Maximum Bond Upside

Discussion of the Bond portion of the Permanent Portfolio

Moderator: Global Moderator

User avatar
MachineGhost
Executive Member
Executive Member
Posts: 10054
Joined: Sat Nov 12, 2011 9:31 am

Re: Maximum Bond Upside

Post by MachineGhost » Sat Jan 10, 2015 11:00 pm

Austen Heller wrote: I have been taking the alternative 'bullet' approach of putting my bond+cash holdings together into a much larger position of shorter-term Treasury bonds.  The 5-year bonds give you decent yield (1.5%) plus weak deflation protection. You also get potential capital gains from 'riding the yield curve', since the yield curve is steep here; this is something you don't get from the 30-year bond, since the yield curve is pretty much flat there.  Of course, the yield curve is not static, so it's hard to make long-term investment decisions based on it's current shape.
Excellent charts, thanks!

I have done similar with my duration risk because I'm looking at it from a long-term risk vs reward perspective (and because trendfollowing didn't work during the bear market).  But the problem with this approach is you lose the hedging potential.  If I recall, T-Bonds were up about 22% last year even though equities didn't correct.  If they had and you had a much lower duration, you would have taken on portfolio losses that the HBPP would have not.  This is a source of concern to me because I have certain Prosperity exposures that are not immediately liquid to sell in terms of negative trendfollowing (which also has its own emotional pitfalls just as buy and hold does).

Of course, the answer just came to me...  you definitely need to risk level the PP if you're going to lower the duration.  Fortunately, volatility seems to correspond to duration very well.
Last edited by MachineGhost on Sat Jan 10, 2015 11:04 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!
User avatar
Austen Heller
Executive Member
Executive Member
Posts: 154
Joined: Tue Aug 24, 2010 6:58 pm

Re: Maximum Bond Upside

Post by Austen Heller » Wed Feb 03, 2016 12:58 pm

Checking back in with this thread...international bond yields have gotten even more crazy.
Japan: 30-yr = 1.06%, with everything negative below 10 years.
Swiss: 30-yr = 0.278%, everything negative below 15 years.
Insane.  Still lots of upside for holders of US bonds, with the 30-yr at 2.66% and the entire yield curve still positive.
murphy_p_t
Executive Member
Executive Member
Posts: 998
Joined: Fri Jul 02, 2010 3:44 pm

Re: Maximum Bond Upside

Post by murphy_p_t » Wed Feb 03, 2016 1:04 pm

Thank u HB!
Reub
Executive Member
Executive Member
Posts: 3158
Joined: Fri Jan 21, 2011 5:44 pm

Re: Maximum Bond Upside

Post by Reub » Wed Feb 03, 2016 1:09 pm

How much will we make when long bonds reach -1%?
User avatar
Austen Heller
Executive Member
Executive Member
Posts: 154
Joined: Tue Aug 24, 2010 6:58 pm

Re: Maximum Bond Upside

Post by Austen Heller » Wed Feb 03, 2016 1:42 pm

Reub wrote: How much will we make when long bonds reach -1%?
Well, I went ahead and updated my previous chart to include negative yields.  The red dot represents current market conditions in the US, 30-year bond yield ~ 2.5%, price 100.  If yield drops to -1%, then price is 222.

Image

*bond pricing calculations performed as described here:
http://www.investopedia.com/university/ ... dbond2.asp
Reub
Executive Member
Executive Member
Posts: 3158
Joined: Fri Jan 21, 2011 5:44 pm

Re: Maximum Bond Upside

Post by Reub » Wed Feb 03, 2016 2:10 pm

So we'll more than double our money? Very good!
User avatar
BearBones
Executive Member
Executive Member
Posts: 689
Joined: Sat Sep 18, 2010 4:26 pm

Re: Maximum Bond Upside

Post by BearBones » Wed Feb 03, 2016 2:13 pm

Haven't read this thread thoroughly, and may have asked this before. But why ever own a neg yielding bond when you can own cash?
Jack Jones
Executive Member
Executive Member
Posts: 268
Joined: Mon Aug 24, 2015 3:12 pm

Re: Maximum Bond Upside

Post by Jack Jones » Wed Feb 03, 2016 2:19 pm

BearBones wrote: Haven't read this thread thoroughly, and may have asked this before. But why ever own a neg yielding bond when you can own cash?
If someone will pay you more for that bond than you paid for it.
User avatar
Xan
Administrator
Administrator
Posts: 3010
Joined: Tue Mar 13, 2012 1:51 pm

Re: Maximum Bond Upside

Post by Xan » Wed Feb 03, 2016 2:29 pm

Jack Jones wrote:
BearBones wrote: Haven't read this thread thoroughly, and may have asked this before. But why ever own a neg yielding bond when you can own cash?
If someone will pay you more for that bond than you paid for it.
Okay, but why would anyone ever buy one?
Jack Jones
Executive Member
Executive Member
Posts: 268
Joined: Mon Aug 24, 2015 3:12 pm

Re: Maximum Bond Upside

Post by Jack Jones » Wed Feb 03, 2016 2:39 pm

Xan wrote:
Jack Jones wrote:
BearBones wrote: Haven't read this thread thoroughly, and may have asked this before. But why ever own a neg yielding bond when you can own cash?
If someone will pay you more for that bond than you paid for it.
Okay, but why would anyone ever buy one?
Some institutions don't have a choice, right? They can't just stockpile $100 bills.
User avatar
BearBones
Executive Member
Executive Member
Posts: 689
Joined: Sat Sep 18, 2010 4:26 pm

Re: Maximum Bond Upside

Post by BearBones » Wed Feb 03, 2016 3:40 pm

Ah, so STT even worse, so institutions still buy longer term treasuries! Boy I feel stupid.

Back when this forum was in its infancy there were such high level discussions of economics and such things. Now feel like many of the newer folks are asking the same questions all over again and things aren't being discussed as much. Have to search for the answers.

And then theres me. I'm not new. Just ask the same damn rudimentary questions over and over again because I can't remember the answer.  ???
User avatar
MediumTex
Administrator
Administrator
Posts: 9078
Joined: Sun Apr 25, 2010 11:47 pm
Contact:

Re: Maximum Bond Upside

Post by MediumTex » Thu Feb 04, 2016 2:38 am

BearBones wrote: Ah, so STT even worse, so institutions still buy longer term treasuries! Boy I feel stupid.

Back when this forum was in its infancy there were such high level discussions of economics and such things. Now feel like many of the newer folks are asking the same questions all over again and things aren't being discussed as much. Have to search for the answers.

And then theres me. I'm not new. Just ask the same damn rudimentary questions over and over again because I can't remember the answer.  ???
I don't remember half the things I've posted here.
Only strength can cooperate. Weakness can only beg.
-Dwight Eisenhower
Post Reply