Bond duration compensation

Discussion of the Bond portion of the Permanent Portfolio

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WhiteElephant
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Re: Bond duration compensation

Post by WhiteElephant » Wed Jan 16, 2019 2:49 pm

Thanks for your post Kevin K.
Because of concern about long term bonds, I adjusted my portfolio by lowering duration. Currently you gain very little by holding on to long-term bonds while the potential downside risk is incredible. It's probably even worse for a Eurozone PP, like mine.

Maybe rates will stay this low for 20+ years, that’s possible of course. But if they don’t it’s possible to suffer very severe losses. Especially if stocks and gold decide to go down as well.

I couldn't feel comfortable anymore by holding on to my eurozone bonds so I've traded them for short-term CD's. Because the duration of my fixed income is much lower now, I've lowered my gold exposure as well, and increased the equity part a bit.

I've basically transitioned into a low duration Desert Portfolio now. Not perfect, but it definitely feels safer than my previous allocation.
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buddtholomew
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Re: Bond duration compensation

Post by buddtholomew » Wed Jan 16, 2019 4:27 pm

Interestingly, when there is a flight to safety 3.07% (today’s yield) looks appealing. Not so long ago investors were holding onto LTT’s in the 2.5% and lower range.

Don’t forget we want LTT’s not for the increased yield but rather the increased duration. A 1% rise is a 17% loss, BUT a 1% decline is a 17% gain...
WhiteElephant
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Re: Bond duration compensation

Post by WhiteElephant » Thu Jan 17, 2019 1:10 am

A 3% yield might still look appealing, but what about long-term yields <1%, like Germany? When are yields too low?

30year German bonds are yielding 0.8% currently, that’s comparable with a 2-year CD with basically zero risk.

The volatility of yield changes at such a low starting point will be explosive. I didn’t feel comfortable with this anymore, and adjusted my portfolio accordingly.
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