The Great Bond Bubble?

Discussion of the Bond portion of the Permanent Portfolio

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ochotona
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Re: The Great Bond Bubble?

Post by ochotona » Thu Mar 01, 2018 10:30 pm

pugchief wrote:Timely article form the Schwab desk:
Bond Bear Market: Why Investor Fears May Be Overblown
Historically, bond bear markets tend to come and go relatively quickly, leaving investors who stayed in the fixed income market relieved they didn’t jump out. Nevertheless, because so many people have expressed fear of the current bond bear market, it may be useful to take a deeper dive into how various types of bonds have performed during bear markets. As we always say, past performance is no guarantee of future results, but perhaps a look back can be enlightening.
Kathy Jones has the most sensible bond advice ever. I don't care if the purists want only 20-30 year Treasuries. A really good portfolio would consist of stocks, gold, cash, and Kathy.
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Re: The Great Bond Bubble?

Post by Kevin K. » Sat Mar 03, 2018 9:29 am

ochotona wrote:
pugchief wrote:Timely article form the Schwab desk:
Bond Bear Market: Why Investor Fears May Be Overblown
Historically, bond bear markets tend to come and go relatively quickly, leaving investors who stayed in the fixed income market relieved they didn’t jump out. Nevertheless, because so many people have expressed fear of the current bond bear market, it may be useful to take a deeper dive into how various types of bonds have performed during bear markets. As we always say, past performance is no guarantee of future results, but perhaps a look back can be enlightening.
Kathy Jones has the most sensible bond advice ever. I don't care if the purists want only 20-30 year Treasuries. A really good portfolio would consist of stocks, gold, cash, and Kathy.
Fun article by Ms. Jones but she doesn't offer any serious counter-argument to Tresidder's points. Towards the end of her article she lists all of the reasons why it really COULD be different this time - i.e. we are starting from unprecedented low interest rates, recklessness regarding the Federal deficit is also unprecedented, the Fed has been printing money for years and in general doing everything it can to foster investing in equities, etc.

Of course the question for most of us is if bonds aren't a good risk where does the money go? Tresidder's answers (physical real estate, commodities, selected foreign stocks, private equity, etc.) are obviously anathema to any passive investor (and he makes it clear throughout his site that he isn't writing for that audience). My take away after re-reading both his bond artcile and the Kathy Jones piece a few times is that if you prefer to take your risk on the equity side of things keep your bond maturities short.
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ochotona
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Re: The Great Bond Bubble?

Post by ochotona » Sat Mar 03, 2018 10:35 am

Kevin K. wrote:My take away after re-reading both his bond artcile and the Kathy Jones piece a few times is that if you prefer to take your risk on the equity side of things keep your bond maturities short.
Exactly right, short and high-quality. I find it amusing to listen to uber-perma-equity-bear Charles Nenner, who says Dow is going to 5,000, but what I find interesting is he says the bottom will be in two years. That's more useful to me than the 5,000 number. So I'm setting my bond maturities to 2020, and I'm also using Guggenheim BulletShare 2020 corporate bond ETF (BSCK). The worst case is, Nenner is full of sh**, nothing happens, I'm not exposed to stomach-jarring interest rate volatility, I get 2%-ish on my money, and I have a pile of cash in 2020. But it would be nice to have a pile of cash to invest at something like an equity market bottom.

I also need to cash because I'll be 59.5 years old, so I'm going to disappear my taxable bank cash and put it into equities, and anything that throws off a lot of interest I'll put in my IRA / 401k, so I don't turn equity cap gains (low tax rate) into ordinary income (higher tax rate) when I pull from the IRAs. I'll have a "virtual emergency fund", if I need cash I'll sell equities in the taxable account, then sell fixed income in the IRA and rebuy them at the same time. Per Phil DeMuth's book, "The Overtaxed Investor: Slash Your Tax Bill & Be a Tax Alpha Dog".
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Re: The Great Bond Bubble?

Post by Roy » Sat Mar 03, 2018 10:59 am

Kevin K. wrote:My take away after re-reading both his bond artcile and the Kathy Jones piece a few times is that if you prefer to take your risk on the equity side of things keep your bond maturities short.
This. And then ride that decision to the beach, as Fama might say.

Or if one has committed to the HBPP—just sit there, riding it to the beach.

Perhaps the best post I recall from the BH forum was from a guy who was a beginner (maybe several months in). He joined to learn, went on to read the books, articles, myriad of “Gems” and all the pertinent posts, including the comments by the then several relative authorities regarding the dangers of portfolio over-analysis, endless introspection, portfolio peeking, and all that.

And he did learn the simple message. After a short time, in which he grasped the basics and set them in motion with the “stay the course” missive, he announced [paraphrasing] the following:

“For me to be a good BH I must now leave BH.”

Brilliant.

In my view, he had devolved, logically, to where the argument went. He didn’t say there weren’t mote things left to learn—always are, right?—assuming more useful learning was to come there, and not some other actual reason for staying. This young man was showing how to be a leader there, yet he was just stating the obvious, as it applied to him.

For where else was he going to be bombarded by an infinity of well-written conflicting noise—the very type that Jack would have said to avoid—were it not being espoused on that very forum.

Guys who had been there a lifetime, who are still writing posts titled “Bad Day in the Dow,” “How to play the Correction,” or “Plan B” (or whatever similar) could have learned from him. I learned from him too, even as I was already past caring by that time. I never forgot. Best post ever. And funny...


Back to the link in the OP. Another way to view that gent's piece, and perhaps consider it with Ms. Jones, is to realize that much of this concern has been or is now being priced-in (save for unexpected inflation, or other events and all sorts of worse than expected that could happen). But most here already know that.
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Re: The Great Bond Bubble?

Post by Desert » Sat Mar 03, 2018 10:07 pm

ochotona wrote:If the 10 year Treasuries interest rate goes high enough, I will just buy a bunch and hold them to maturity. Retirement in 8 years. My hurdle rate for retirement success is not too high.
I don't get into the timing, but the 10 year treasury duration isn't too different from a cash/LTT barbell, so you're pretty much adhering to the PP philosophy with this path.
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Re: The Great Bond Bubble?

Post by Desert » Sat Mar 03, 2018 10:11 pm

ochotona wrote:My bond duration is down to 5 years. Taken together with cash, they are 3 years. Definitely not HBPP. Well... there's a small HBPP in there somewhere, surrounded by a huge rind of Otherness.
Historically, it hasn't mattered much. Buy federally-backed fixed income with a composite duration in the 5-10 year range, and you've captured the essence of the HBPP fixed income philosophy.
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Re: The Great Bond Bubble?

Post by glennds » Sat Mar 03, 2018 11:05 pm

Desert wrote:
ochotona wrote:My bond duration is down to 5 years. Taken together with cash, they are 3 years. Definitely not HBPP. Well... there's a small HBPP in there somewhere, surrounded by a huge rind of Otherness.
Historically, it hasn't mattered much. Buy federally-backed fixed income with a composite duration in the 5-10 year range, and you've captured the essence of the HBPP fixed income philosophy.
But doesn't the HBPP look to the long bond for it's maximum volatility, which is exactly what you want in a negative correlation risk parity strategy? I would think shortening up the duration would reduce the bond volatility and interfere with the strategy.

The federal backing is the same in both scenarios, but that's only one piece of the bond equation in the HBPP strategy. If I'm wrong on this, please correct me.
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Re: The Great Bond Bubble?

Post by ochotona » Sun Mar 04, 2018 6:47 am

CORRELATION VALUES

S&P500 to Long Treasuries (VUSTX) -0.24
S&P500 to Intermediate Treasuries (VFITX) -0.20
GLD to Long Treasuries (VUSTX) 0.13
GLD to Intermediate Treasuries (VFITX) 0.16

How much is it worth worrying over a 0.03-0.04 difference, if having the shorter duration keeps you from jumping out of a window?
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Re: The Great Bond Bubble?

Post by Roy » Sun Mar 04, 2018 6:51 am

glennds wrote:
Desert wrote:
ochotona wrote:My bond duration is down to 5 years. Taken together with cash, they are 3 years. Definitely not HBPP. Well... there's a small HBPP in there somewhere, surrounded by a huge rind of Otherness.
Historically, it hasn't mattered much. Buy federally-backed fixed income with a composite duration in the 5-10 year range, and you've captured the essence of the HBPP fixed income philosophy.
But doesn't the HBPP look to the long bond for it's maximum volatility, which is exactly what you want in a negative correlation risk parity strategy? I would think shortening up the duration would reduce the bond volatility and interfere with the strategy.

The federal backing is the same in both scenarios, but that's only one piece of the bond equation in the HBPP strategy. If I'm wrong on this, please correct me.
glenn
Hi, Glenn,

The 30-Year bond does offer greater volatility than bonds with shorter durations, and it is useful for partly that reason.

But the correlation with stocks is greater with long bonds than shorter durations (the higher expected return with long bonds doesn’t come for free). But there has been a tendency for the correlation to be low, and sometimes negative in crisis. Though, very recently they have been more correlated. Correlations are not constant.

Shortening duration might interfere with the HBPP strategy, even in the current climate.

But a big reason the mix works well in crisis is that the equity (Beta) exposure is only 25%. This is why the other portfolios mentioned on this site (like the “ Larry”—using 70% in 2-year Treasuries) also do well protecting against the Left Fat Tail event (while surrendering greater return during upswings in that tradeoff).

And yes, Treasuries matter big-time in that they are among the most liquid securities, and they don’t incur credit risk, which would make them more correlated with stocks (as the last crash showed).
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Re: The Great Bond Bubble?

Post by Hal » Sun Mar 04, 2018 7:36 pm

My pennies worth on the bond discussion !

Individual Asset correlations and volatility may change over time, but their behaviour in various economic conditions are repeatable.

Eg: During Deflation, as the money supply decreases, Bonds values go up

The HBPP is based on assets behaviour during various economics conditions, not specifically on correlations or volatility.

Many thanks to forum members who helped me understand this concept earlier. (Link for reference)

viewtopic.php?f=1&t=9147&hilit=risk+parity+volatility

Regards,
Hal
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Re: The Great Bond Bubble?

Post by glennds » Mon Mar 05, 2018 12:11 pm

Hal, you may have stated it better than I. I should not have used the term volatility. What I was trying to say was that the 30year Treasury would be more sensitive to the changes in economic condition than the shorter duration bonds, and in the HBPP strategy, that's what you want.

A shorter duration bond would be less sensitive to economic change, which might be a good thing in a vacuum, depending on the trade-off in yield. But it's not a good thing in the overall context of the HBPP.

HBPP forces you to always own something that sucks. But it also forces you to own one or more things that don't (or won't for long).
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Re: The Great Bond Bubble?

Post by Kevin K. » Mon Mar 05, 2018 2:17 pm

What Tresidder is saying at the end of his overly-long bond article is what this piece from 2016 says from the outset:

https://www.marketwatch.com/story/stock ... 2016-01-14

We sometimes forget that even 10 year Treasuries were paying over 4% when the SHTF in 2008. Not only have Treasury interest rates gone down dramatically since then but we have also seen staggering inflows to bond ETFs that basically didn't exist before the last crisis. This piece on the rise of corporate bond ETFs should be enough to put a halt to any desire to chase yield in that arena:

https://www.cnbc.com/2017/02/06/etfs-an ... -fear.html

So as Roy said limiting the equity exposure to around 25% is one key PP principle that seems to have stood the test of time (though I would argue that making that 25% all U.S. mega-cap is foolish). The 30 year T's aren't likely to save you, the cash is still smart and as for gold...we don't know anything about what it will do but we do know that (as William Bernstein showed quite convincingly in his book "Deep Risk") it doesn't offer protection against inflation.

Personally I think that reducing fat tails through some iteration of the Larry (Swedroe) approach of ~30% internationally diversified (and value/small tilted) equities and putting everything else in T bills or CDs going out no more than 2 years makes all kinds of sense in this environment. That said I may very well be wrong and far smarter people than me (Mssrs. Rowland and Lawson, Harry Browne and Tyler of Portfolio Charts among them) are very comfortable with the PP in this environment.

It is just so refreshing to be able to talk about defensive strategies here vs. listening to the steady drumbeat of stay-the-course with 60% or more in equities and the rest in Total Bond Market over on Bogleheads. ;)
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