term gain, and sell at 0% federal capital gains.

Kinda a heads I win, tails you lose to the tax-man so to speak.

[rickb]

Per the latest annual report I can find, Black Rock has currently loaned out about 39% of the bonds it "owns" in TLT.  This shows up as short term investments in the schedule of investments (p. 26).  The cash collateral they've received for these loans is primarily (90%) in Black Rock's institutional MM fund.

It looks like about 40% of IEI's holding are loaned out as well (p. 22), with the collateral for these loans also primarily (86%) in their institutional MM fund.

In contrast, Vanguard's latest semi-annual report for EDV shows no assets attributed to lending activities.  I don't know for sure that they don't hide this in some other statement, but I would think it would show up in the annual/semi-annual reports.

[mathjak107]

considering that i owned a money market that went belly up and i lost a bit of money in it ,  swapping what is considered the safest investment in the world for one that has already demonstrated failure  goes against the pp principals .

there is a reason it does not use corporate bonds and money markets with commercial paper  .

[dualstow]

...
do you need to do any tax loss harvesting ever?

Unless I have something incorrect, I do tax-loss harvesting for long vs. short. I'm currently in the 15% tax bracket. If I sell at a loss within the first year, I can claim that for the 15% capital gains short-term loss. If I know I'm going to have a gain, I hold it for over a year, let it turn into a long-term gain, and sell at 0% federal capital gains.

Kinda a heads I win, tails you lose to the tax-man so to speak.

Ah, I think I get it. Though I don't play it that way, I see what you mean. Long & short.
I guess I *do* do something like that with risky individual stocks, but it's driven more by cutting my losses on something that may never come back.