Gyroscopic Investing

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.

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.

Thank u HB!

How much will we make when long bonds reach -1%?

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.



*bond pricing calculations performed as described here:
http://www.investopedia.com/university/ ... dbond2.asp

So we'll more than double our money? Very good!

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?

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.

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?

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.

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. 

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.

Austen Heller wrote:

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.



*bond pricing calculations performed as described here:
http://www.investopedia.com/university/ ... dbond2.asp

The two words all Treasury bond investors should know: positive convexity.

In this blog post I discuss the concept along with a couple useful links:

https://web.archive.org/web/20160324133 ... y-and-you/

Links that discuss this concept further:

http://financetrain.com/bond-duration-a ... rt-1-of-2/
http://financetrain.com/bond-duration-a ... rt-2-of-2/

Now the next question is if I would personally buy long bonds in negative yield territory? No, I wouldn't. But as others have stated some institutional investors don't have an option.

MediumTex provided a similar response here:

http://gyroscopicinvesting.com/forum/pe ... #msg140483

The message seems to be that changes in yield will lead to greater volatility in bond prices in low-interest-rate environments, and that this effect is a good thing for a PP.  I'm going to play devil's advocate and look at it the other way.  A change in bond value will have less of an effect on yields when interest rates are low than when they are high.  For example, a trillion-dollar change in the value of 30-year treasuries will have a much larger effect on the yield when interest rates are high than when they are low.  And it's this change in bond value that will affect the PP the most, regardless of the state of interest rates.  In other words, a low-interest-rate environment will lead to lower volatility in yields than a high-interest-rate environment (there's just less room to move), but their effects on the PP will ultimately be the same, so there is no need to worry about interest rates when implementing a PP.

Thoughts?

Switzerland's 50 year bond (to be precise, it's actually 48 years, due 2064) yield today fell to an all time low of 0.32%.

Yes, if you want to lend Switzerland money for the next 50 years, you're only going to get 0.32% interest per year.

Lang wrote: Switzerland's 50 year bond (to be precise, it's actually 48 years, due 2064) yield today fell to an all time low of 0.32%.

Yes, if you want to lend Switzerland money for the next 50 years, you're only going to get 0.32% interest per year.

Clearly at some point investors should just not be buying bonds.

In the case of the Permanent Portfolio, you'd have a hard time getting me to buy long term bonds under 1%. I say this knowing that it breaks the model. But I'd also say that 30 year bonds paying under 1% the risk is just far too high. 50 year bonds under 1% is an absurdly bad deal as well. Investors would be better in cash.

By the way, the maximum bond upside of that Switzerland bond is now just 11%. Of course, this assumes that its yield won't go negative, but would you buy a 50 year bond with a negative yield?

Lang wrote: By the way, the maximum bond upside of that Switzerland bond is now just 11%. Of course, this assumes that its yield won't go negative, but would you buy a 50 year bond with a negative yield?

No. I won't buy any long bonds under 1%.

At some point the risk is just too high. Even with negative yields it's not worth it because long-term negative yields are not stable and will revert.

It's an interesting discussion because obviously the Permanent Portfolio holds long-term bonds. But at some point dogma needs to relent to reality.

Personally if long term bond rates go below 1% in the U.S. I'll strongly consider selling them and going to cash for that allocation until they rise again.

If I'm in Europe staring at long term bonds that are negative, I'd probably sell them and hold cash.

This is all very new territory for investors and options start getting really limited.

Is there no history of LTT's being this low? If it has happened before how did it end?

Reub wrote: Is there no history of LTT's being this low? If it has happened before how did it end?

In the 1930s they supposedly hit around 1% or so. But it's hard to compare eras like this to each other. The banking system back then was far different than today still being on a gold standard and of course economies were much different.

But regardless of the era, long term bonds paying less than 1% is never a good deal.

If banks start charging retail consumers to hold their money, then probably all of us with cash should become microlenders, I'm serious. Or loan sharks, however you want to characterize it.

Craig, your comments make sense to me, but they also make me want to sell my bonds "too soon." I don't get this feeling from stocks which I can hold onto during a bubble, and just wait for my 30 or 35% band. I'm kind of tempted to quietly sweep all my anti-timing words under the rug, exchange long bonds for two-year notes, and just suffer the low yields while counting my modest profits.

[quote="craigr"]

No. I won't buy any long bonds under 1%.

At some point the risk is just too high. Even with negative yields it's not worth it because long-term negative yields are not stable and will revert.

It's an interesting discussion because obviously the Permanent Portfolio holds long-term bonds. But at some point dogma needs to relent to reality.

Personally if long term bond rates go below 1% in the U.S. I'll strongly consider selling them and going to cash for that allocation until they rise again.

dualstow wrote: Craig, your comments make sense to me, but they also make me want to sell my bonds "too soon." I don't get this feeling from stocks which I can hold onto during a bubble, and just wait for my 30 or 35% band. I'm kind of tempted to quietly sweep all my anti-timing words under the rug, exchange long bonds for two-year notes, and just suffer the low yields while counting my modest profits.

If we get into negative long interest rate territory, and it suddenly starts to get less negative, and the price of TLT or TLO crosses back under its 10 or 12 month moving average, you'll know it's time to get out, and you'd better not delay at that point.

Get out? PP holders don't get out. We hold all four assets because they work in tandem. I could see rebalancing but not totally getting out of one of the assets.

Reub wrote: Get out? PP holders don't get out. We hold all four assets because they work in tandem. I could see rebalancing but not totally getting out of one of the assets.

If interested in trend-following the PP, follow this thread.