Realistic Expectations for Long Bonds

Discussion of the Bond portion of the Permanent Portfolio

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jhogue
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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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Xan
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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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I Shrugged
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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.
Luckin Coffee, another reason why I mostly stick to the domestic (U.S.) market
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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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dualstow
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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.
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Tyler
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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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Cortopassi
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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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I Shrugged
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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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