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Bond Convexity

Posted: Mon May 27, 2019 10:54 pm
by Tyler
I'm pretty sure I first heard about bond convexity on this forum, so it feels appropriate to share a little research on that topic. It's a particularly important concept for the Permanent Portfolio not only because of the long term treasuries but also because of how the underlying portfolio theory works. Long story short -- if you've ever wondered if low interest rates negate the PP in some way, don't worry about it! HB truly made a portfolio that is a lot more resilient than you think.

https://portfoliocharts.com/2019/05/27/ ... convexity/

Re: Bond Convexity

Posted: Tue May 28, 2019 9:16 am
by pmward
Great article Tyler. I knew that bonds returned substantially more in capitol appreciation at lower rates, but seeing the graph on paper I didn't realize just how much so. The visual really helps sink the point home. Also, I always assumed that it was symmetric on both ends, I didn't realize it was rigged in a way where the gain from lowered rates outweighs the loss from higher rates. Very interesting indeed. This is a great article for the forum, where there has been a lot of fear about long term bonds.

Re: Bond Convexity

Posted: Tue May 28, 2019 10:23 am
by Xan
Great article, Tyler. Thank you!

Re: Bond Convexity

Posted: Tue May 28, 2019 10:56 am
by Cortopassi
Tyler, I haven't browsed your site for a while -- My Portfolio that combines all charts onto a single page is amazing. Great improvements!

Re: Bond Convexity

Posted: Wed May 29, 2019 8:07 am
by sophie
Tyler, your clear thinking and outstanding chartmaking are phenomenal. Thank you for this insightful piece! Well timed, because it's coming on time to buy some long bonds.

Are you thinking of publishing a book based on your website?

Re: Bond Convexity

Posted: Wed May 29, 2019 10:06 am
by Tyler
Thanks, guys. Glad you like it! This particular article was kinda fun because I also feel like I learned something in the process.

@Sophie -- I've thought about writing a book a few times, but then I get distracted with a new chart idea and the book goes on the back burner. ;D I've been writing long enough that I do feel like I finally have a decently fleshed-out perspective, so one of these days I'll have to jot down an outline and maybe give it a try.

Re: Bond Convexity

Posted: Wed May 29, 2019 2:05 pm
by Kevin K.
First of all I want to join the chorus here in thanking Tyler for yet another brilliant and eye-opening post on his site, which continues to improve having already established itself as (in my opinion) the single most useful educational resource for investing on the web.

I also feel obliged to share a persona mea culpa which is that I substituted IT Treasuries (plus a year's worth of living expenses in a Treasury MM account) for the bond barbell specified in both the PP and GB. While long-term returns have been similar, I didn't realize that in doing this I had also greatly decreased the average duration of my bonds, which would be close to 15 years for a classic barbell vs. 5-7 for a typical IT Treasury fund.

I really appreciate this forum - and realize that I underestimated Mr. Browne's genius once again.

Re: Bond Convexity

Posted: Wed May 29, 2019 3:19 pm
by pmward
Kevin K. wrote:
Wed May 29, 2019 2:05 pm
First of all I want to join the chorus here in thanking Tyler for yet another brilliant and eye-opening post on his site, which continues to improve having already established itself as (in my opinion) the single most useful educational resource for investing on the web.

I also feel obliged to share a persona mea culpa which is that I substituted IT Treasuries (plus a year's worth of living expenses in a Treasury MM account) for the bond barbell specified in both the PP and GB. While long-term returns have been similar, I didn't realize that in doing this I had also greatly decreased the average duration of my bonds, which would be close to 15 years for a classic barbell vs. 5-7 for a typical IT Treasury fund.

I really appreciate this forum - and realize that I underestimated Mr. Browne's genius once again.
The barbell done by HB's methods is a 12.75 year average maturity (25 year average maturity on the long side, .5 year average maturity on the short).

Adding in short term bonds with a 2 year average maturity as opposed to 1 year T-Bills gives a 13.5 year average maturity.

Buying 30 years and selling at 25 years and using the short term bonds with a 2 year average maturity is a 15 year average maturity.

All these common variations are all actually very close to each other.

Re: Bond Convexity

Posted: Wed May 29, 2019 3:42 pm
by pugchief
+1 on Tyler's awesomeness

Re: Bond Convexity

Posted: Thu May 30, 2019 11:29 pm
by Kbg
Tyler,

That was extremely well done...your favorite recent graph, is my new favorite bond graph (ever).

Re: Bond Convexity

Posted: Fri May 31, 2019 11:12 pm
by Tyler
Thanks!

I can honestly say I've learned a lot of what I know from discussions on this forum, and you even helped inspire me to make many of my charting tools. So I'm always happy to give back.