Clive wrote:
I don't see much difference in volatilities between our 50 year and 30 year durations
There may be a cut-off point when long is long no matter if its 30, 40 or 50 years.
Clive, I have not looked at the British gilts but generally the longer the duration (weighted average term to maturity of the bond cash flow) the more price volatility relative to interest rate movements. Zero coupon bonds do not issue interest payments but mature at par so duration and maturity are the same. For comparison purposes, look at long treasury ETF TLT. It's weighted average maturity is roughly 28 years but it's duration is 15 years (it's bonds pay interest semi-annually). Then look at treasury zero coupon ETF EDV. It has a average maturity/duration of roughly 26 years. In 2008, EDV was up 57% versus 31% for TLT. That knife cuts both ways though as EDV was down 48% in 2009 while TLT was "only" down 26%.
The Treasury non-callable longer duration is what gives you the "juice" you are looking for in a deflationary environment.
When looking at EDV's chart, I happened to notice that there was a big drop in late 2009 - this can be attributed to a $11.11 dividend. If you happen to use yahoo finance adjusted prices (which accounts for dividends, splits, etc.), these are the numbers I get:
I just listened to the podcast about Bonds for the pemanent portfolio and was wondering if the Pimco ETF ZROZ could be used?
Does anyone have an opinion about using ZROZ instead of TLT or use it as a proxy for tax loss harvesting?
ZROZ pays quarterly dividends
Craigr and MediumTex: if you don't mind I'd like to resurrect this thread and discuss the suitability of LT options for PP.
Craigr, in your December 12th podcast on bonds you recommended TLT, FLBIX and VUSTX. I understand the downsides of VUSTX which is not a pure LT Treasuries fund. I was wondering why you haven't mentioned EDV at all. Is it a higher volatility or something else?
Thanks!
Last edited by foglifter on Tue Jan 25, 2011 1:03 pm, edited 1 time in total.
"Let every man divide his money into three parts, and invest a third in land, a third in business, and a third let him keep in reserve."
- Talmud
goldfinger wrote:
And I have a question about EDV, where does its dividend come from, since it is zero coupon?
It comes from zero-coupon bonds maturing, is my understanding. The fund itself is ongoing, and so some percentage of the bonds need to mature each year, and new ones be bought to take their place. In this way the whole thing is perpetual.
In contrast, funds like American Century Investments Zero Coupon 2025 Fund Investor Class (BTTRX) buy a whole lump of zero-coupon bonds at the beginning of the creation of the fund, don't pay anything out for the whole time, and then in the end all the bonds mature and the fund pays everyone and closes. With that model, there's a start and an end to the fund. The whole fund "matures," one could say.
I was trying to understand the dividend too. If they have constantly maturing and new zeros, and the average maturity of the fund is 25 years, I would assume the longest zero is a 50 year duration, right? I couldn't find out if this was the case.
Kriegsspiel wrote:
I was trying to understand the dividend too. If they have constantly maturing and new zeros, and the average maturity of the fund is 25 years, I would assume the longest zero is a 50 year duration, right? I couldn't find out if this was the case.
Zeroes don't pay interest. All of your gain is from the capital gain. Of course... a fund of zeroes could be set up any way they please, but the zeros themselves pay no interest.
But you STILL have to pay IRS every year on the imputed income! It's a pain! That's why I'll never own them in a taxable account.
