Realistic Expectations for Long Bonds

Discussion of the Bond portion of the Permanent Portfolio

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ochotona
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Re: Realistic Expectations for Long Bonds

Post by ochotona » Fri Mar 30, 2018 11:19 am

MangoMan wrote:
ochotona wrote:
ochotona wrote:On macrovoices.com there is a great podcast with Jeff Snider on why long bond rates are not going to go much higher, and he doesn't think we've seen the low in interest rates yet. https://www.macrovoices.com/
On the other hand, Julian Brigden thinks the bottom in LT yields is in. New podcast. https://www.macrovoices.com/

Julian gave out a gem early in the talk... watch the 100 month moving average on 30 year Treasury yields. The yields have not busted above that line for decades.
Where can you chart the 100 month MA?
If you have a pay account at Stockcharts.com, you can do it. below is the chart from Julien Brigden. The green line is the 100 month MA. The 435 week moving average works, too, for free on Stockcharts.com. Symbol is $UST30Y. It shows if we break above 3.25% on the 30 year, it will be the first time that moving average has been broken in 33 years.

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jhogue
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Re: Realistic Expectations for Long Bonds

Post by jhogue » Sat Mar 31, 2018 11:15 am

What a cool chart!

Looks like an advertisement for EE bonds (3.53% guaranteed at 20 years).
“Groucho Marx wrote:
A stock trader asked him, "Groucho, where do you put all your money?" Groucho was said to have replied, "In Treasury bonds", and the trader said, "You can't make much money on those." Groucho said, "You can if you have enough of them!"
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Re: Realistic Expectations for Long Bonds

Post by jhogue » Sun Apr 01, 2018 9:59 am

Desert,

Perhaps I should have been more explicit:

The current iteration of EE bonds was initiated in May of 2005, featuring a doubling of purchase price at 20 years, or 3.53% p.a., tax deferred and free of state and local taxes.

Some people on this forum have said they would never even consider buying EE bonds for PP “deeper cash” because they can’t envision “locking up their cash for 20 years” to get that doubling effect. Presumably, they fear inflation and/or rising interest rates because “interest rates have no place to go but up.”

Ochotona’s chart notes that the 100 month SMA since 1985 comes in at 3.2577% p.a., with not much volatility as I read it. That means to me that holders of EE bonds since May 2005 have done OK. To be sure, they didn’t get rich quick buying and holding EE bonds, but they didn’t lose their shirt in a speculative bet on interest rates either.

Happy Easter everybody!
“Groucho Marx wrote:
A stock trader asked him, "Groucho, where do you put all your money?" Groucho was said to have replied, "In Treasury bonds", and the trader said, "You can't make much money on those." Groucho said, "You can if you have enough of them!"
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jhogue
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Re: Realistic Expectations for Long Bonds

Post by jhogue » Mon Apr 02, 2018 10:40 am

1. Yes, lower rates have certainly benefited EE bond holders. To put it in more concrete terms: If you bought EE bonds at 3.53% in 2005, you would have to be able to find a Treasury note of seven years’ maturity today, yielding more than 8%, in order to exercise your option to sell your EE bond (and buy that seven year 8%+ Treasury at a net profit). Not going to happen—unless you are so personally desperate for cash you have liquidated everything else in PP Cash.

2. You are certainly correct that there has been a significant appreciation in long bond values during the period shown in ochotono’s chart. No doubt about it, long bonds have certainly lifted permanent portfolios—mine included. Have long term interest rates finally turned a corner and started heading upward? The only correct answer to that question is that nobody knows for sure. It is difficult to imagine the kind of massive deflation that it would take to force long term dollar interest rates to go negative from here (thereby lifting LTT values still higher), but the recent examples of the euro and Swiss franc certainly suggest it is not entirely out of the realm of the possible.
“Groucho Marx wrote:
A stock trader asked him, "Groucho, where do you put all your money?" Groucho was said to have replied, "In Treasury bonds", and the trader said, "You can't make much money on those." Groucho said, "You can if you have enough of them!"
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Re: Realistic Expectations for Long Bonds

Post by jhogue » Tue Apr 03, 2018 1:10 pm

1. Investors sometimes mistakenly believe that you are permanently “locked in” for 20 years when you buy an EE bond. However, should current interest rates climb high enough, you always retain the option to trade any EE bond for a better performing Treasury at 0% cost. (Just don’t forget that you will have to pay federal taxes on accrued interest).
For the chart I use to manage EE bond “swaps” for Treasurys over time,
see moda’s “EE Bond Phantom Return Analysis”
viewtopic.php?f=4&t=1760&p=148025&hilit ... df#p148025
I suppose I should note once again that using savings bonds is an optional deviation from Harry Browne’s passive strategy for PP Cash. You run no additional risk in terms of safety, stability, and liquidity by holding savings bonds instead of a Treasury MMF for some portion of your PP Cash, but you do have to actively manage savings bonds in order to maximize yield when you purchase and minimize tax consequences when you redeem them.

2. Today’s article in the Wall Street Journal, “Foreign Demand Curbs Treasury Yields,” is a reminder that rates for all maturities of U.S. Treasurys are significantly impacted not only by US government borrowing, but also foreign central banks’ demand for dollar-denominated securities to fund their trade surpluses with the US. In the past few years strong foreign demand has played an important role in dampening the anticipated rise in Treasury interest rates. Demand for dollars is also stoked by global markets in commodities like oil, which trades almost exclusively in dollars, regardless of the nationality of either the buyer or the seller. Fun and exciting to be the world’s reserve currency, isn’t it?
“Groucho Marx wrote:
A stock trader asked him, "Groucho, where do you put all your money?" Groucho was said to have replied, "In Treasury bonds", and the trader said, "You can't make much money on those." Groucho said, "You can if you have enough of them!"
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Re: Realistic Expectations for Long Bonds

Post by Xan » Tue Apr 03, 2018 3:08 pm

MangoMan wrote:
jhogue wrote:you always retain the option to trade any EE bond for a better performing Treasury at 0% cost
What does that mean? Please elaborate.
I believe he's saying that if short-term rates increase, you can always cash out your EE bonds without penalty (although with taxes) and then buy short-term T-bills instead.

In other words, you're not trapped at a rate that looks high now but might not in the future.
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Re: Realistic Expectations for Long Bonds

Post by jhogue » Tue Apr 03, 2018 6:42 pm

Xan,

You won’t be buying short-term T-bills to replace your EE bonds with this strategy. Let us say you bought a $10,000 EE bond ten years ago. Checking moda’s chart, if today’s rate rose to over 6%, you should exercise your option to redeem your EE bond ($10,000 + 0.1% annual interest ) and then buy a ten year 6% Treasury note for $10,000 to get the same double-your-money effect (guaranteed $20,000 at 20 years).

Moda’s break-even interest rate curve begins to rise ever-more steeply after about ten years. What that means in effect is that you have to check current interest rates against your EE bonds for their first five to ten years more frequently. After ten years, it becomes increasingly unlikely that interest rates could rise high enough to trigger an EE bond redemption. As I stated, these new iteration EE bonds first available in 2005 now have just 7 years to reach their 20 year double-your-money mark (2025). You would not redeem them today unless you could find an offer of a 7 year Treasury with a yield to maturity of at least 8.19%.

Note that savings bonds belong in PP Cash, not PP Bonds, because they are not marketable and therefore do not have the volatility that Harry Browne wanted from LTTs. All of their appreciation comes from interest, not the interest + capital gains of LTTs. Used properly, however, they can give you a more profitable and robust Treasury barbell over time.
“Groucho Marx wrote:
A stock trader asked him, "Groucho, where do you put all your money?" Groucho was said to have replied, "In Treasury bonds", and the trader said, "You can't make much money on those." Groucho said, "You can if you have enough of them!"
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Re: Realistic Expectations for Long Bonds

Post by Xan » Tue Apr 03, 2018 8:06 pm

Got it. That makes sense.
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Re: Realistic Expectations for Long Bonds

Post by boglerdude » Sun Apr 08, 2018 5:17 am

Deflationary Forces Will See 30-Year UST Going To 2%: Shilling
https://www.bloomberg.com/news/audio/20 ... g-jfo8f3p9

Shilling appears to have less of agenda than other pundits. Or maybe thats my confirmation bias, he makes me feel better about being a cowardly investor
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Re: Realistic Expectations for Long Bonds

Post by I Shrugged » Mon Apr 09, 2018 6:43 pm

Shilling has been right on bonds for something like 30 years. I have made good money by believing him, well before the PP.
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Re: Realistic Expectations for Long Bonds

Post by barrett » Fri Mar 06, 2020 8:47 am

Not sure where to post this so I'll just resurrect this old thread...

We used to discuss at what level of yield would people start selling off their long bonds. Are we there yet for any of you? As I write this, the yield has just dipped to 1.25% (!!!!). Any sellers? Thanks.
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Re: Realistic Expectations for Long Bonds

Post by dualstow » Fri Mar 06, 2020 9:28 am

barrett wrote:
Fri Mar 06, 2020 8:47 am
Not sure where to post this so I'll just resurrect this old thread...

We used to discuss at what level of yield would people start selling off their long bonds. Are we there yet for any of you? As I write this, the yield has just dipped to 1.25% (!!!!). Any sellers? Thanks.
Hey, it’s barrett!

I sold a bunch of long bonds prematurely (last year), thinking they’d never get better than breakeven.
Repurchased some EDV and bonds before all this drama, luckily, but not enough.
Now I’m getting close to selling “purposely prematurely” because I *would* be close to a rebalancing point if I had those bonds.
What to buy? stocks and CDs.
RIP Marcello Gandini
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Tyler
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Re: Realistic Expectations for Long Bonds

Post by Tyler » Fri Mar 06, 2020 10:13 am

barrett wrote:
Fri Mar 06, 2020 8:47 am
Not sure where to post this so I'll just resurrect this old thread...

We used to discuss at what level of yield would people start selling off their long bonds. Are we there yet for any of you? As I write this, the yield has just dipped to 1.25% (!!!!). Any sellers? Thanks.
If anything, the record low rates make me appreciate the role of long term treasuries in the PP even more. They're primarily driven not by the interest rate they pay but by changes in interest rates, and because of bond convexity they're more responsive than ever. That may not be appealing for portfolios that use bonds as ballast against stock volatility, but for portfolios like the PP that balance multiple volatile assets the low rates actually help.

Here's a quick primer: https://portfoliocharts.com/2019/05/27/ ... convexity/
Last edited by Tyler on Fri Mar 06, 2020 11:31 am, edited 1 time in total.
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Re: Realistic Expectations for Long Bonds

Post by dualstow » Fri Mar 06, 2020 11:21 am

Tyler wrote:
Fri Mar 06, 2020 10:13 am
If anything, the record low rates make me appreciate the role of long term treasuries in the PP even more. They're primarily driven not by the interest rate they pay but by changes in interest rates,
It's both, right? When I first logged on here, Craig said that the long bonds were good for paying living expenses. (He must have a lot of bonds). I primarily thought about yield until, like you wrote above, interest rates changed.
Suddenly, I found I was holding bonds with a yield that looked pretty attractive compared to the rate for most instruments.

The other difference is that you can't sell someone your savings account. You can't sell your (non-brokered) CD or savings bond for a profit, even if the yield is decent. You can sell your treasury bonds.

So now the yield is just one marker of many of how great the value of the bond could be.
RIP Marcello Gandini
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Re: Realistic Expectations for Long Bonds

Post by Tyler » Fri Mar 06, 2020 11:34 am

dualstow wrote:
Fri Mar 06, 2020 11:21 am
It's both, right? When I first logged on here, Craig said that the long bonds were good for paying living expenses. (He must have a lot of bonds). I primarily thought about yield until, like you wrote above, interest rates changed.
Sure -- bonds make money from both the interest payment and the capital appreciation from rate changes. I should have been more clear. At high rates the interest contributes the most profit, and at low rates capital appreciation is king. And that capital appreciation can be way higher than most people realize.
Last edited by Tyler on Fri Mar 06, 2020 12:00 pm, edited 2 times in total.
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Re: Realistic Expectations for Long Bonds

Post by Cortopassi » Fri Mar 06, 2020 11:55 am

I knew I read a good article on bond convexity not long ago, I should have known it was yours, Tyler!!!
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Re: Realistic Expectations for Long Bonds

Post by I Shrugged » Fri Mar 06, 2020 5:52 pm

Heck no, not selling.
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Re: Realistic Expectations for Long Bonds

Post by dragoncar » Mon Mar 09, 2020 3:58 am

Wasn't paying attention and suddenly my 30-years are sub-1%? Came back to find this discussion
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Re: Realistic Expectations for Long Bonds

Post by Kriegsspiel » Mon Mar 09, 2020 7:47 am

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You there, Ephialtes. May you live forever.
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Re: Realistic Expectations for Long Bonds

Post by Cortopassi » Mon Mar 09, 2020 8:48 am

The convexity of the bonds is doing an excellent job propping up the PP the past couple days.

My portfolio is at year's high. Nuts. My hat is off to this portfolio.

I know I could be speaking different tomorrow.

Things are getting closer to rebalance bands.
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Re: Realistic Expectations for Long Bonds

Post by dualstow » Mon Mar 09, 2020 9:07 am

Cortopassi wrote:
Mon Mar 09, 2020 8:48 am
The convexity of the bonds is doing an excellent job propping up the PP the past couple days.

My portfolio is at year's high. Nuts. My hat is off to this portfolio.

I know I could be speaking different tomorrow.

Things are getting closer to rebalance bands.
Awesome, Corto. These are the days I wish I had everything in the pp and no variable portfolio.
RIP Marcello Gandini
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Re: Realistic Expectations for Long Bonds

Post by pmward » Mon Mar 09, 2020 9:08 am

Cortopassi wrote:
Mon Mar 09, 2020 8:48 am
The convexity of the bonds is doing an excellent job propping up the PP the past couple days.

My portfolio is at year's high. Nuts. My hat is off to this portfolio.

I know I could be speaking different tomorrow.

Things are getting closer to rebalance bands.
As of yesterday I was surprised to see that my performance was still up 2% in the last 90 days in personal capitol. Long term treasuries and gold have come to the rescue!
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Re: Realistic Expectations for Long Bonds

Post by ppnewbie » Mon Mar 09, 2020 9:57 pm

I feel like the spaceship is going warp speed through an asteroid belt at the moment. She's holding together but I've definitely got white knuckles holding on. I keep thinking about selling some of the stock portion ahead of my rebalance band or rebalance period in order to spare an (unnecessary) downturn in that bucket. I am also relatively close to the rebalance period in late may / early june.
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Re: Realistic Expectations for Long Bonds

Post by murphy_p_t » Tue Mar 10, 2020 1:15 pm

I looked at TLT to see the performance in 2008, to get an idea of what to expect.

I expect a snapback as bonds appear massively overbought, by historic measures.
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Re: Realistic Expectations for Long Bonds

Post by mathjak107 » Tue Mar 10, 2020 3:09 pm

Tlt fell 5.13% today. 8.78 a share ...nasty day for bonds

Shy was down almost a half percent

Gld down 2.10%
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