Why Hold Long Bonds Now

[fpugh1950]

I have been investing in a permanent portfolio mix of 25% equally in the four asset classes for one year now. Obviously this past year, gold and long bonds have tanked and the stock market has gone up tremendously. As I prepare to rebalance, I am faced with a question on bonds. Bonds have already dropped this year. The likelihood of interest rates dropping and bond prices rising seems very small since rates are so low already. If rates rise, then bond prices will drop even more.  I really don't want to mess with the PP approach as it has worked so well over the years. However, It seems to me that the Fed's tapering (tampering) program has thrown a whole different factor into the equation. Do I go ahead and rebalance and put more money into bonds when it seems that they can do nothing but drop even more? Is there anything that could cause bond prices to rise that I am missing? Especially interested in hearing from some of you who have weathered storms in the past.

[Tortoise]

When there is eventually another financial crisis, money will flow out of stocks and some of it will go into long Treasury bonds. Doesn't matter much what interest rates are when that happens. Money has to flow somewhere. If it's flowing out of something, it's flowing into something else.

[AdamA]

Keep your bonds. 

Rates can absolutely get lower. 

[dualstow]

This seems to be the single scariest step to take for majority of us, me included. Even more daunting than the first stab at buying physical gold.

There is talk on a couple other threads of buying shorter term treasuries, e.g. 7- and 10-year notes, obviating both cash and 30-year bonds.
It's tempting, but I don't like it since I need cash anyway. Perhaps this option is best for those who live in countries that don't sell long bonds.

[Boltleg]

The bond market is pretty efficient, much like the stock market, and picking a bond duration is like picking a stock sector. All other investors also know that rates will someday rise, and this risk is priced into the value (and therefore yield) of longer bonds. Shortening your bond duration at this time is not the logical reaction to knowing that rates will someday rise—it's a bet that rates will rise higher and/or faster than the market predicts. If they rise less or more slowly than the market has predicted, then the long-term bond investor is rewarded more than their short-term peers in the form of collecting higher coupons over the whole period. Last I checked, interest rates have had "nowhere to go but up" for ~4 years but it hasn't happened.

[moda0306]

The bond market is pretty efficient, much like the stock market, and picking a bond duration is like picking a stock sector. All other investors also know that rates will someday rise, and this risk is priced into the value (and therefore yield) of longer bonds. Shortening your bond duration at this time is not the logical reaction to knowing that rates will someday rise—it's a bet that rates will rise higher and/or faster than the market predicts. If they rise less or more slowly than the market has predicted, then the long-term bond investor is rewarded more than their short-term peers in the form of collecting higher coupons over the whole period. Last I checked, interest rates have had "nowhere to go but up" for ~4 years but it hasn't happened.

Yes. Yes. Yes.

[Gumby]

The bond market is pretty efficient, much like the stock market, and picking a bond duration is like picking a stock sector. All other investors also know that rates will someday rise, and this risk is priced into the value (and therefore yield) of longer bonds. Shortening your bond duration at this time is not the logical reaction to knowing that rates will someday rise—it's a bet that rates will rise higher and/or faster than the market predicts. If they rise less or more slowly than the market has predicted, then the long-term bond investor is rewarded more than their short-term peers in the form of collecting higher coupons over the whole period. Last I checked, interest rates have had "nowhere to go but up" for ~4 years but it hasn't happened.

Yes. Yes. Yes.

Well said

[moda0306]

The bond market is pretty efficient, much like the stock market, and picking a bond duration is like picking a stock sector. All other investors also know that rates will someday rise, and this risk is priced into the value (and therefore yield) of longer bonds. Shortening your bond duration at this time is not the logical reaction to knowing that rates will someday rise—it's a bet that rates will rise higher and/or faster than the market predicts. If they rise less or more slowly than the market has predicted, then the long-term bond investor is rewarded more than their short-term peers in the form of collecting higher coupons over the whole period. Last I checked, interest rates have had "nowhere to go but up" for ~4 years but it hasn't happened.

Yes. Yes. Yes.

Well said

You're complimenting me right?

Jk. Hopefully we've got another melveyr here.  It's almost fun getting schooled on Econ by a guy who was just able to buy his first beer.

It's odd when I'm the one arguing for the side of "Um, actually, the markets work pretty damn well in this area" against those that would otherwise want to call me a socialist or statist.

[MediumTex]

The bond market is pretty efficient, much like the stock market, and picking a bond duration is like picking a stock sector. All other investors also know that rates will someday rise, and this risk is priced into the value (and therefore yield) of longer bonds. Shortening your bond duration at this time is not the logical reaction to knowing that rates will someday rise—it's a bet that rates will rise higher and/or faster than the market predicts. If they rise less or more slowly than the market has predicted, then the long-term bond investor is rewarded more than their short-term peers in the form of collecting higher coupons over the whole period. Last I checked, interest rates have had "nowhere to go but up" for ~4 years but it hasn't happened.

Single ladies in the club
Trackin' players packin' nerve
Who can ride the long bond
Without worryin' bout the curve

[dualstow]

lol. Thanks for that. I'm getting dragged to a night of samba music until midnight, and I don't dance.
At least I'll be smiling about the post above all night.

[Roberto]

I have just implemented the PP with about 100k of retirement money, but even after reading HB's shorter version and Craig R.'s longer version of the story, I still find myself unconvinced on the bonds portion.  I keep wondering if HB would be sticking to his guns in the current economy.  Nobody seems to honestly believe anymore that the American government's obligations can actually ever be paid short of incessant printing,  and I can't find anyone else (other than you folks) recommending bonds -and definitely not long bonds- unless they somehow profit on the sale.

Sorry to beat a dead horse...but I just tied up 25% of the money on bonds yielding 3.625-3.75%, and I'm not supposed to touch any of them for another 5 years, and only then to replace them with more promises from an insolvent borrower? 

Otherwise, I love the rest of the program, and have been looking at the "PP- Cash" possibility on this forum.  Might a "PP-Bonds" also be workable?  Thanks!

[Pointedstick]

Sorry to beat a dead horse...but I just tied up 25% of the money on bonds yielding 3.625-3.75%, and I'm not supposed to touch any of them for another 5 years, and only then to replace them with more promises from an insolvent borrower?

Promises? Insolvent? Can you name any other borrowers with the largest military force in the world? We're not talking about bonds issued by Ye Olde Spark Plugs inc. The normal rules about bond risks don't apply when you're talking about the world's reserve currency issuer and bully policeman. The risks are different.

Welcome to the forum and the PP, by the way.

[Kshartle]

Trust your gut on this one. Sell those bonds.

The entity that is promising to pay can never keep it's promise. It can never return to you the value you loan it now. It will piss it all away on welfare schemes.

Think about the worst junk bond you can think of....at least that rabble doesn't have a business model based on pissing money away on deadbeats.

They will pay you off with printed money that will push stocks and gold up higher.

Put the money there. Suffer the drab of extra volitility and get the gains. They are there for the taking. Stop looking at your investments every sinlge day. Fight a war not a battle. Let everyone else lose their money loaning to the government. The government is in a hopeless situation. They will act tough but it is crumbling.

[Pointedstick]

Kshartle, I think you're welcome to present your point of view here, but let's try to keep it out of the financial discussions. You don't even use the PP, and this is a forum primarily for those of us who do. Please don't just scare people off with this doomer porn. The place to make arguments against the PP is not to new members who are just getting started. It's awfully rude.

[Kshartle]

Kshartle, I think you're welcome to present your point of view here, but let's try to keep it out of the financial discussions. You don't even use the PP, and this is a forum primarily for those of us who do. Please don't just scare people off with this doomer porn. The place to make arguments against the PP is not to new members who are just getting started. It's awfully rude.

PS I just erased a post dripping with sarcasm because I think this is a serious matter.

Do you really think someone with any kind of long-term horizon is served by buying 30 year US T-bond yielding 3.75%?

Remember the thread about caring about your fellow human and being a dick if you don't? If I don't respond to someone who is scared to do what I think is foolish.......then I'm a dick if I don't say they should trust thier gut.

And I think it's rude to just try to suck them into buying something like it's a damn cult.

And it's insulting to them to act like they're incapable of making their own decisions. 

I know you're not like that but dang man.......

[l82start]

fortunately others can come long and refute those opposing points of view that do get posted, they are a good place to point out that while doomer porn may have a possibility of coming true, there are other scenarios that also have a possibility of coming true, and that the fundamental reason behind the PP idea, is the recognition that we are awful (or unlikely to be good at) at predicting which may actually be true or be more likely, and we hedge our bets to preserve wealth no matter what.... 

[Pointedstick]

PS I just erased a post dripping with sarcasm because I think this is a serious matter.

Do you really think someone with any kind of long-term horizon is served by buying 30 year US T-bond yielding 3.75%?

If it dampens the volatility of your portfolio, and you're looking for a low-volatility portfolio, then yes. You said it yourself: Roberto should man up and accept the greater volatility of a gold-and-stocks portfolio. What if he doesn't want to? What if 50% gold is too scary for him? What if an integrated cash position is appealing? It's awfully presumptuous of you to, on the basis of a single post with no context, tell Roberto to abandon his present course of action (that this entire forum happens to be dedicated to) and adopt the portfolio that YOU use on the basis of a decidedly negative view of the U.S. government that is not even shared by most libertarians and even many anarcho-capitalist types.

I mean, don't you see the chutzpah of that? It's like standing outside the door of a nice restaurant and telling people to go home and cook their own meals instead.

[Kshartle]

PS I just erased a post dripping with sarcasm because I think this is a serious matter.

Do you really think someone with any kind of long-term horizon is served by buying 30 year US T-bond yielding 3.75%?

If it dampens the volatility of your portfolio, and you're looking for a low-volatility portfolio, then yes. You said it yourself: Roberto should man up and accept the greater volatility of a gold-and-stocks portfolio. What if he doesn't want to? What if 50% gold is too scary for him? What if an integrated cash position is appealing? It's awfully presumptuous of you to, on the basis of a single post with no context, tell Roberto to abandon his present course of action (that this entire forum happens to be dedicated to) and adopt the portfolio that YOU use on the basis of a decidedly negative view of the U.S. government that is not even shared by most libertarians and even many anarcho-capitalist types.

I mean, don't you see the chutzpah of that? It's like standing outside the door of a nice restaurant and telling people to go home and cook their own meals instead.

There is no chutzpah in telling someone I agree with their assesment and I think they should trust their intuition.....particularly when I have argued the logic for thier stance in detail many times.

To me the chutzpah is in telling someone to blindly follow an idea without regard to their own reason and logic....spend thier money on so called investments they don't trust and hold onto them regardless of anything...because of a book I read that made me feel safe.

I love Browne. I don't think in one million years he would put 50% of his money in government bonds right now....it seems insane to me.

My investments are 100% apolitical. They are based on as objective an assesment of the US government's situation as I can muster. I've explained them in detail. The only retort here is ever "yeah, they're broke but so what they can print". Well ok....then why hold their paper if you are younger? Never an answer from you guys........

[KevinW]

Well, this was posted in the Bonds section of a forum dedicated to implementing the Permanent Portfolio. So I think it's safe to presume that someone who posts there is interested in buying bonds as part of a Permanent Portfolio. It's not like this is the I'm New To Investing and Don't Know Where To Start forum.

Discussion of other investing approaches and there merits aren't really on topic here. If they are appropriate anywhere on this forum, it's in the Other Discussions section.

[edsanville]

I love Browne. I don't think in one million years he would put 50% of his money in government bonds right now....it seems insane to me.

Do you think Browne originally included 50% government bonds because he loved and trusted the government?

[Kshartle]

Well, this was posted in the Bonds section of a forum dedicated to implementing the Permanent Portfolio. So I think it's safe to presume that someone who posts there is interested in buying bonds as part of a Permanent Portfolio. It's not like this is the I'm New To Investing and Don't Know Where To Start forum.

Discussion of other investing approaches and there merits aren't really on topic here. If they are appropriate anywhere on this forum, it's in the Other Discussions section.

The topic is "Why hold long bonds now?"

Do you think that means the ONLY appropriate response is.......because the PP says so?

By my understanding the original poster posed a question because he actually wanted a discussion on the merits of holding bonds.....not a robotic mantra.

If you guys are so comfortable with holding your bonds why do you care if I disagree and why can't you help me understand how the government will be able to make good on them without lots of inflation?

[Kshartle]

I love Browne. I don't think in one million years he would put 50% of his money in government bonds right now....it seems insane to me.

Do you think Browne originally included 50% government bonds because he loved and trusted the government?

No

[KevinW]

If you guys are so comfortable with holding your bonds why do you care if I disagree and why can't you help me understand how the government will be able to make good on them without lots of inflation?

It's OK to disagree, but these discussions are repetitive and their tenor is insulting.

[Roberto]

I appreciate everyone jumping in on this.  I am no economist, so please correct me....

Either interest rates will go up or stay the same, in which case I'd rather  enjoy the benefits of holding cash.  Yes, they could go down another few points, but is it possible that a drop from about 3.5% to  0 % would cause a greater benefit than an added 3.5% in value?  Is there an exponential growth possibility here that I am missing?

PS, I realize that Uncle Sam is not Ye Olde Spark Plugs Inc., but he sure ain't as good as he once was.  In modern times, no "world's reserve currency" has lasted longer than a couple of centuries.  In the last seven  hundred years or so, the Florentines, Venetians, Dutch, Spanish, British, and now Americans have all temporarily enjoyed  that financial dominance; and although no other nation is ready for that role quite yet, barring some huge cultural change, the American house of cards is likely to eventually collapse under the weight of its own debt.  To me, that scenario seems much more plausible today than it did eight years ago when we lost the genius behind the whole PP strategy.

WWHD?   

[Pointedstick]

I appreciate everyone jumping in on this.  I am no economist, so please correct me....

Either interest rates will go up or stay the same, in which case I'd rather  enjoy the benefits of holding cash.  Yes, they could go down another few points, but is it possible that a drop from about 3.5% to  0 % would cause a greater benefit than an added 3.5% in value?  Is there an exponential growth possibility here that I am missing?

If rates drop to zero, then not only can people with existing bonds with higher coupon rates make a ridiculous amount of money selling, but they will be in a perfect position to then move into cash instead while they wait for rates to rise. This falls in the category of "not 100% PP" but nobody said the PP had to be a brainless portfolio. If bond rates fall to zero, there's literally no advantage to holding them instead of cash. The lower bound distinguishes bonds from stocks and gold that have no practical limit on their growth.

PS, I realize that Uncle Sam is not Ye Olde Spark Plugs Inc., but he sure ain't as good as he once was.  In modern times, no "world's reserve currency" has lasted longer than a couple of centuries.  In the last seven  hundred years or so, the Florentines, Dutch, Spanish, British, and now Americans have all temporarily enjoyed  that financial dominance; and although no other nation is ready for that role quite yet, barring some huge cultural change, the American house of cards is likely to eventually collapse under the weight of its own debt.

Totally agree. But "eventually" and "a couple of centuries" span a lot of time. Is it going to happen tomorrow? In 20 years? 50 years? 150? Because each of those answers would suggest a very, very different present course of action. Thankfully, the PP keeps us from having to make that guess. We hold 25% in gold, which is our "disaster insurance" for such dramatic upheavals.

Gold actually has a lot of parallels with insurance in that really it's something you shouldn't feel like you have to use. If gold is going up, it means that bad things are happening. All else being equal, we should prefer a world so stable that it doesn't need gold (an unproductive asset that has no associated income stream).

Imagine that gold is like homeowner's insurance. You hope you'll never need to use it because your house remains safe. But think about it: if you knew that your house was about to be destroyed, would you increase your homeowner's insurance, or just leave the house? That's kind of the way I feel about doomer porn. If you think that things are really so bad, just having more gold isn't gonna cut it. You should take more dramatic steps to protect yourself from the impending disaster.

It's easy to get swept up in the cult of negativity, and there are degrees of this; the PP is a more "pessimistic" portfolio than a Boglehead stock-and-bond portfolio, but that pessimism means that it takes us into contact with people who are even more pessimistic than us and prefer large amounts of gold or cash. Personally, I think the PP offers the right balance of optimism and pessimism for me, but I can't say that about you or anybody else. We all have to make that determination for ourselves. If Kshartle's arguments are convincing to you, the PP might not be the best portfolio for your psychological makeup.