Maximum Bond Upside

[barrett]

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.

[dualstow]

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

[stuper1]

Also, what would TLT be at if the long bond rate were at 1%?

[Austen Heller]

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.

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!

[stuper1]

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?

[barrett]

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.

[dualstow]

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.

[BearBones]

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.

[Austen Heller]

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.

[BearBones]

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]

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.

[dualstow]

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.

Wow, I forgot about that. I started saving my nickels because of Paul Boyer, the Mad Money Machine guy who eventually did go mad and devote everything to Bitcoin. I think some maintenance men may have dipped into my stash when we were temporarily in an apartment, but I have a nice cigar box of nickels left.

[Lang]

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.

[craigr]

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.

[portart]

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.

[ochotona]

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

[dualstow]

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.

[buddtholomew]

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?

[craigr]

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.

[MediumTex]

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.

[dragoncar]

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

[Lang]

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%.

[buddtholomew]

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?

[dualstow]

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.

[Lang]

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%.