Maximum Bond Upside

Discussion of the Bond portion of the Permanent Portfolio

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Lang
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Re: Maximum Bond Upside

Post by Lang » Thu Feb 11, 2016 2:15 pm

Switzerland's 50 year bond now only yields 0.31, a record low. Also, all of its bonds up to 17 year maturity have negative yields.
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Re: Maximum Bond Upside

Post by craigr » Thu Feb 11, 2016 2:48 pm

Lang wrote: 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.
Yes. You might just have to hold tight. Dividends from stocks will provide some income that could go a lot further under bad deflation. But in a bad depression situation, it's more about losing less than making big profits.
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Re: Maximum Bond Upside

Post by portart » Thu Feb 11, 2016 6:21 pm

Today I looked at the chart of TLT, at all time highs...Soooo, I sold it all, took the cash and will sit and wait for a nice correction. For once I sold high.. any thoughts? I am out of balance now in my PP but, at all time highs in my acct. I won't feel too bad if it keeps raging.
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Re: Maximum Bond Upside

Post by ochotona » Thu Feb 11, 2016 7:30 pm

I just can't stand to buy stuff when it's on a panic parabolic melt-up.
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Re: Maximum Bond Upside

Post by dualstow » Thu Feb 11, 2016 7:45 pm

portart wrote: Today I looked at the chart of TLT, at all time highs...Soooo, I sold it all, took the cash and will sit and wait for a nice correction. For once I sold high.. any thoughts? I am out of balance now in my PP but, at all time highs in my acct. I won't feel too bad if it keeps raging.
Any thoughts? Only that I'm in no position to criticize. Many's the time I considered the same, like every time TLT breaches 130. (I'm holding bonds directly, but TLT is a convenient and simple gauge). After Craig said he'd sell at 1%, I really got the bug.

It's not like you're capitulating and selling at a loss, in which case I'd be highly critical.
I'd say enjoy your profits, don't rush back in while things are still high, obviously, and all is well:) Like Craig said, everyone has their number.
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Re: Maximum Bond Upside

Post by buddtholomew » Thu Feb 11, 2016 9:22 pm

I am resigned to always hold all PP assets within 15/35 rebalance bands, but reserve the right to manage my positions around the edges.
For example, I sold 10% of my gold holdings today for a 17% gain.
I also manage fixed income duration to 5.6 years which has me holding more cash than most.

My only recommendation is to hold all assets at all times.
Deciding when to re-enter LTT's is a daunting task.
What rate makes sense to you and how can you ensure that yields won't rise once you re-enter?
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Re: Maximum Bond Upside

Post by craigr » Thu Feb 11, 2016 9:51 pm

dualstow wrote:Any thoughts? Only that I'm in no position to criticize. Many's the time I considered the same, like every time TLT breaches 130. (I'm holding bonds directly, but TLT is a convenient and simple gauge). After Craig said he'd sell at 1%, I really got the bug.
FWIW. The reason I don't comment much on what I do is because I don't want people to blindly copy it.

Mostly though with unprecedented things going on with bonds, I just wanted to say that at some point you just have to take your chips and go home. Bonds are perhaps the only asset in the portfolio that the value risk vs. reward is pretty stark. Yields are what yields are and it's known what happens up or down as interest rates move. Gold doesn't have this indicator. Stocks don't either. Cash is cash and relatively stable and short interest rates moves can be waited out.

But again, with long bonds at 1% or less, the risk of holding them for me, is just not worth it. I bring up the issue now because I feel being quiet about it isn't doing any favors. You'll notice that I rarely ever comment on portfolio assets otherwise because mostly it's just noise. But long bonds below 1% is juggling nitroglycerin kind of risk in my mind and a horrible buy.

Again as others (and I) have pointed out. It's one thing to get out, but another to know when to get back in. I think it is safe to say though that bonds that are under 1% are probably not a hot buying opportunity and I'd avoid them regardless of portfolio theory. As when to get back in? I don't know. Again I haven't had to face this question yet. But I'll point out that people have been saying since 2008 that long bonds are a horrible idea and they've been wrong, wrong, wrong. So I could be joining that crowd if I sell out at 1%, but I'll just have to deal with that.

Hopefully Harry Browne will forgive me, but I think he'd be understanding when long bonds are paying 0.50% for 50 years that they aren't worth the risk. ;)

These are interesting times, guys. We could be witnessing the endgame for Keynesianism. The ultimate race to the bottom where mere mortals are all losers.
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Re: Maximum Bond Upside

Post by MediumTex » Thu Feb 11, 2016 10:55 pm

I have a different take on this issue.

Currently (and at all times), the market price represents a perfect balance between buyers and sellers, which means that there is no more upward pressure on prices than there is downward pressure.

It's true that there is not anywhere near the potential upside in LT bonds at this point that there was when rates were at 4%-4.5%, which is about as high as LT rates have been since 2008, but there is still plenty of upside that can be captured from here, even though that seems crazy.  When there are more buyers than sellers, rates will fall, regardless of where they are right now.

Any PP investor should be perfectly comfortable holding all four PP assets, even if he is certain that one of the assets is going to fall in value.  If one asset falls, another asset is likely to rise and protect you from overall portfolio losses.

If you sell now, you have the daunting task of deciding when to get back in.  You are just as likely to be right as you are to be wrong, which means that selling now and buying back in later might mitigate some future losses in this part of the portfolio, but it might also put you in a position of being paralyzed and failing to buy back in at, say, 2.5%, only to see rates drop back to 1%, which would cause you to miss out on a lot of gains when rates fell again.

I'm just holding tight.  I'm okay if LT treasuries take some losses.  At any given time, some part of the portfolio is always taking losses.

That's my two cents.

Don't put too much stock in anything Craig or I have to say on this topic, though.  We don't know anything that the rest of you don't know.  LT treasuries have provided outstanding service in recent years, and people have been hating them almost the whole way.  It's very hard to think clearly about something like this when fear and uncertainty begin to creep into your mind.  It seems unlikely that simply sticking with the basic PP recipe will lead to excessive future regret, but selling one of the assets hoping you can catch it at a good future re-entry point could easily lead to a series of bad decisions than could pollute your whole portfolio.
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Re: Maximum Bond Upside

Post by dragoncar » Fri Feb 12, 2016 12:22 am

Right now long bonds are not too far off my mortgage rate.  But if we go really low, sub 1%, and mortgage rates don't drop accordingly, I might have to join the "pay off you mortgage" camp
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Re: Maximum Bond Upside

Post by Lang » Wed Feb 24, 2016 6:43 am

Swiss bond yields keep breaking new lows. At the moment:

- All Swiss government bonds up to 20 years have a negative yield.
- 30 year bonds now have a yield of 0.19%. Maximum upside left in that bond (before yield reaches zero) is about 4%.
- 50 year bonds now have a yield of 0.28%. Maximum upside left in that bond is about 10%.
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Re: Maximum Bond Upside

Post by buddtholomew » Wed Feb 24, 2016 10:38 am

Lang wrote: Swiss bond yields keep breaking new lows. At the moment:

- All Swiss government bonds up to 20 years have a negative yield.
- 30 year bonds now have a yield of 0.19%. Maximum upside left in that bond (before yield reaches zero) is about 4%.
- 50 year bonds now have a yield of 0.28%. Maximum upside left in that bond is about 10%.
How has a negative interest rate affected the bond price?
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Re: Maximum Bond Upside

Post by dualstow » Wed Feb 24, 2016 10:53 am

craigr wrote:
dualstow wrote:Any thoughts? Only that I'm in no position to criticize. Many's the time I considered the same, like every time TLT breaches 130. (I'm holding bonds directly, but TLT is a convenient and simple gauge). After Craig said he'd sell at 1%, I really got the bug.
FWIW. The reason I don't comment much on what I do is because I don't want people to blindly copy it.
Makes sense. I don't think we should even copy what Harry Browne did, necessarily. For example, I don't do much geographical diversification of assets, in part because I don't have enough assets for it to really matter. And also partly because Swiss banks are succumbing to American pressure. I'll cross that bridge when I come to it.

Still, when you talk about selling at a certain point, that is something I certainly take into consideration. It's no different than when Harry Browne unloaded silver and talked about it in his newsletter. Of course, you're just mentioning your personal plan and not a recommendation in a newsletter, but in both cases, I take the new info under consideration.
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Re: Maximum Bond Upside

Post by Lang » Wed Feb 24, 2016 10:54 am

buddtholomew wrote:
Lang wrote: Swiss bond yields keep breaking new lows. At the moment:

- All Swiss government bonds up to 20 years have a negative yield.
- 30 year bonds now have a yield of 0.19%. Maximum upside left in that bond (before yield reaches zero) is about 4%.
- 50 year bonds now have a yield of 0.28%. Maximum upside left in that bond is about 10%.
How has a negative interest rate affected the bond price?
The 50 year bond was issued two years ago with a coupon rate of 2% and maturity in 2064. As I wrote, it now trades at a yield of 0.28%. The bond's price since its issuance has risen by 78%.
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Re: Maximum Bond Upside

Post by buddtholomew » Wed Feb 24, 2016 11:47 am

Lang wrote:
buddtholomew wrote:
Lang wrote: Swiss bond yields keep breaking new lows. At the moment:

- All Swiss government bonds up to 20 years have a negative yield.
- 30 year bonds now have a yield of 0.19%. Maximum upside left in that bond (before yield reaches zero) is about 4%.
- 50 year bonds now have a yield of 0.28%. Maximum upside left in that bond is about 10%.

The 50 year bond was issued two years ago with a coupon rate of 2% and maturity in 2064. As I wrote, it now trades at a yield of 0.28%. The bond's price since its issuance has risen by 78%.
Thanks Lang. What about shorter maturities with negative yields. How have they faired?
How has a negative interest rate affected the bond price?
Last edited by buddtholomew on Wed Feb 24, 2016 11:49 am, edited 1 time in total.
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Re: Maximum Bond Upside

Post by Lang » Wed Feb 24, 2016 12:15 pm

Over the same period, the 30Y was up by approximately 33% and the 10Y was up by approximately 13%.

Anyway, I just wanted to point out how crazy things are in Switzerland, and how, potentially, they could be in other countries as well.
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Re: Maximum Bond Upside

Post by ochotona » Wed Feb 24, 2016 12:21 pm

The stampede for the exit someday will be horrifying. When, we have no idea. Probably when people now age 17 earn their MBAs and start running things. They will have no context.

To them Nirp Zirp will be normal.
Last edited by ochotona on Wed Feb 24, 2016 12:24 pm, edited 1 time in total.
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Re: Maximum Bond Upside

Post by barrett » Wed Feb 24, 2016 2:10 pm

ochotona wrote: The stampede for the exit someday will be horrifying. When, we have no idea.
I would think for there to be a "stampede", there would have to be other safe havens for cash that are immediately obvious to a lot of people. The Swiss yields are just incredibly low, but why can't they stay that way for a long time? And the exit could be a slow climb back up to more normal historic rates.

Thanks for posting these numbers, Lang. Really gives us US investors something to think about.

On a related note, I was trying to explain this low/negative yield bond thing to a visiting Brazilian friend the other day. He buys government bonds that pay 7% above the rate of inflation (officially now 12%, I believe).
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Re: Maximum Bond Upside

Post by buddtholomew » Wed Feb 24, 2016 4:49 pm

barrett wrote:
ochotona wrote: The stampede for the exit someday will be horrifying. When, we have no idea.
I would think for there to be a "stampede", there would have to be other safe havens for cash that are immediately obvious to a lot of people. The Swiss yields are just incredibly low, but why can't they stay that way for a long time? And the exit could be a slow climb back up to more normal historic rates.

Thanks for posting these numbers, Lang. Really gives us US investors something to think about.

On a related note, I was trying to explain this low/negative yield bond thing to a visiting Brazilian friend the other day. He buys government bonds that pay 7% above the rate of inflation (officially now 12%, I believe).
Brazil - risk/reward..
As a US PP investor, should I be concerned with negative interest rates on long-term treasuries?
The price will increase but I will pay interest for holding the investment. Is that accurate?
If that's the case, is the interest I pay deductible in California? Half joking, 95% serious  ;)
Last edited by buddtholomew on Wed Feb 24, 2016 6:35 pm, edited 1 time in total.
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Re: Maximum Bond Upside

Post by ochotona » Wed Feb 24, 2016 10:40 pm

barrett wrote:
ochotona wrote: The stampede for the exit someday will be horrifying. When, we have no idea.
I would think for there to be a "stampede", there would have to be other safe havens for cash that are immediately obvious to a lot of people. The Swiss yields are just incredibly low, but why can't they stay that way for a long time? And the exit could be a slow climb back up to more normal historic rates.
If a bunch of people freak out one day because the interest changes from -0.20% to -0.10%, and start to sell, in these bond markets with low liquidity, and you can't match up a buyer with a seller, then the price will crash!
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Re: Maximum Bond Upside

Post by Lang » Thu Feb 25, 2016 2:38 am

There was already a "stampede" on that 50 year bond last year. The yield went up from 0.33% to 1.03% in a few months, and the bond price fell 21%.
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Re: Maximum Bond Upside

Post by barrett » Thu Feb 25, 2016 5:56 am

Lang wrote: There was already a "stampede" on that 50 year bond last year. The yield went up from 0.33% to 1.03% in a few months, and the bond price fell 21%.
I believe that more or less coincided with the move here in the US on the long bond from 2.25% to 3.25%. Yeah, it didn't feel great but it wasn't a disaster either. My position is still that with rates this low, one can lower the percentage of long bonds in a PP-style portfolio because they become so sensitive to rate changes in that environment. We don't need as many of them if they move up in price because of convexity. And we don't want as many for the same reason.
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Re: Maximum Bond Upside

Post by Lang » Thu Feb 25, 2016 10:56 am

Swiss bonds just aren't stopping. The 30 year yield fell today to 0.16% and the 50 year yield fell to 0.26%. Anyone wanna buy?

European bond yields (Germany, France, etc.) fell sharply as well.
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Re: Maximum Bond Upside

Post by Lang » Fri Feb 26, 2016 12:38 pm

The 50 year Swiss yield is down today yet again, from 0.26% to 0.22%. At this pace it will get to zero next week...
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Re: Maximum Bond Upside

Post by dualstow » Fri Feb 26, 2016 1:21 pm

Lang wrote: The 50 year Swiss yield is down today yet again, from 0.26% to 0.22%. At this pace it will get to zero next week...
.2% is pretty much zero. :-)
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Re: Maximum Bond Upside

Post by Reub » Tue Mar 01, 2016 1:33 pm

craigr wrote:
dualstow wrote:Any thoughts? Only that I'm in no position to criticize. Many's the time I considered the same, like every time TLT breaches 130. (I'm holding bonds directly, but TLT is a convenient and simple gauge). After Craig said he'd sell at 1%, I really got the bug.
FWIW. The reason I don't comment much on what I do is because I don't want people to blindly copy it.

Mostly though with unprecedented things going on with bonds, I just wanted to say that at some point you just have to take your chips and go home. Bonds are perhaps the only asset in the portfolio that the value risk vs. reward is pretty stark. Yields are what yields are and it's known what happens up or down as interest rates move. Gold doesn't have this indicator. Stocks don't either. Cash is cash and relatively stable and short interest rates moves can be waited out.

But again, with long bonds at 1% or less, the risk of holding them for me, is just not worth it. I bring up the issue now because I feel being quiet about it isn't doing any favors. You'll notice that I rarely ever comment on portfolio assets otherwise because mostly it's just noise. But long bonds below 1% is juggling nitroglycerin kind of risk in my mind and a horrible buy.

Again as others (and I) have pointed out. It's one thing to get out, but another to know when to get back in. I think it is safe to say though that bonds that are under 1% are probably not a hot buying opportunity and I'd avoid them regardless of portfolio theory. As when to get back in? I don't know. Again I haven't had to face this question yet. But I'll point out that people have been saying since 2008 that long bonds are a horrible idea and they've been wrong, wrong, wrong. So I could be joining that crowd if I sell out at 1%, but I'll just have to deal with that.

Hopefully Harry Browne will forgive me, but I think he'd be understanding when long bonds are paying 0.50% for 50 years that they aren't worth the risk. ;)

These are interesting times, guys. We could be witnessing the endgame for Keynesianism. The ultimate race to the bottom where mere mortals are all losers.
I've lightened up on my long bonds too. They are looking very bearish to me these days. I know that it's counter to the PP philosophy but what the heck.
Last edited by Reub on Tue Mar 01, 2016 1:41 pm, edited 1 time in total.
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