Realistic Expectations for Long Bonds

Discussion of the Bond portion of the Permanent Portfolio

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Hal
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Re: Realistic Expectations for Long Bonds

Post by Hal » Wed Mar 14, 2018 8:57 pm

stuper1 wrote:I think the problem is that the PP hasn't really been tested in a situation where bond yields are on a long-term upward trend. The period prior to 1981 doesn't really count in my eyes because the U.S. was just coming off the gold standard, and the skyrocketing gold price helped the PP immensely. Nobody really knows whether the PP will be able to keep up satisfactorily against a long-term bond price-decline headwind.
Exactly !

That's why I like to understand the principles behind the PP (or any other portfolio method Eg: Bogle Portfolio), and just not blindly follow the method.
Have learnt so much since discovering Harry Browne.

What worked in the past may not work in the future - life is never predictable.
Eg; Father lived in Germany through WW2. No portfolio allocation would have been profitable. - Got out alive, he was happy.
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Re: Realistic Expectations for Long Bonds

Post by drumminj » Wed Mar 14, 2018 11:30 pm

Hal wrote:Father lived in Germany through WW2. No portfolio allocation would have been profitable. - Got out alive, he was happy.
I suspect physical gold, especially if held in another country, would have helped significantly?
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Re: Realistic Expectations for Long Bonds

Post by Hal » Thu Mar 15, 2018 4:29 am

drumminj wrote:
Hal wrote:Father lived in Germany through WW2. No portfolio allocation would have been profitable. - Got out alive, he was happy.
I suspect physical gold, especially if held in another country, would have helped significantly?
Agree with you there ! Not profitable, but definitely helpful.
Couldn't see him filling a bag full of German Long Duration Bonds would have been much use ;D

B.T.W, seeing this is a Bond Forum. What happened to the Bonds during the American Civil War? I believe the US went of the gold standard to greenbacks (fiat) at the same time
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Re: Realistic Expectations for Long Bonds

Post by barrett » Thu Mar 15, 2018 9:20 am

glennds wrote:Let me get this straight... the discussion is among a group of believers in a defensive portfolio strategy built around the premise that nobody can predict the future.
And we are questioning one of the four components of that same portfolio because of our prognosis of the future?
I think the discussion is more nuanced that than, glennds. We aren't really trying to predict the future... just discussing what bonds are capable of when starting from a base level of 3%. Also, I think Harry Browne would approve of discussions like this as even he did a lot of tweaking on his way to the 4X25 allocation.

I reread the bond section in Craig and MT's book last night. In addition to the great performance by bonds in 2008, they also highlighted their performance in 2011 when they went up 33% and the stock market was choppy, but ultimately flat, for the year. But in both of those cases, the run ups were short lived (meaning these are not multi-year trends). One of my contentions is that a PP investor has to look at their portfolio more than once a year, or risk missing the opportunity of rebalancing out of bonds when they are high. They have upside limits that just aren't the same as with stocks and gold.
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Re: Realistic Expectations for Long Bonds

Post by glennds » Thu Mar 15, 2018 9:45 am

barrett wrote:
glennds wrote:Let me get this straight... the discussion is among a group of believers in a defensive portfolio strategy built around the premise that nobody can predict the future.
And we are questioning one of the four components of that same portfolio because of our prognosis of the future?
I think the discussion is more nuanced that than, glennds. We aren't really trying to predict the future... just discussing what bonds are capable of when starting from a base level of 3%. Also, I think Harry Browne would approve of discussions like this as even he did a lot of tweaking on his way to the 4X25 allocation.

I reread the bond section in Craig and MT's book last night. In addition to the great performance by bonds in 2008, they also highlighted their performance in 2011 when they went up 33% and the stock market was choppy, but ultimately flat, for the year. But in both of those cases, the run ups were short lived (meaning these are not multi-year trends). One of my contentions is that a PP investor has to look at their portfolio more than once a year, or risk missing the opportunity of rebalancing out of bonds when they are high. They have upside limits that just aren't the same as with stocks and gold.
Very fair and valid points!
Help out a simpleton (me) here - could the analysis be less binary that interest rate outlook=bond performance? Might there be other unpredictable factors that could influence the bond market one way or another? Examples - market forces of supply and demand brought about by: flight to safety, comparatively less attractive alternatives elsewhere, economic conditions as HB outlined? Or perhaps other reasons capital might tend to flow from one asset class to another. Maybe you buy the dog because it suddenly has less fleas than the one you currently own. Sometimes I think of those times when I'm driving on the highway, my speed doesn't change, but suddenly it seems like I'm going faster simply because everyone else is going slower. In relative terms I'm now outperforming (in speed) even though I haven't changed.

On a partially unrelated note, I think there may be much more influence in the T30 market today than there was in HB's time, as a result of foreign government purchasing, sovereign wealth funds, and other massive buyers. Granted it's a huge market but I wonder if the size of the holdings and sheer buying volume of these institutional and governmental buyers isn't a material influence, and possible distortion, all on it's own. If there's any merit to this observation, then what's a little HBPP fella to do if such forces restrict the protective features of the one asset class from pulling the load when you need it?

Thanks in advance for any insight on either of these two points,
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buddtholomew
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Re: Realistic Expectations for Long Bonds

Post by buddtholomew » Thu Mar 15, 2018 12:34 pm

Theoretically LTT’s have a ceiling at 0%, but in practice fixed income investments can have -ve yields. Is that realistic to expect, I don’t know.
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Re: Realistic Expectations for Long Bonds

Post by dualstow » Thu Mar 15, 2018 2:50 pm

barrett wrote: So, what ARE realistic expectations for long bonds at the moment?
Great question, barrett. I know less than you, which is why I haven't had much to say.
I recently decided not to buy any new long bonds, but I haven't sold any either. I've got some reaching their "best before" date in 2020, where "best before" = only 20 years left on them.

Instead, I may put new money toward gold, an asset that I have also previously thought about not adding to. :-) That's my own situation. Because of the vp, gold is nowhere near 25% of my total holdings (but it *is* 25% of my pp).
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Re: Realistic Expectations for Long Bonds

Post by Cortopassi » Thu Mar 15, 2018 4:14 pm

I've asked before, without any answers I understand:

--Why are US long treasuries at such a higher interest rate than various European and Asian countries? Only European country with a higher yield is Greece! I would think the US should be the lowest of virtually anywhere except what, Japan and Germany?

--So looking at it this way, I would say US bonds still have a better than 50/50 chance of increasing in value and dropping yield.

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Re: Realistic Expectations for Long Bonds

Post by Cortopassi » Fri Mar 16, 2018 2:43 pm

And this from Mish:

https://www.themaven.net/mishtalk/econo ... z2PU_1Jx9Q

Takeaway:

Debt Deflation Coming Up

I expect another round of asset-based deflation with consumer prices and US treasury yields to follow.

Buy long-term treasury calls or long-duration Treasury ETFs.

The higher rates get, the better those calls and ETFs look, even if we do not hit convergence.
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Re: Realistic Expectations for Long Bonds

Post by ochotona » Fri Mar 16, 2018 2:46 pm

Having taken tax losses from bonds, I am going to rebuy them after the 30 day period is over. Thank you interest rate demigods for the little tax loss.
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Re: Realistic Expectations for Long Bonds

Post by dualstow » Fri Mar 16, 2018 2:52 pm

ochotona wrote:...
Thank you interest rate demigods
...
How about the bond vigilantes?
https://en.wikipedia.org/wiki/Bond_vigilante
✓ I should put them in my sig.
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Re: Realistic Expectations for Long Bonds

Post by barrett » Sat Mar 17, 2018 7:30 am

Cortopassi wrote:I've asked before, without any answers I understand:

--Why are US long treasuries at such a higher interest rate than various European and Asian countries? Only European country with a higher yield is Greece! I would think the US should be the lowest of virtually anywhere except what, Japan and Germany?

--So looking at it this way, I would say US bonds still have a better than 50/50 chance of increasing in value and dropping yield.
Hey Cortopassi,

I put your question to a high school friend of mine who works for Pimco. Here is his response:


There is a lot underneath your question. Intl Govt Bond yields are impacted by:
Inflation Expectations in each country
Growth Expectations in each country
Short Term borrowing rates in each country
Perceived safe haven status
Central Bank bond buying actions (known as QE)
Currency expectations
Amount of debt issuance

All of these are in play in the answer today. But I do not have time to type a whole book. A few key points for now:

-US deficits will be growing due to new tax law; there needs to be more US treasury issuance to accommodate; more issuance (supply) means price goes down (and yield goes up)

- Foreign governments are still VERY active in QE; ECB continues to buy almost $60 billion per month; Japan’s MOF keeps 10 year yields at 0% by mandate and buys whenever they rise to 0.10% and sells whenever they reach -0.10%; for a few years, German Bunds were negative yields too as everyone was afraid to keep money in the banks, they all bought Bunds

- a more regular impact is from short rates in each country; when an institutional investor buys a Euro Gov’t Bond, they must sell dollars, buy euros, then buy the bond; many do this as a financed trade, so calculation must include borrowing in Euro with short rate (detractor) from return; and receiving short US rates

Lastly today has an interesting twist. One would think with the much higher US rates, the currency would be doing well (it hasn’t). This conundrum is discussed in a short blog on our website pimco.com from Mohsen Fahmi.


This is me writing again. My guess would have been that the yield disparity between countries was mostly a result of currency risk. I guess that is only one factor but it's pretty easy to imagine that a person living in Europe, say, and buying US bond yielding 3% annually, could get hammered by a 5-10% drop in the Euro.
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