Maximum Bond Upside

Discussion of the Bond portion of the Permanent Portfolio

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barrett
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Re: Maximum Bond Upside

Post by barrett » Wed Feb 10, 2016 11:13 am

I have to say that I am really happy to see super-low long-bond rates being discussed. In my mind I always think of this conundrum as "Pfanni's Dilemma" because he has been asking for feedback and not getting much. I know that belgo also had some related questions recently.

FWIW, I am also in the extra cash camp. As far as when to buy back in when/if rates rise, obviously that's an individual call, but I think we have to use our brains and, as Craig has stated, not rely on dogma. Right now with the rate on 30-year US debt being relatively high compared to what we see in Japan and Europe, I think we can reasonably guess that a further decline in rates here in the US is quite possible.

Lastly, I would probably go with a stutter-step approach somewhere between 2% and 1% and just hold fewer long bonds... not eliminate them altogether. Still pondering this though.
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dualstow
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Re: Maximum Bond Upside

Post by dualstow » Wed Feb 10, 2016 11:27 am

Good post, barrett.
TLT is at 132.xy by the way. What's the highest it has ever gone? 135-140?
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stuper1
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Re: Maximum Bond Upside

Post by stuper1 » Wed Feb 10, 2016 11:43 am

Also, what would TLT be at if the long bond rate were at 1%?
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Austen Heller
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Re: Maximum Bond Upside

Post by Austen Heller » Wed Feb 10, 2016 12:29 pm

dualstow wrote: TLT is at 132.xy by the way. What's the highest it has ever gone? 135-140?
Google Finance shows that it made it up above 138 in the week of Jan 30, 2015.
stuper1 wrote: Also, what would TLT be at if the long bond rate were at 1%?
This isn't perfect, but using these current inputs:
TLT price 132, avg maturity 26.5 years, avg yield 2.38%
If yield falls to 1%, then price will be 174, an increase of 31.8% from today's price.
Holding long bonds at such low yields is like climbing Mt. Everest:  If you have the fortitude to make it to the peak, don't hang around for too long admiring the view!

Image
Last edited by Austen Heller on Wed Feb 10, 2016 12:35 pm, edited 1 time in total.
stuper1
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Re: Maximum Bond Upside

Post by stuper1 » Wed Feb 10, 2016 12:45 pm

I like the Mt. Everest analogy.

I also like the 35% rebalance band, which keeps me from having to rely on skill and fortitude.

Here's a question that's been discussed before.  If long bond yields are below a certain percentage (say X percent) and we hit a 15/35 rebalance band on any asset, instead of rebalancing to 4 x 25, should we put less than 25% into long bonds (say Y percent)? 

What values of X and Y do people on this forum like?  If Y is less than 25%, where does the remainder go?  Cash, or an even split between cash/stocks/gold, or what?
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Re: Maximum Bond Upside

Post by barrett » Wed Feb 10, 2016 12:49 pm

Thanks for posting that, AH. My take on the numbers you posted is that it's a dramatic move in bond yields that doesn't lift the overall PP by very much... roughly 8% if all else remains unchanged. This takes us back to MG's original question as to whether or not there is enough juice remaining in LTTs to really lift the entire portfolio.

Of course, when times are rough, breaking even - or even losing a bit - is fine. Sometimes it's a big plus to be able to stay invested and not get hammered.

I remember Sophie referencing a thread on this topic a couple of years ago. The question was essentially "When to dump long bonds?" Anyone know where that thread is? It would be interesting if the current answer jives with what folks felt a few years back.
Last edited by barrett on Wed Feb 10, 2016 2:26 pm, edited 1 time in total.
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dualstow
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Re: Maximum Bond Upside

Post by dualstow » Wed Feb 10, 2016 12:59 pm

Austen Heller wrote: Holding long bonds at such low yields is like climbing Mt. Everest:  If you have the fortitude to make it to the peak, don't hang around for too long admiring the view!
http://i65.tinypic.com/301k26p.jpg
Indeed! Thanks for that. Yeah, 138 sounds familiar.
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Re: Maximum Bond Upside

Post by BearBones » Wed Feb 10, 2016 8:36 pm

So pardon if this is totally ignorant. But where is my logic flawed below?

So if treasuries are turning negative, doesn't this mean severe deflation? Where else to move the money? Stocks, real estate, gold are all losing value vs the currency. The value of virtually everything you own plummets so everyone flees to cash, right? But if cash at everything from banks to Treasury Direct is yielding -1 to -2 (still better than owing other assets), wouldn't a 30 year TB of +1ish look pretty damn good?

I think that the flaw may be in the current environment may be and aberration of QE where central banks are forcing the rates lower to prevent deflation. Basically forcing everyone out of cash and safe investments to prop up sick markets.
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Austen Heller
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Re: Maximum Bond Upside

Post by Austen Heller » Wed Feb 10, 2016 9:29 pm

BearBones wrote: But if cash at everything from banks to Treasury Direct is yielding -1 to -2 (still better than owing other assets), wouldn't a 30 year TB of +1ish look pretty damn good?
You are right, cash at -1% is no good.  That is when I will be be turning to the Nickel Plan.  A regular nickel weighs 5 grams, which is the highest weight:value ratio of any coin.  So if you figure that 1 pound of nickels = $4.53592, then 1 ton of nickels = $9071.  Every time I need to protect another $9071, just go out and get a ton of nickels.  Of course, you do this piece by piece, not all at once.  Once your basement is full of nickels, you are set.  No need to worry about theft either, it will be too heavy.

Kyle Bass tried this a few years ago, but back then it made even more sense, since the nickel's melt value was higher than 5 cents; this is no longer the case (current melt value is about 2.6 cents).

http://www.businessinsider.com/why-kyle ... ls-2011-11

Of course, by the time that the proles have figured out that they should hang onto coinage, President Sanders will have already outlawed physical cash, just like Sweden.
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Re: Maximum Bond Upside

Post by Desert » Wed Feb 10, 2016 9:38 pm

Austen Heller wrote:
BearBones wrote: But if cash at everything from banks to Treasury Direct is yielding -1 to -2 (still better than owing other assets), wouldn't a 30 year TB of +1ish look pretty damn good?
You are right, cash at -1% is no good.  That is when I will be be turning to the Nickel Plan.  A regular nickel weighs 5 grams, which is the highest weight:value ratio of any coin.  So if you figure that 1 pound of nickels = $4.53592, then 1 ton of nickels = $9071.  Every time I need to protect another $9071, just go out and get a ton of nickels.  Of course, you do this piece by piece, not all at once.  Once your basement is full of nickels, you are set.  No need to worry about theft either, it will be too heavy.

Kyle Bass tried this a few years ago, but back then it made even more sense, since the nickel's melt value was higher than 5 cents; this is no longer the case (current melt value is about 2.6 cents).

http://www.businessinsider.com/why-kyle ... ls-2011-11

Of course, by the time that the proles have figured out that they should hang onto coinage, President Sanders will have already outlawed physical cash, just like Sweden.
That's beautiful.  But I am still bitter over the drop in nickel prices.  I began hoarding nickels a few years ago, and now my (admittedly small) stash serves only as a pathetic reminder of the crushing cycles in commodity prices. 

But one day, the price of nickel will recover.  And then ... then, my friends, who will be laughing...  you will all be my slaves on that glorious day. 
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BearBones
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Re: Maximum Bond Upside

Post by BearBones » Thu Feb 11, 2016 7:16 am

Austen Heller wrote: You are right, cash at -1% is no good.  That is when I will be be turning to the Nickel Plan... Once your basement is full of nickels, you are set...

Kyle Bass tried this a few years ago, but back then it made even more sense, since the nickel's melt value was higher than 5 cents; this is no longer the case (current melt value is about 2.6 cents)...
But if low or negative yields of cash and bonds are due to deflation, metals and other hard assets will continue to lose value rather than preserve or gain, right?
Lang
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Re: Maximum Bond Upside

Post by Lang » Thu Feb 11, 2016 8:58 am

Perhaps looking for a profitable investment (with a good risk/reward) in a deflationary environment is asking too much. The value of your money increases every year even without investing it in anything.
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