10 yr vs 30 yr yield change

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thisisallen
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10 yr vs 30 yr yield change

Post by thisisallen » Sat Nov 19, 2016 9:22 am

the PP holds 30 yr bonds because they are the most volatile (sensitive to changes in interest rates/price). Is that true?

in the recent run-up in yield after the election the 10 yr bond seems to be at least as volatile if not more volatile than the 30 yr bond. In other words, the interest rate change for the 10 yr bond is the same % or a bit more than the 30 yr bond. It seems that at this time there is no advantage of the 30 yr bond vs the 10 yr. If that is correct then why is this happening, why is the 30 yr bond not reacting more than the 10 yr?
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I Shrugged
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Re: 10 yr vs 30 yr yield change

Post by I Shrugged » Sat Nov 19, 2016 10:17 am

You are just looking at a small snapshot of time, though.
barrett
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Re: 10 yr vs 30 yr yield change

Post by barrett » Sat Nov 19, 2016 10:34 am

peaktotrough.com shows the 30-year bond off 7.44% since the election. Looks like the 10-year bond is only off 4.05%. What data are you looking at?
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Re: 10 yr vs 30 yr yield change

Post by barrett » Sat Nov 19, 2016 11:02 am

My guess is that you are just looking at yield changes without taking duration into account. The 30-year bond is more volatile because it has a longer duration.
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buddtholomew
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Re: 10 yr vs 30 yr yield change

Post by buddtholomew » Sat Nov 19, 2016 12:19 pm

Nevertheless, the OP makes a valid point.
My 5.6 year TLT + Cash has performed better than the BND ETF with the same duration.
The yield curve has flattened or beginning to invert.
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buddtholomew
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Re: 10 yr vs 30 yr yield change

Post by buddtholomew » Sat Nov 19, 2016 12:52 pm

Yes that's true, but a good proxy nonetheless as it holds bonds across the yield curve. Granted risk is not the same.

The point is rates could rise faster at the short and intermediate term durations and slower for longer duration instruments.

-or-

I could be trying to persuade myself into holding onto my LTT's. I looked at selling some to reduce duration but the difference in losses between the 10 and 30-year keeps me invested in the barbell (LTT's + cash). If stocks ever fall, I still expect a flight to safety and hopefully LTT's will benefit.
thisisallen
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Re: 10 yr vs 30 yr yield change

Post by thisisallen » Sat Nov 19, 2016 8:46 pm

OP here. @ barrett. Yes, I was looking at the yield changes. Could you explain how duration effects the phenomenon? And why the LTTs are still more valid than 10 yr?
Thx
thisisallen
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Re: 10 yr vs 30 yr yield change

Post by thisisallen » Sat Nov 19, 2016 8:56 pm

P.S. Thx for pointing to peaktotrough.com
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Re: 10 yr vs 30 yr yield change

Post by ochotona » Sun Nov 20, 2016 7:07 am

I like to do simple trading around the edges as tweaks. Tomorrow I am going to rebalance and buy long term Treasuries. From a short term perspective we're 3 standard deviations out from the middle of the Keltner Channel for 10 year yields. That screams "it's on sale today" to me.

The world has decided in a week that inflation and growth are back based on the election results. In a month or a year it could decide the opposite.
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Re: 10 yr vs 30 yr yield change

Post by barrett » Sun Nov 20, 2016 8:34 am

thisisallen wrote:Yes, I was looking at the yield changes. Could you explain how duration effects the phenomenon? And why the LTTs are still more valid than 10 yr?
I am not the guy to be explaining bond duration in depth, but basically it is a measure of a bond's sensitivity to changes in interest rates.

Some googling on the subject will either clarify or confuse you further! This is from the Fidelity website:

"In general terms, duration is the number of years required to recover the cost of a bond, considering the present value of all interest and principal payments. Duration is expressed as a number of years from the bond's purchase date. In general, the greater the bond's duration, the more sensitive its market price is likely to be to future interest rate changes."

This video is only two minutes long and gives a good overview:

https://www.youtube.com/watch?v=S3lEAQDjmM8

Normally, if interest rates change by 1%, a fixed income security's price is likely to experience an inverse change by approximately 1% for each year of duration.

So...

Over the last year the yield on the 30-year bond has ranged from 2.1% to 3.1%. We've essentially seen a drop of one percent followed by a rise of one percent. So a bond with, say, a 17-year duration would have first risen by 17% and then fallen by 17%. A bond with a shorter duration would have gone up less and also fallen less. I used the number 17 because that's what the fund TLT more or less targets (Its current "effective duration" is 17.33 years while its weighted average maturity is 26.2 years). Many PPers use TLT which is why I am using that as an example.

My understanding is that Harry Browne chose the 30-year bond for the PP as a simple way to more or less balance the risk between bonds, gold and stocks.

Hope that helps.
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buddtholomew
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Re: 10 yr vs 30 yr yield change

Post by buddtholomew » Sun Nov 20, 2016 9:02 am

Barrett, I simply have fallen in love with your post.
Nice job!
thisisallen
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Re: 10 yr vs 30 yr yield change

Post by thisisallen » Sun Nov 20, 2016 9:45 am

^ +1
good explanation. all clear.
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Re: 10 yr vs 30 yr yield change

Post by barrett » Sun Nov 20, 2016 1:17 pm

buddtholomew wrote:Barrett, I simply have fallen in love with your post.
Nice job!
Budd, you are witnessing a mediocre mind at the height of its analytical powers!
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Re: 10 yr vs 30 yr yield change

Post by buddtholomew » Mon Nov 21, 2016 1:04 pm

The most intelligent people I know are able to explain the most complex subject matter in lay-men's terms.
Reminds me of "The Big Short" where celebrities explained the financial crisis using simple language and examples.
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