TLT Study - Inverting History

Discussion of the Bond portion of the Permanent Portfolio

Moderator: Global Moderator

boglerdude
Executive Member
Executive Member
Posts: 376
Joined: Wed Aug 10, 2016 1:40 am

Re: TLT Study - Inverting History

Post by boglerdude » Mon Apr 29, 2019 2:39 am

When and why are Japan's long term rates going to rise?
pmward
Executive Member
Executive Member
Posts: 452
Joined: Thu Jan 24, 2019 4:39 pm

Re: TLT Study - Inverting History

Post by pmward » Mon Apr 29, 2019 9:15 am

Kbg wrote:
Sat Apr 27, 2019 5:08 pm
STTs (or some other ST instrument) are always better than cash unless the nominal rate is actually negative. But again, what to do is not difficult at all. Go with the highest interest rate for a given length and risk level.
I think it does get a bit trickier than that if you look at the countries currency with negative rates. Most of them are negative up until about 10 years out. Since the whole point of the STT is safe money, I'm not sure if there is an appropriate "risk level" for that allocation in that environment. It would be a very hard decision to make, especially with any funds that need short term liquidity (emergency fund, big purchase savings, etc)
User avatar
Kbg
Executive Member
Executive Member
Posts: 1313
Joined: Fri May 23, 2014 4:18 pm

Re: TLT Study - Inverting History

Post by Kbg » Mon Apr 29, 2019 2:40 pm

pmward wrote:
Mon Apr 29, 2019 9:15 am
Kbg wrote:
Sat Apr 27, 2019 5:08 pm
STTs (or some other ST instrument) are always better than cash unless the nominal rate is actually negative. But again, what to do is not difficult at all. Go with the highest interest rate for a given length and risk level.
I think it does get a bit trickier than that if you look at the countries currency with negative rates. Most of them are negative up until about 10 years out. Since the whole point of the STT is safe money, I'm not sure if there is an appropriate "risk level" for that allocation in that environment. It would be a very hard decision to make, especially with any funds that need short term liquidity (emergency fund, big purchase savings, etc)
It's not tricky at all, it's basic math. Using Germany as an example (I just pulled the 10 year rate as it was easy to find):

10yr bond:~-.6%
Inflation rate: 1.7%

Cost of holding 10 year German bond: -2.3% real
Cost of holding cash: -1.7% real

Correct answer: Hold cash

Let's assume the -.6 was a +.6 and it was a STT vs. 10 year bond. Thus, +.6 - 1.7 = -1.1 real.

Correct answer: Hold STTs

Assuming you do not believe you have an accurate crystal ball, the "correct" investment choice for cash and STTs is always an exercise in basic math that any elementary schooler can do.
User avatar
pugchief
Executive Member
Executive Member
Posts: 2747
Joined: Tue Jun 26, 2012 2:41 pm
Location: suburbs of Chicago, IL

Re: TLT Study - Inverting History

Post by pugchief » Mon Apr 29, 2019 5:36 pm

Except STT aren't 10 years, they are 1-3 years (for PP purposes).
User avatar
Kbg
Executive Member
Executive Member
Posts: 1313
Joined: Fri May 23, 2014 4:18 pm

Re: TLT Study - Inverting History

Post by Kbg » Mon Apr 29, 2019 8:46 pm

pugchief wrote:
Mon Apr 29, 2019 5:36 pm
Except STT aren't 10 years, they are 1-3 years (for PP purposes).
"Let's assume the -.6 was a +.6 and it was a STT vs. 10 year bond."
stuper1
Executive Member
Executive Member
Posts: 771
Joined: Sun Mar 03, 2013 7:18 pm

Re: TLT Study - Inverting History

Post by stuper1 » Mon Apr 29, 2019 9:17 pm

Unless I'm missing something, it sounds like you're saying to hold STTs if they have a positive interest rate and hold cash otherwise. Does that mean physical cash? So I would sell my x hundred thousand dollars of STTs and turn it into greenbacks that I would put in my safe deposit box?
User avatar
sophie
Executive Member
Executive Member
Posts: 3070
Joined: Mon Apr 23, 2012 7:15 pm

Re: TLT Study - Inverting History

Post by sophie » Tue Apr 30, 2019 8:16 am

This is probably why European countries are going cashless:

https://www.verdict.co.uk/europe-cashless-society/

Anyway we just went through about 10 years of near zero returns on short term cash instruments, and there are plenty of threads out there on how to optimize. Savings bonds & fee-free bank savings accounts are your friends in a negative short term interest environment. But there's not likely to be a free lunch to partake of for too long, so you may not have much in the way of options. I expect many will turn to dividend stocks which is what happened here - but then if that's the case, it's hard to understand why European stocks haven't been doing well.

Optimizing long bonds is a different story. The US treasury market is too tight to allow for much in the way of arbitrage. When I last bought bonds, I checked yields and it actually worked out better to buy the bond with the lowest rate, because you get more of them for your money. But only slightly better, like a tenth of a percent difference.
User avatar
Kbg
Executive Member
Executive Member
Posts: 1313
Joined: Fri May 23, 2014 4:18 pm

Re: TLT Study - Inverting History

Post by Kbg » Tue Apr 30, 2019 8:34 am

stuper1 wrote:
Mon Apr 29, 2019 9:17 pm
Unless I'm missing something, it sounds like you're saying to hold STTs if they have a positive interest rate and hold cash otherwise. Does that mean physical cash? So I would sell my x hundred thousand dollars of STTs and turn it into greenbacks that I would put in my safe deposit box?
No, I'm saying go with whatever ST instrument gives you the best risk equivalent real rate of return.

If we ever get to the point that banks charge you for holding your cash, yeah that's gonna be problematic in a negative interest rate environment. I have a hard time believing this would happen as they still need deposits to make loans and they can only make loans at a ratio to their reserves. Who knows though. As Meb Faber frequently says...the biggest surprise in my investing career is negative interest sovereigns.

If we actually got to such a situation then I think "real risk" vs. real returns would be the most logical driver as to what to do. Do I just pay the bank to hold my cash or do I store it physically somehow? Personally I'd rather have $100,000 in digital currency somewhere in multiple backed up locations than in physical cash in my home. (Note: I've probably been loose with my definition of cash. What I mean by cash is any form of money that is non-interest bearing. Thus, paper bills, precious metal coins that are legal tender, a debit card, no-interest checking account, pre-paid credit card or PayPal account...whatever.)

Cue gold fans here... :)
pmward
Executive Member
Executive Member
Posts: 452
Joined: Thu Jan 24, 2019 4:39 pm

Re: TLT Study - Inverting History

Post by pmward » Tue Apr 30, 2019 9:04 am

Kbg wrote:
Tue Apr 30, 2019 8:34 am
If we actually got to such a situation then I think "real risk" vs. real returns would be the most logical driver as to what to do.
The only question I have is how does one quantify "real risk"?
User avatar
Xan
Administrator
Administrator
Posts: 2242
Joined: Tue Mar 13, 2012 1:51 pm

Re: TLT Study - Inverting History

Post by Xan » Tue Apr 30, 2019 9:26 am

pmward wrote:
Tue Apr 30, 2019 9:04 am
Kbg wrote:
Tue Apr 30, 2019 8:34 am
If we actually got to such a situation then I think "real risk" vs. real returns would be the most logical driver as to what to do.
The only question I have is how does one quantify "real risk"?
I think it's the same debate we often have with gold: ETF vs big, obvious in-house safe vs hidden in-house safe vs deposit box. Not really a right answer, other than perhaps to diversify.
User avatar
Kbg
Executive Member
Executive Member
Posts: 1313
Joined: Fri May 23, 2014 4:18 pm

Re: TLT Study - Inverting History

Post by Kbg » Tue Apr 30, 2019 7:51 pm

Yep. Let’s skip a rehash shall we. :-)
Kevin K.
Full Member
Full Member
Posts: 92
Joined: Mon Apr 26, 2010 2:37 pm

Re: TLT Study - Inverting History

Post by Kevin K. » Sat May 04, 2019 9:54 am

pmward wrote:
Sat Apr 27, 2019 9:10 am
Another article that I came across today looking at the issue of bond returns going forward: https://movement.capital/analyzing-bond ... ded4b883a5
Thanks very much for posting this article.

Perhaps I'm drawing the wrong conclusion, but in reading this piece, the other article that the OP cited in starting this thread and other recent bond market analysis it seems pretty clear that with baseline Treasury interest rates so low and the yield curve inverted or close to it there's just not much incentive to hold T's with maturities much longer than a year or two. I understand and respect how the 30 year/STT barbell works in "normal" times, of course but with current 30 year rates at 2.93% (not even half a percent more than Tnotes) there's no way the long T's help in a flight-to-safety situation while any surge in interest rates would decimate them. Heck I don't even see any incentive to choose ITT's which would be the normal default choice (risk:reward sweet spot). I'm just not seeing a downside to keeping the entire bond allocation in STT's.
Post Reply