Help me understand

[fi50@fi2023]

Hello all - long time reader and sporadic poster. I've read the HB book and Craig's update and I'm still feeling strange about buying 30 year bonds in today's climate. Could someone point me to a post that is helpful? Sorry for the ignorance.

[barrett]

Hello all - long time reader and sporadic poster. I've read the HB book and Craig's update and I'm still feeling strange about buying 30 year bonds in today's climate. Could someone point me to a post that is helpful? Sorry for the ignorance.

I don't know of any one post that you should read. If you've read the PP book and you still can't bring yourself to buy 30-year bonds, then I would say don't do it. Harry Browne himself always said to walk away from an investment opportunity that you didn't understand or like... that there would always be other opportunities. Just curious if you are comfortable with the other PP components.

[flyingpylon]

I think the standard advice in this situation is that you just have to like the overall PP, not all four of its components at once. There will almost always be one of them that is out of favor, and then when you least expect it, it will surprise you.

[Cortopassi]

Take a look here:

http://markets.ft.com/data/bonds

See that the US 30 year has a higher yield than Japan, UK, Euro.

I've struggled with this one. Why does the US, likely far and away the safest of those four, have the highest yield?

All I can come up with is it is an anomaly and that US yields have further down to travel over the next few years.

I'm sure many will disagree.

[fi50@fi2023]

Thanks for the feedback. The 3% yield is good under the circumstances. How does TLT tend to perform during a slow and steady interest rate increase? I would imaging it's better to have TLT on the way up and individual bonds on the way down. Thoughts?

[boglerdude]

Gary Shilling is one of the few long bond advocates. Predicts 1% on the 10 year.

Anyone want to share the cost of the newsletter? =) Sample:
http://www.macrovoices.com/publications ... etter/file

"Why does the US, likely far and away the safest of those four, have the highest yield?"

Expected inflation, real return should be the same. eg. a Japanese bond at 0% vs a US at 0%, you'd buy the Japanese bond because expected inflation/debasement of yen is lower.

[Drewskers]

Hello all - long time reader and sporadic poster. I've read the HB book and Craig's update and I'm still feeling strange about buying 30 year bonds in today's climate. Could someone point me to a post that is helpful? Sorry for the ignorance.

Feelings shouldn't have anything to do with it. If you are a Harry Brown Permanent Portfolio adherent than adhere to the rebalancing system he outlined. No investment plan works if you do not stick to the plan. If you cannot stomach executing the plan, then it is not the plan for you. Find a plan you can stomach.

Lest you think I am being harsh, I'll just say, I don't follow the HBPP. I maintain a risk-managed PP, according to criteria I have developed for myself and my personal risk tolerance and financial objectives. And currently have no holdings in long-term bonds (or gold)!

[Drewskers]

By the way, the standard rule of thumb is that for every percentage-point increase in Treasury yields, an investor could expect to lose an amount equal to the bonds duration. This works for bond funds too. For those that hold TLT as the LTT component of their PP, currently TLT's duration is 17.29 years, and the US 20-year treasury yield (symbol $UST20Y on stockcharts.com) has increased from the 1.7% low in July to 2.71% as of today. Therefore the rule of thumb predicts an approximate 17.3% decrease in TLT, and in fact TLT's price has decreased about 17.8% since July. Pretty close!

[barrett]

I liked this post from Pointedstick back in July of 2015:

"Consider this: with rates so low, it's widely accepted here that risk-averse investors have jumped into the stock market in search of yield. This is a dangerous situation because these people don't want to be in stocks; they would prefer fixed income. So let's say Yellen makes the fateful announcement and LTT rates jump. On one hand, prices will fall. But on the other hand, won't a huge amount of people currently holding stocks they don't like sell them and buy bonds that are giving rates closer to what they find reasonable? I think it's quite possible that this flood out of stocks and into bonds could keep bond prices from falling as much as we fear, especially if the exit from stocks becomes a self-fulfilling prophecy and the market slumps due to all the selling, prompting people to buy even more LTTs in their flight to safety."

That thread unfortunately got highjacked by our then resident troll but this point of view is almost certainly valid. I think we can agree that most investors are trying to figure out the correct mix of stocks, bonds and cash. Let's set aside gold for now because it's such a tiny market in dollar terms. There comes a point when bond yields (let's say for sake of clarity that I am talking about the 10-year treasury note) are high enough that stock investors see that they have a viable alternative to holding overpriced stocks. Looks like the yield on the 10-year note is currently at 2.36% while the yield on the S&P is at 2%. So we are likely not yet at that point but, in general, the stock and bond markets tend to be in a relative state of equilibrium. There is a point at which investors will opt for the "risk-free" return of treasuries.

Stock prices have remained high while bond prices have come down some. I believe that at some point the PS flight to treasuries will happen (maybe not for a while but at some point). And to Cortopassi's point, the demand can come from all over the world, not just from US investors.

[fi50@fi2023]

Thanks all for the clarification. I am also trying to understand whether TLT's constant purchasing of new bonds dampens the direct impact of interest rate increases. Does it affect the 1% rule of thumb x duration calculus or is that calculation assuming the constant purchasing by TLT?

[barrett]

Lots of time to ponder and post this morning but I just wanted to add that, with regard to demand from overseas, the Chinese 30-year bond yield is at 3.32%. The US 30-year yield is just over 3%. With the Chinese manipulating their currency downward (RMB is now a 6.92 for one USD), it could be advantageous for them to buy more US debt because it will in turn buy more Renminbi. Of course I don't really know who the Chinese buyers are, but it's a good bet that the buyers have close ties with the currency manipulators.

Will try to crawl back into my hole now.

[barrett]

Thanks all for the clarification. I am also trying to understand whether TLT's constant purchasing of new bonds dampens the direct impact of interest rate increases. Does it affect the 1% rule of thumb x duration calculus or is that calculation assuming the constant purchasing by TLT?

My understanding is that TLT seeks to maintain a more or less constant duration through the purchase of longer duration issues and the sale of shorter duration issues. The 1% rule of thumb holds. Over time the coupon payments will dampen the effect of interest rate rises, but that is less true when rates are this low. And that holds true whether you are using individual treasuries or TLT.

One thing that should definitely not be overlooked about TLT is its .15% expense ratio. So at a 3% yield, about 5% of your coupon payments are being eaten up by the expense ratio. For this reason (among others) many of people who run a PP only uses TLT for small bond allocations and then buy individual treasuries when they have enough funds available. At Fidelity you can buy and sell treasuries at no charge (at least I believe that is correct... you would be wise to call them and ask if/how they make money on treasury transactions).

There was a thread in this section a while back where someone posted a link to an article that looked at rough periods for long bonds between the late 1950s and early 1980s. I am hesitant to provide a link because I read that article again the other day and it was unclear whether the author was writing about real or nominal rates.

[Drewskers]

I don't follow the HBPP. I maintain a risk-managed PP, according to criteria I have developed for myself and my personal risk tolerance and financial objectives. And currently have no holdings in long-term bonds (or gold)!

Could you please elaborate on this? What are you using as risk criteria, signals, etc.?

Trend for each asset class is evaluated on a weekly basis by crossovers of moving average pairs (nominally 10 and 40 week) applied to total return for the asset. When the trend is up (10 week > 40 week) I am long and when the trend is down (10 week < 40 week) I'm in cash. I use secondary indicators (primarily breadth) to resolve stagnant periods when the trend is indeterminate, and maintain trailing stops when the uptrend appears to be degrading.