TLT Negative YTD

Discussion of the Bond portion of the Permanent Portfolio

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lordmetroid
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Re: TLT Negative YTD

Post by lordmetroid » Tue May 05, 2015 9:51 am

If you do following to the bottom, how would you know when it starts climbing again.
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ochotona
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Re: TLT Negative YTD

Post by ochotona » Tue May 05, 2015 9:54 am

lordmetroid wrote: If you do following to the bottom, how would you know when it starts climbing again.
I'll answer on the Stocks sub-forum.
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buddtholomew
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Re: TLT Negative YTD

Post by buddtholomew » Fri May 08, 2015 6:07 pm

A single 1% increase in interest rates will result in approximately a 16% loss if invested in TLT. It would take 16 years to recoup those losses if reinvesting interest. We invest in LTT's for their volatility and not their interest payments.
"The first principle is that you must not fool yourself and you are the easiest person to fool" --Feynman.
bedraggled
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Re: TLT Negative YTD

Post by bedraggled » Fri May 08, 2015 6:32 pm

Budd,

Are you suggesting that a 5% increase in interests rates will drop the value of LTTs by 80%?

Thanks.
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Re: TLT Negative YTD

Post by rickb » Fri May 08, 2015 11:15 pm

bedraggled wrote: Budd,

Are you suggesting that a 5% increase in interests rates will drop the value of LTTs by 80%?

Thanks.
There are numerous bond value calculators on the web.  According to this one, a $1000 face value 30-year bond with a coupon rate of 2.9% (today's rate) is worth about

$824 if rates rise to 3.9%
$687 if rates rise to 4.9%
$580 if rates rise to 5.9%
$496 if rates rise to 6.9%
$429 if rates rise to 7.9%

Of course, rates can't possibly rise from 2.9% to 7.9% overnight (this would likely take at least several years) which affects the computation in two ways - 1) you'll have received dividend payments along the way, 2) by the time rates are 7.9% the bond won't have 30 years left (so the change in value won't be quite as dramatic).

Nevertheless, long term bonds definitely do not do well in an environment of rising interest rates.  However, from the same calculator, the same $1000 2.9% bond is worth about

$1106 if rates fall to 2.4%
$1228 if rates fall to 1.9%
$1366 if rates fall to 1.4%

People have been saying for years that rates have nowhere to go but up.  Here's the yield for 30 year treasuries over the last 5 years: http://finance.yahoo.com/echarts?s=%5et ... 2:%225y%22}.  30 year bonds in Japan are currently yielding 1.43%.  Rather than "nowhere to go but up" I think it's more accurate to say rates could up or they could go down.  Betting one way or the other requires seeing into the future. 

As Neils Bohr is reputed to have said, "Prediction is very difficult, especially about the future".
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Re: TLT Negative YTD

Post by bedraggled » Sat May 09, 2015 7:46 am

Thanks, Rickb,

I have been a deflationist since 1982 and rates are playing out as I thought and with room to drop significantly.  Lately, though, things seem weird, at least to me, and I wonder what the future looks like just beyond the near term.  With China and Russia creating that bank thing in Asia, will that toss a wrench into the machine?

Thoughts, please.
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Re: TLT Negative YTD

Post by Reub » Sat May 09, 2015 7:55 am

With the very low rates that we have now, the loss will barely be mitigated by the interest paid by the bonds, if I read this correctly. This will make the end of the treasury bull that much more painful.
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Re: TLT Negative YTD

Post by barrett » Sat May 09, 2015 7:59 am

rickb wrote: Of course, rates can't possibly rise from 2.9% to 7.9% overnight (this would likely take at least several years) which affects the computation in two ways - 1) you'll have received dividend payments along the way, 2) by the time rates are 7.9% the bond won't have 30 years left (so the change in value won't be quite as dramatic).
Not sure how much this adds to your post, rickb, but you also need to consider that you'd most likely be rebalancing into bonds as rates rise, and by the time they get to 7.9% you'd have a bunch of bonds with higher coupons and thus a PP with (at last!) some more income.

Love the Neils Bohr quote.
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ochotona
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Re: TLT Negative YTD

Post by ochotona » Sat May 09, 2015 9:54 am

The 35 year bull market in long bonds is not as large if you adjust for inflation.

I am looking at VUSTX (Vanguard Long-Term Treasury Fund Investor Shares) on 1/1/2000 on Google, the price was $9.67, but in 2015 Dollars it was $13.18. It peaked lately in February 2015 at $14.14. During that period, VUSTX is up 7.28%, or CAGR 0.46% in real terms. Not really a bull market, mostly just inflation.

I don't have market values for LTT going back to 1980, but bear in mind from 1980-2015, the purchasing power of a US Dollar has decreased by 71.5% !!!   http://www.bls.gov/data/inflation_calculator.htm
Last edited by ochotona on Sat May 09, 2015 9:59 am, edited 1 time in total.
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Re: TLT Negative YTD

Post by iwealth » Sat May 09, 2015 10:11 am

30 year bond prices were at all-time highs 3 months ago. Literally just 3 months ago. The bull market has been going on since the 80s.

FWIW, isn't a steep bond correction a GOOD thing for PP holders? And a steep stock correction for that matter. Don't you want to start seeing these assets show some wild volatility so that you can finally capture some of it? Or do people think bond yields are going to fly straight to 6,7,8%+ with no dips along the way?

Short-term portfolio pain is a necessary evil if you want long-term gains.
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ochotona
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Re: TLT Negative YTD

Post by ochotona » Sat May 09, 2015 10:31 am

iwealth wrote: 30 year bond prices were at all-time highs 3 months ago. Literally just 3 months ago. The bull market has been going on since the 80s.
Yes, but those who fear, "OMG, we could go back to the bond prices of 1980, if we went back to the interest rates of 1980!" forget that we can't just roll back downhill in reverse to 1980, unless they give us "Super Dollars with 1980 purchasing power" when the bonds un-mature  ;) at the end of our backwards time travel.

I'm not saying it won't be bad, but if we went back to 1980 LT interest rates, bond prices would not fall to 1980 nominal levels, they would fall to the 1980 prices inflated to the Present Day Dollar value... which would be a greatly lessened hit, reduced by 71.5%.
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Re: TLT Negative YTD

Post by Tortoise » Sat May 09, 2015 5:04 pm

If the multi-decade downhill slope in LTT interest rates eventually bottoms out and the rates start climbing, who's to say the rates will continue to climb in a steady slope for decades? The interest rate behavior going forward could be completely different, for example, bouncing randomly back and forth within a certain range for many, many years.

In that case, it would be a good thing to have LTTs in the PP to harvest the volatility and counterbalance the wild swings in stocks and gold. Yes, there could be some short-term losses in the LTT piece for a year or two, as there sometimes are, but then interest rates could reverse and drop right back down, giving us big LTT gains for the year or two after that. Isn't that just how the PP's three volatile asset classes are supposed to work?

It all depends, and nobody knows. Accordingly, I choose to keep holding my LTTs and let the PP do its thing.
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