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 7:26 am

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.
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Re: Realistic Expectations for Long Bonds

Post by pugchief » Fri Mar 30, 2018 11:14 am

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?
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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

pugchief 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.

Image
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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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Desert
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Re: Realistic Expectations for Long Bonds

Post by Desert » Sat Mar 31, 2018 9:30 pm

jhogue wrote:What a cool chart!

Looks like an advertisement for EE bonds (3.53% guaranteed at 20 years).
It actually shows the opposite, over that time period. The capital gains resulting from huge reductions in rates were a massive tailwind for the HBPP and other similar portfolios (like mine). Now the future ... yes, maybe EE bonds will be great. Check back in 20 years.
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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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Desert
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Re: Realistic Expectations for Long Bonds

Post by Desert » Sun Apr 01, 2018 8:53 pm

jhogue wrote: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!
Thanks for the clarification. After pondering the chart above a bit more (the font is small and tough to decipher), it appears that the 100 month SMA declined from about 10+ percent in 1985 to the current 3+ percent today. So the appreciation of long bonds during that period were huge. I 2005, it looks like the 100 month SMA was around 7 percent, still far exceeding the 3.53%.

All that said, I agree that the lower the rates go, the better that 20 year doubling looks!

Happy Easter to you as well!
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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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Desert
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Re: Realistic Expectations for Long Bonds

Post by Desert » Mon Apr 02, 2018 10:06 pm

jhogue wrote: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.
100 percent agree on point 2, still pondering point 1. :)
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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 pugchief » Tue Apr 03, 2018 2:24 pm

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.
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Re: Realistic Expectations for Long Bonds

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

pugchief 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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