Meaning of 1-3 yr and 10-30 yr treasury ladders

Discussion of the Bond portion of the Permanent Portfolio

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LittleDinghy
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Meaning of 1-3 yr and 10-30 yr treasury ladders

Post by LittleDinghy » Wed Jun 05, 2019 10:47 pm

I'm currently implementing a very Golden Butterfly-like portfolio for our household's nest egg (I'm 3.5 years from retiring at 70.5 and my wife is 8.5 years from retiring at 65). Last year each of us read and committed to the Permanent Portfolio book then found portfoliocharts.com. For the ST treasuries asset, the portfoliocharts site states that "The returns on the site use a 1-3 year ladder...", and for the LT treasuries it states that "The returns on the site use a 10-30 year ladder...but the results are also decent proxies for long term bond funds with longer maturities between 20-30 years."

Question 1:
For the 1-3 year ladder does the GB portfolio hold each rung to maturity and then use the proceeds to buy another rung 3 years out? Or, does it roll over the ladder one year from maturity.

Question 2
I have a very similar question for the 10-30 year ladder (but I'm tempted to use the PP's recommendation of a 20-30 year maturity, starting with a 25-30 year ladder - except that, for the LT bond asset, unlike for the cash asset, the PP book doesn't actually say to use a ladder). Does the GB portfolio hold each rung till the youngest reaches 10 years from maturity, and then sell that rung and use the proceeds to purchase another 30 year rung?

The Schwab fixed income guy on the phone today thought it unwise to rollover a ST bond at 1 year from maturity. He thought one should hold to maturity to konw the return.
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sophie
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Re: Meaning of 1-3 yr and 10-30 yr treasury ladders

Post by sophie » Thu Jun 06, 2019 6:28 am

Welcome LittleDinghy! And congrats on your decision. I think you'll be pleased with this portfolio in retirement.

Most of us go with Harry Browne's recommendations for the cash and bond allocations. It's much simpler than what Tyler uses on his site and either way doesn't affect returns by enough to worry about. You can get more info in the stickied threads in the Cash and Bond sections.

Brief summary, cash is ideally a collection of Treasury bills held to maturity and auto-rolled, or a Treasury-only money market fund. As it happens, 1 and 3 month T bills are winning over almost everything else now so that's what most of us are using. It's also perfectly fine to use US Savings Bonds, a bank savings account, CDs, and money markets like Vanguard Prime - just be aware of the added risk of some of these (tiny as it is).

Going out to 3 years duration has been done in the past to squeeze out a bit more return on cash, though you wouldn't want to do it now as the returns would actually be lower than the 1 month T bill. That involves buying a ladder of 3 year Treasuries held to maturity. You typically only want to do this for "deep" cash that you don't expect to have to use, as there is a cost to sell one of those notes on the secondary market.

For long bonds, buy either TLT or equivalent, or 30 year Treasury bonds directly. Hold these for 10 years, then sell and replace with new 30 year bonds. These tend to be more volatile than TLT, which is actually what you want. Plus, direct ownership reduces your effective expense ratio. (for bonds: this is the bid-ask spread divided by 20 years; for TLT the ER is 0.15 annually).
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moda0306
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Re: Meaning of 1-3 yr and 10-30 yr treasury ladders

Post by moda0306 » Thu Jun 06, 2019 7:30 am

Where has Tyler posted his method? I'm getting more and more interested in hitting higher-yielding portions of the yield curve vs a solid barbell.
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Re: Meaning of 1-3 yr and 10-30 yr treasury ladders

Post by johntaylor » Thu Jun 06, 2019 8:04 am

moda0306 wrote:
Thu Jun 06, 2019 7:30 am
Where has Tyler posted his method? I'm getting more and more interested in hitting higher-yielding portions of the yield curve vs a solid barbell.
Tyler rocks:
memberlist.php?mode=viewprofile&u=949
https://portfoliocharts.com/
more about his personal version of the PP:
https://portfoliocharts.com/2015/09/22/ ... butterfly/
https://portfoliocharts.com/2016/04/18/ ... butterfly/
LittleDinghy
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Re: Meaning of 1-3 yr and 10-30 yr treasury ladders

Post by LittleDinghy » Thu Jun 06, 2019 9:16 am

Sophie thank you for your kind welcome!
sophie wrote:
Thu Jun 06, 2019 6:28 am

For long bonds, buy...30 year Treasury bonds directly. Hold these for 10 years, then sell and replace with new 30 year bonds. These tend to be more volatile than TLT, which is actually what you want.
I'm a little confused between the above quote from your post and what I read in "The Permanent Portfolio." Page 94 of The Permanent Portfolio book (PP book) states "Buy a U.S. Treasury long term bond with 25 to 30 years maturity" and goes on to recommend rolling it over when it has 20 years to maturity, just as you do above.

Both your and the PP book's recommendation is to place 25% of my household portfolio into one issue of treasuries. 25% of our household portfolio is a sizable dollar amount. Is it really better to use this whole 25% to buy one issue of treasuries (whether all 30 year at auction, or one issue somewhere between 25 and 30 years per the PP book), or is it better to buy a ladder of treasuries with the rungs of the ladder being 25, 26, 27, 28, 29, and 30 years to maturity?

Thank you.
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Tyler
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Re: Meaning of 1-3 yr and 10-30 yr treasury ladders

Post by Tyler » Thu Jun 06, 2019 10:56 am

LittleDinghy wrote:
Wed Jun 05, 2019 10:47 pm
Question 1:
For the 1-3 year ladder does the GB portfolio hold each rung to maturity and then use the proceeds to buy another rung 3 years out? Or, does it roll over the ladder one year from maturity.

The Schwab fixed income guy on the phone today thought it unwise to rollover a ST bond at 1 year from maturity. He thought one should hold to maturity to konw the return.
Welcome!

The bond models on the Portfolio Charts follow standard bond index fund practices and do not hold bonds all the way to maturity. So the ST 1-3 year index sells them when they reach 1 year, and the LT 10-30 year index sells them when they reach 10 years. Practically speaking, if managing your own ST bond ladder I personally wouldn't mess with selling them with 1 year left. Letting them mature and auto-rolling the proceeds into new 3-year bonds is just fine. Or you can just buy an index fund like SHY and let them take care of it.

moda0306 wrote:
Thu Jun 06, 2019 7:30 am
Where has Tyler posted his method? I'm getting more and more interested in hitting higher-yielding portions of the yield curve vs a solid barbell.
You can find my bond fund calculation methodology here: https://portfoliocharts.com/bond-index-calculator/

Note that the downloadable spreadsheet will also let you calculate the returns for a bond ladder with any range of maturities that you like.
PortfolioCharts.com : a picture is worth a thousand calculations
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Re: Meaning of 1-3 yr and 10-30 yr treasury ladders

Post by pmward » Thu Jun 06, 2019 11:25 am

LittleDinghy wrote:
Thu Jun 06, 2019 9:16 am
Both your and the PP book's recommendation is to place 25% of my household portfolio into one issue of treasuries. 25% of our household portfolio is a sizable dollar amount. Is it really better to use this whole 25% to buy one issue of treasuries (whether all 30 year at auction, or one issue somewhere between 25 and 30 years per the PP book), or is it better to buy a ladder of treasuries with the rungs of the ladder being 25, 26, 27, 28, 29, and 30 years to maturity?

Thank you.
You would have to define "better". It's different, but whether that difference is better or worse depends. Either way, the difference would not be very large in the grand scheme. We had a topic that talked a lot about this here: viewtopic.php?f=3&t=9940
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Re: Meaning of 1-3 yr and 10-30 yr treasury ladders

Post by Pet Hog » Thu Jun 06, 2019 7:10 pm

LittleDinghy wrote:
Thu Jun 06, 2019 9:16 am
Is it really better to use this whole 25% to buy one issue of treasuries (whether all 30 year at auction, or one issue somewhere between 25 and 30 years per the PP book), or is it better to buy a ladder of treasuries with the rungs of the ladder being 25, 26, 27, 28, 29, and 30 years to maturity?
One strategy you might like to consider is somewhere between the two.

I have a "ladder" of two long-term treasuries (a step-ladder, if you will!) of approximately equal value, with one paying coupons in February/August and the other in May/November. This way I get an interest payment every quarter, each one about the same amount. And I'm not getting too much cash at once, and I have four days a year (rather than two) to consider a reinvestment/rebalance strategy. Next time I sell, I will make sure they are staggered about three years apart. That means it renews as a 30/27-year-maturity ladder, and when it becomes a 27/24-year ladder it's time to sell again. So you sell one every three years and buy a 30-year treasury at auction, holding each for six years. Keeping the maturities in the 30-to-24-year range ensures high volatility and long duration, better matching the volatility of the stock and gold tranches -- a feature I think should help in these days of low interest rates.

And not too complicated to implement as part of a 35/15 rebalancing strategy.
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Re: Meaning of 1-3 yr and 10-30 yr treasury ladders

Post by Kbg » Thu Jun 06, 2019 10:21 pm

Yeah, confusing and involves quite a bit of work...or for a small fee of:

.07% VGLT (Vanguard Long Term Treasury ETF, duration 17.1 years)

.15% TLT (iShares 20+ Year Treasury Bond ETF, duration 17.7 years)

Yes, there is a cost over DIY and you can quite easily compute what that cost will be precisely using the above...what you gain by simplification is the following:

1. One and done (buy the fund once and do nothing from that time forward)
2. Single transaction "cash out" if you need to do that
3. Simplified tax records (one fund vs. multiple bonds you have to report on)
4. You can do things in chunks less than $100, reinvest etc.
5. If your inheritors aren't into financial stuff, much more simplified to liquidate (or just keep the whole thing on autopilot)

We humans make errors. I like this stuff, am fairly knowledgeable concerning trading and finance and I make errors all the time that cost money. I can assure you that if you like/are willing to keep detailed records and are willing to hold your self extremely accountable you will find DIY costs you money via various errors and simple inefficiencies.

If the above appeals to you then here's how you can make the bonds component extremely close to the HBPP with minimal hassle.

Buy VGLT for the long bond side

Buy Vanguard Prime MM or Vanguard short term treasury ETF for the short term side (VGSH)

Two funds, were done here. Let's go golf (or whatever)

(OK I lied just a little...you do have to figure out what to do with the interest getting spun off if you aren't living on it...so whether bonds or an ETF you are getting interest anywhere from monthly to every six months and you also have to manage that. Let's say you want to reinvest the interest, in my mind there is no comparison which method will involve less work)

Just an alternative viewpoint for consideration
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sophie
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Re: Meaning of 1-3 yr and 10-30 yr treasury ladders

Post by sophie » Sat Jun 08, 2019 9:46 am

Little, if I were in your shoes I would put the entire bond allocation into one purchase of long treasuries (after taking a good stiff drink probably). And I'd also hold off doing so for a few days because the market just did something strange and bond prices will probably settle a bit. You'll end up doing it that way anyway, because for a sizeable purchase like that it's worth waiting for the next 30 year auction rather than buying on the secondary market.

In accounts where buying AND selling directly held treasuries is inconvenient or impossible, buy TLT or your long Treasury fund of choice.

Don't reinvest the TLT dividends. Let them pile up as cash, along with the bond interest payments.

Put a note in your calendar to sell the long bonds in 10 years and buy new ones. There's nothing to do until then except sit back and collect the coupon payments! Once you've done this it will seem a lot less intimidating.

Between now and retirement, add new contributions to the cash allocation and rebalance when/if cash goes hits the top of your rebalancing band. If your rebalance plan calls for buying bonds, you can either add to the long bonds or buy TLT, whatever you want at the time.
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Re: Meaning of 1-3 yr and 10-30 yr treasury ladders

Post by Kbg » Sat Jun 08, 2019 11:02 am

Sophie,

Why TLT over VGLT?
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sophie
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Re: Meaning of 1-3 yr and 10-30 yr treasury ladders

Post by sophie » Sat Jun 08, 2019 12:58 pm

TLT or equivalent. Just got lazy typing.
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