Maximum Bond Upside

Discussion of the Bond portion of the Permanent Portfolio

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MachineGhost
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Maximum Bond Upside

Post by MachineGhost » Wed Jan 07, 2015 5:13 am

I may be rehashing a previous thread, but I'm wondering how much upside bonds have in terms of capital gains at current yields to reach 0%?  Since stocks are about 75% above where they need to be to reach a secular bear market low, I'm suddenly curious if bonds have enough upside juice left to offer complete protection.  Anyone?
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Lang
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Re: Maximum Bond Upside

Post by Lang » Wed Jan 07, 2015 5:25 am

It depends on the maturity and the coupon rate. A rough approximation is given by duration- if the bond's duration is 5 years and YTM is 2%, then the capital gain on that bond will be roughly 5x2=10% if its YTM were to drop to 0%. I usually use quotenet.com to find such data.

To see the precise relationship between the bond's yield and its price, you can use a price/yield calculator, e.g. Fidelity's: https://powertools.fidelity.com/fixedincome/yield.do
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Re: Maximum Bond Upside

Post by MachineGhost » Wed Jan 07, 2015 5:55 am

Lang wrote: It depends on the maturity and the coupon rate. A rough approximation is given by duration- if the bond's duration is 5 years and YTM is 2%, then the capital gain on that bond will be roughly 5x2=10% if its YTM were to drop to 0%. I usually use quotenet.com to find such data.

To see the precise relationship between the bond's yield and its price, you can use a price/yield calculator, e.g. Fidelity's: https://powertools.fidelity.com/fixedincome/yield.do
Looks like its roughly 40-50% upside gain left.  17 * 2.5% = 42.5% or the calculator shows it around 50% extrapolated.  That's very interesting!  There's not actually enough juice left.  So long as it doesn't happen all in one year, although I'm not sure how rebalancing into even lower yields along the way would improve the situation.
Last edited by MachineGhost on Wed Jan 07, 2015 6:01 am, edited 1 time in total.
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Re: Maximum Bond Upside

Post by Lang » Wed Jan 07, 2015 7:37 am

That's how it is everywhere. Some countries, like Canada and the UK, have recently issued ultra-long 50 year government bonds. These have higher duration than 30 year bonds and therefore carry more "juice" within them.

There was some talk last year that the US Treasury might issue ultra-long bonds, but as far as I know, this hasn't happened so far. Some US Corporates, such as Microsoft and Ford, have recently issued ultra-long bonds. But from what I see, almost all of these bonds are callable, so their effective duration is actually poorer than 30 year Treasuries.
Last edited by Lang on Wed Jan 07, 2015 7:45 am, edited 1 time in total.
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Re: Maximum Bond Upside

Post by Reub » Wed Jan 07, 2015 2:19 pm

Can't US bonds go past zero into negative territory too?
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Re: Maximum Bond Upside

Post by Reub » Wed Jan 07, 2015 2:31 pm

Have you noticed how today's bond "correction" was barely down at all even though we've had a massive move up preceding it? IMHO I would not rebalance out of long bonds unless or until you actually hit the rebalance band.....and not before that.
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Re: Maximum Bond Upside

Post by Alanw » Wed Jan 07, 2015 2:35 pm

US 10 year yield = 1.95,  Spain 10 year yield = 1.71. Where would you rather invest? We could have a long way to go.
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Re: Maximum Bond Upside

Post by moda0306 » Wed Jan 07, 2015 2:46 pm

WHAT?

When the hell did Spain's yields recover... weren't they like a Greece Jr. a couple years ago?
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Re: Maximum Bond Upside

Post by Alanw » Wed Jan 07, 2015 2:52 pm

Just checked Euro bond yields on CNBC web site. UK = 1.6, Germany = .47, even Italy = 1.88. Go figure.
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Re: Maximum Bond Upside

Post by barrett » Wed Jan 07, 2015 3:22 pm

moda0306 wrote: WHAT?

When the hell did Spain's yields recover... weren't they like a Greece Jr. a couple years ago?
I think even when Spanish yields were "high" they were only at about 6%, no? Damn! I knew I should have gone long on Spain!

I am guessing that the fact these countries are part of the EU has some kind of mitigating effect on bond prices. Anyone care to explain if this is true?
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Re: Maximum Bond Upside

Post by MachineGhost » Wed Jan 07, 2015 11:30 pm

barrett wrote: I am guessing that the fact these countries are part of the EU has some kind of mitigating effect on bond prices. Anyone care to explain if this is true?
It is.  Germany subsidizes the irresponsible members.  Watch for Greece to flip the EU the bird and exit.  They really have no choice as some of the Greek are literally starving to death due to EU-imposed austerity.  Madness.

So I guess there is hope if the Treasury issues longer-duration bonds.  So 50-years at 1% would be equivalent to 30-years at 2.5%?  They could keep issuing longer and longer durations and keep pushing rates back to 0% over and over.  That sure sounds like a literal "pushing on a string" to me!

Yes, it seems obvious now Keynesianism is imploding around the world.  The weird thing is it seems to be a "soft default" except for Europe which has no printing press.
Last edited by MachineGhost on Wed Jan 07, 2015 11:37 pm, edited 1 time in total.
"All generous minds have a horror of what are commonly called 'Facts'. They are the brute beasts of the intellectual domain." -- Thomas Hobbes

Disclaimer: I am not a broker, dealer, investment advisor, physician, theologian or prophet.  I should not be considered as legally permitted to render such advice!
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Re: Maximum Bond Upside

Post by MachineGhost » Wed Jan 07, 2015 11:37 pm

Reub wrote: Can't US bonds go past zero into negative territory too?
Do we still get capital gains in negative yield territory?  It does make sort of sense because without a gold standard, something has got to give and it should be negative yields rather than a peg.
"All generous minds have a horror of what are commonly called 'Facts'. They are the brute beasts of the intellectual domain." -- Thomas Hobbes

Disclaimer: I am not a broker, dealer, investment advisor, physician, theologian or prophet.  I should not be considered as legally permitted to render such advice!
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