100 year bond!?

Discussion of the Bond portion of the Permanent Portfolio

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gaddyslapper007
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100 year bond!?

Post by gaddyslapper007 » Fri Dec 16, 2016 9:13 am

Curious of your thoughts regarding the issuance of 50 or 100 year bonds....."if" issued...would they replace the 30-20 year bond holding portion of the PP?

http://www.barrons.com/articles/here-co ... 1480749334
LC475
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Re: 100 year bond!?

Post by LC475 » Wed Dec 21, 2016 4:56 pm

I would say yes. You want the most powerful bonds you can get, the more powerful the better. That means as long-term as possible.
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sophie
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Re: 100 year bond!?

Post by sophie » Thu Dec 22, 2016 7:46 am

Interesting question. Couple of thoughts:

- Long bonds for the PP are not meant to be held to maturity. I wonder what the price spread would be like when it comes time to sell these bonds.

- If you bought 100 year bonds, the bond portion would become too powerful. It's already a bit more powerful than stocks. I'd probably counterbalance with lower maturities (e.g. cash) to keep the average duration about the same.

Bottom line: my first reaction is that I wouldn't buy them.
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sophie
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Re: 100 year bond!?

Post by sophie » Thu Dec 22, 2016 12:07 pm

Maybe I misremembered, but also there were other people looking at this and results may have differed.

I thought it was gold > bonds > stocks, which is why people have spent a lot of time talking about how to punch up stock volatility by buying small caps etc.

Bonds are less volatile if you buy funds like VUSTX or TLT, for sure. If you have individual bonds with average 25 years to maturity, my impression is that volatility is greater than that of TLT.
whatchamacallit
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Re: 100 year bond!?

Post by whatchamacallit » Thu Dec 22, 2016 2:38 pm

I don't see why they would sell longer duration bonds unless they really think interest rates are going back up. I would need some high rates like 6%+ to make me buy.
LC475
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Re: 100 year bond!?

Post by LC475 » Fri Dec 23, 2016 10:18 am

Harry always said you wanted as long and as powerful as possible. I agree with him.

100 year bonds would behave the same as 30 year bonds, just with 3 times the leverage.Interest rates go up, you lose three times as much. Interest rates go down, you win three times bigger.

Sounds good to me!

Plus, nobody will want them (except us crazy PPers) and so the interest rate will have to be extra-attractive.
Lang
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Re: 100 year bond!?

Post by Lang » Sat Jan 28, 2017 9:59 am

You should focus on duration rather than maturity. It is a more accurate measure of the bond's volatility. If a 100Y Treasury bond were issued today, its rate would obviously be higher than the 30Y rate, i.e. at least 3%. This implies a duration of at most 32 years.

At the moment, as far as I know, the longest duration bond in the world today (and possibly in all human history) is Austria's 70 year government bond, issued last year at a rate of 1.5% and now yielding 2.03% (this represents a 17% decrease in price :o ). It now has a duration of 40 years, so if its yield increases (decreases) by one percent, its price will increase (decrease) by approximately 40%. Maybe this is the "right" long-term bond for Eurozone PP investors. It has high volatility, reasonable safety (Germany would be preferable to Austria, but I don't think the difference is significant) and tradeability.

Ireland and Belgium issued 100 year bonds last year, but they were issued at reasonably high interest rates (2.3-2.35%), so their duration is lower than the Austrian govvie. Also, they were sold exclusively to private investors, so they are inaccessible to individual investors like us.
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