Why should I buy Treasuries now?

[MediumTex]

As craig said, though, long term bonds are going to pay you a nice coupon yield even if rates don't fall, and if rates do begin to edge back up that will probably be a symptom of a recovering economy, as opposed to this crazy inflation that everyone seems to be expecting (though no one seems to have a clue where people are going to get the money to pay these future higher prices).

From an international sell-off of U.S. Treasury securities, perhaps?

When fear reaches critical mass, it creates a "run" on whatever is feared.  Human nature, I guess.  If enough of our foreign creditors come to the eventual realization that U.S. federal debt is a Ponzi scheme--and the biggest one ever, at that--they just might feel the urge to sell their dollars instead of sit on them.  If that were to happen, I'm guessing we'd see the dollar prices of a lot of goods and services start to get bid up by our foreign creditors.

Not sure how likely that scenario is, though.  If a sell-off happens, maybe it will happen slowly enough for the market to adjust to the change in novel and perhaps totally unforeseen ways.

Here's what is important to think about when considering that scenario, though:

If everyone is selling treasuries, what are they going to be buying?  Greek debt? Irish debt? Latin American debt? Russian debt? Japanese debt? 

In other words, the U.S. only looks broke until you begin comparing it to other nations, and all of the sudden the U.S. doesn't look so bad.

[LNGTERMER]

I wanna tell you about Texas Radio and the PP
Comes out of the Virginia swamps
Cool and slow with plenty of precision
With a structure that is narrow and hard to master

Some call the PP heavenly in its brilliance
Others, mean and scornful of the Wall Street dream
I love the friends I have gathered together in this internet forum
We have discussions in honor of our investments
This is the land where the Masters of the Universe died

The non-correlated asset Negroes in the forest brightly feathered
They are saying, "Forget Jim Cramer and his minions.
Live with us in forests of indifference toward future market conditions.
Out here on the perimeter there is no CNBC reception.
Out here we is stoned - until it's time to rebalance."

Listen to this, and I'll tell you 'bout the heartache
I'll tell you 'bout the heartache and the loss of capital
I'll tell you 'bout the hopeless bear market night
The meager food for souls forgot
I'll tell you 'bout the hedge fund manager with raw iron soul

I'll tell you this
No eternal reward will forgive us now for wasting our hard earned savings

I'll tell you 'bout Texas Radio and the PP
Soft drivin', slow and mad, like some new investing language

Now, listen to this, and I'll tell you 'bout the Texas
I'll tell you 'bout the Texas Radio
I'll tell you 'bout making non-correlated assets and volatility work for you
Wandering far from the dens of fortune tellers and thieves
I'll tell you 'bout the PP and its simple beauty

bravo MT, awesome.

Edit:

Here's what is important to think about when considering that scenario, though:

If everyone is selling treasuries, what are they going to be buying?  Greek debt? Irish debt? Latin American debt? Russian debt? Japanese debt?

The relativity theorem as described by Einstein prevails here, the US is strong comparatively, a reaffirmation that the laws of physics do apply to ecomomics as well . I am really starting to see the wisdom of HB.

[Storm]

Man, what an awesome Doors song you just made up new lyrics to, MT.

Craig, you need to get a loop of that song where Jim Morrison isn't talking, just loop it in Garageband over and over again, and do your best Jim Morrison impression... 

[yankees60]

I am only resurrecting this nearly 10 year old Topic because it seems to be a frequently asked question at various times - LIKE NOW!


Vinny

[yankees60]

The only economic condition that scares me is long term deflation, in part because it suggests a deeply dysfunctional underlying economy with problems that can take decades to fully address.

Contrary to common perception, inflation in a reserve currency is not that big a deal--it can be easily tamed through raising interest rates (as Volcker did the one and only time the U.S. saw a prolonged period of inflation in the last 100 years).  The same is not true when it comes to deflation--once the central bank gets to zero, no more interest rate cuts are possible, and we are seeing the futility of alternative efforts to juice the economy such as QE.

The only protection against deflation is long term bonds; that's reason enough for me to have them.

I think that the whole "interest rates are about to skyrocket" story is yet another media-created narrative that has little basis in reality.  When you look at long term interest rates based upon expected future output (which is what really drives long term rates), you see a mean of around 4% that has held up for hundreds of years.  Right now, we have inflation expectations of about zero and long term bond rates a little over 4%, which seems about right to me.  If deflation fears resurface (and I think they probably will), it's easy to imagine long term treasury yields going to 2% or lower.

As craig said, though, long term bonds are going to pay you a nice coupon yield even if rates don't fall, and if rates do begin to edge back up that will probably be a symptom of a recovering economy, as opposed to this crazy inflation that everyone seems to be expecting (though no one seems to have a clue where people are going to get the money to pay these future higher prices).

The more time I spend around the PP, the more I feel like I can "see into" the wisdom and soundness in its design.  The fact that it hides in plain sight and few people will ever avail themselves of its safety and stability is just something that a PP investor has to learn to accept.

One thing that the PP teaches you is that you don't know as much about the future as you think you do.  Once this reality begins to fully sink in (and it takes a while), it leads to the additional realizations that you may also not know as much about the past or present as you think you do.  These insights can lead to a durable foundation of humility, which can form the basis for great improvements in decision-making across the board.

This was an outstanding post within this Topic.....

Vinny

[Tortoise]

This was an outstanding post within this Topic.....

I'm sure you've noticed in your "forum archaeology" that MediumTex generated a disproportionately large number of outstanding posts here. The guy has a rare clarity of thought and expression.

[yankees60]

This was an outstanding post within this Topic.....

I'm sure you've noticed in your "forum archaeology" that MediumTex generated a disproportionately large number of outstanding posts here. The guy has a rare clarity of thought and expression.

Yes. But only later.

I first focused all on Craig. Read every single post he ever wrote on the Bogle Heads forum. Then, in the process, discovered here and read everything that we wrote here. Since he was a prolific poster in both places that took a fair amount of time.

It was only when I embarked on my forum archeology, I then discovered that Tex was Craig's equal. And, actually, upon joining this forum, it was Tex to whom I sent my first private message, thanking him for the book. At that time, I was unaware that he'd basically stopped participating.

Vinny

[AdamA]

It was only when I embarked on my forum archeology, I then discovered that Tex was Craig's equal. And, actually, upon joining this forum, it was Tex to whom I sent my first private message, thanking him for the book. At that time, I was unaware that he'd basically stopped participating.

Vinny

When I first discovered this forum I used to check every day to see if he had posted anything new. His stuff was really great. Articulate and thought provoking.

I wonder what happened to him.

[yankees60]

Wow, this is impressive. Looks like M*, Yahoo and Google provide simply the price charts as you said. Good point.

Stockcharts.com uses total return as Madmoney points out. Morningstar also uses total returns as well as price charts. If you want to build a tracking portfolio I recommend using Morningstar. It will include total returns YTD which includes all dividends, etc. Stockcharts is excellent for looking at historical performance of allocations that includes dividends as well.

Is this any longer true at either Stockcharts.com or Morningstar?

I just made a quick stop at Stockcharts.com and what is described here did not jump out at me. What did was a chart. And, Morningstar seems to have moved away from giving a lot away for free to now charging for almost everything?

Vinny

[pmward]

Wow, this is impressive. Looks like M*, Yahoo and Google provide simply the price charts as you said. Good point.

Stockcharts.com uses total return as Madmoney points out. Morningstar also uses total returns as well as price charts. If you want to build a tracking portfolio I recommend using Morningstar. It will include total returns YTD which includes all dividends, etc. Stockcharts is excellent for looking at historical performance of allocations that includes dividends as well.

Is this any longer true at either Stockcharts.com or Morningstar?

I just made a quick stop at Stockcharts.com and what is described here did not jump out at me. What did was a chart. And, Morningstar seems to have moved away from giving a lot away for free to now charging for almost everything?

Vinny

Yes stockcharts.com's "Perf Chart" includes total return with all distributions included. PortfolioVisualizer also does the same. Stockcharts.com a bit overkill for anyone that only wants to track performance, so unless you want the advanced charting abilities PortfolioVisualizer is probably the tool I would recommend.

[foglifter]

Wow, this is impressive. Looks like M*, Yahoo and Google provide simply the price charts as you said. Good point.

Stockcharts.com uses total return as Madmoney points out. Morningstar also uses total returns as well as price charts. If you want to build a tracking portfolio I recommend using Morningstar. It will include total returns YTD which includes all dividends, etc. Stockcharts is excellent for looking at historical performance of allocations that includes dividends as well.

Is this any longer true at either Stockcharts.com or Morningstar?

I just made a quick stop at Stockcharts.com and what is described here did not jump out at me. What did was a chart. And, Morningstar seems to have moved away from giving a lot away for free to now charging for almost everything?

Vinny

Yes stockcharts.com's "Perf Chart" includes total return with all distributions included. PortfolioVisualizer also does the same. Stockcharts.com a bit overkill for anyone that only wants to track performance, so unless you want the advanced charting abilities PortfolioVisualizer is probably the tool I would recommend.

PV is a great tool, unfortunately their new business model removed the most interesting features from the basic account.

[Kevin K.]

The only economic condition that scares me is long term deflation, in part because it suggests a deeply dysfunctional underlying economy with problems that can take decades to fully address.

Contrary to common perception, inflation in a reserve currency is not that big a deal--it can be easily tamed through raising interest rates (as Volcker did the one and only time the U.S. saw a prolonged period of inflation in the last 100 years).  The same is not true when it comes to deflation--once the central bank gets to zero, no more interest rate cuts are possible, and we are seeing the futility of alternative efforts to juice the economy such as QE.

The only protection against deflation is long term bonds; that's reason enough for me to have them.

I think that the whole "interest rates are about to skyrocket" story is yet another media-created narrative that has little basis in reality.  When you look at long term interest rates based upon expected future output (which is what really drives long term rates), you see a mean of around 4% that has held up for hundreds of years.  Right now, we have inflation expectations of about zero and long term bond rates a little over 4%, which seems about right to me.  If deflation fears resurface (and I think they probably will), it's easy to imagine long term treasury yields going to 2% or lower.

As craig said, though, long term bonds are going to pay you a nice coupon yield even if rates don't fall, and if rates do begin to edge back up that will probably be a symptom of a recovering economy, as opposed to this crazy inflation that everyone seems to be expecting (though no one seems to have a clue where people are going to get the money to pay these future higher prices).

The more time I spend around the PP, the more I feel like I can "see into" the wisdom and soundness in its design.  The fact that it hides in plain sight and few people will ever avail themselves of its safety and stability is just something that a PP investor has to learn to accept.

One thing that the PP teaches you is that you don't know as much about the future as you think you do.  Once this reality begins to fully sink in (and it takes a while), it leads to the additional realizations that you may also not know as much about the past or present as you think you do.  These insights can lead to a durable foundation of humility, which can form the basis for great improvements in decision-making across the board.

I just finished re-reading William Bernstein's "Deep Risk : How History Informs Portfolio Design." He has this to say about deflation:

"...deflation, while more rare [than inflation], carries with it, as demonstrated recently in Japan, a far more serious deep risk in the form of its potentially destructive effect on the real value of equities. (It's also a bit imprecise to think of "deflation" as the intrinsic nature of the risk; rather it's the underlying prolonged economic depressions that produce the deflation, along with catastrophic political and socioeconomic costs that typically accompany deflation). Three main ways of purchasing protection against deflation are available: Treasury bills and bonds; once again, international diversification [of equities]; and, paradoxically, gold, which, as the DMS database shows, appreciates more in real value with deflationary spirals than with severe inflation.

Unfortunately, inflation is a far more likely scourge, and a tilt towards long bonds and bills carries a very high cost should inflation occur. A related cost of long bonds and bills is foregone stock returns, and particularly foregoing the inflation protection offered by globally diversified equities against deflation. The best, and certainly the cheapest, way to defend against inflation is, once again, international diversification of stock holdings."

MT in the quote above says that LTT's are the ONLY protection against deflation and that's not so. Now admittedly deflation, which is a very rare event in the modern era, is looking a whole lot more possible now that at any time in the past 100 years, but that doesn't mean that LTT's paying 1.5% are the only defensive tool available to us.

[pp4me]

I have one set of LTT's that have an interest rate of 4.25%. The maturity date is 2040 which means, according to HB's strategy, I'm suppose to sell and re-purchase this year.

So, would you do that?

I'm thinking NOT. I understand deflation protection and have even seen it work (in 2008) but the idea of trading in the 4.25% coupon payments I see in my IRA twice each year for practically zilch is a hard pill to swallow.

[pmward]

I have one set of LTT's that have an interest rate of 4.25%. The maturity date is 2040 which means, according to HB's strategy, I'm suppose to sell and re-purchase this year.

So, would you do that?

I'm thinking NOT. I understand deflation protection and have even seen it work (in 2008) but the idea of trading in the 4.25% coupon payments I see in my IRA twice each year for practically zilch is a hard pill to swallow.

You are not trading away the 4.25% coupon... you are pulling all those years of the difference in yield forward and collecting them today instead of at a later date. There really is no net difference. If this were a taxable account it would actually be a positive difference, as that would be logged as a long term capital gain vs interest.

[modeljc]

The only economic condition that scares me is long term deflation, in part because it suggests a deeply dysfunctional underlying economy with problems that can take decades to fully address.

Contrary to common perception, inflation in a reserve currency is not that big a deal--it can be easily tamed through raising interest rates (as Volcker did the one and only time the U.S. saw a prolonged period of inflation in the last 100 years).  The same is not true when it comes to deflation--once the central bank gets to zero, no more interest rate cuts are possible, and we are seeing the futility of alternative efforts to juice the economy such as QE.

The only protection against deflation is long term bonds; that's reason enough for me to have them.

I think that the whole "interest rates are about to skyrocket" story is yet another media-created narrative that has little basis in reality.  When you look at long term interest rates based upon expected future output (which is what really drives long term rates), you see a mean of around 4% that has held up for hundreds of years.  Right now, we have inflation expectations of about zero and long term bond rates a little over 4%, which seems about right to me.  If deflation fears resurface (and I think they probably will), it's easy to imagine long term treasury yields going to 2% or lower.

As craig said, though, long term bonds are going to pay you a nice coupon yield even if rates don't fall, and if rates do begin to edge back up that will probably be a symptom of a recovering economy, as opposed to this crazy inflation that everyone seems to be expecting (though no one seems to have a clue where people are going to get the money to pay these future higher prices).

The more time I spend around the PP, the more I feel like I can "see into" the wisdom and soundness in its design.  The fact that it hides in plain sight and few people will ever avail themselves of its safety and stability is just something that a PP investor has to learn to accept.

One thing that the PP teaches you is that you don't know as much about the future as you think you do.  Once this reality begins to fully sink in (and it takes a while), it leads to the additional realizations that you may also not know as much about the past or present as you think you do.  These insights can lead to a durable foundation of humility, which can form the basis for great improvements in decision-making across the board.

I just finished re-reading William Bernstein's "Deep Risk : How History Informs Portfolio Design." He has this to say about deflation:

"...deflation, while more rare [than inflation], carries with it, as demonstrated recently in Japan, a far more serious deep risk in the form of its potentially destructive effect on the real value of equities. (It's also a bit imprecise to think of "deflation" as the intrinsic nature of the risk; rather it's the underlying prolonged economic depressions that produce the deflation, along with catastrophic political and socioeconomic costs that typically accompany deflation). Three main ways of purchasing protection against deflation are available: Treasury bills and bonds; once again, international diversification [of equities]; and, paradoxically, gold, which, as the DMS database shows, appreciates more in real value with deflationary spirals than with severe inflation.

Unfortunately, inflation is a far more likely scourge, and a tilt towards long bonds and bills carries a very high cost should inflation occur. A related cost of long bonds and bills is foregone stock returns, and particularly foregoing the inflation protection offered by globally diversified equities against deflation. The best, and certainly the cheapest, way to defend against inflation is, once again, international diversification of stock holdings."

MT in the quote above says that LTT's are the ONLY protection against deflation and that's not so. Now admittedly deflation, which is a very rare event in the modern era, is looking a whole lot more possible now that at any time in the past 100 years, but that doesn't mean that LTT's paying 1.5% are the only defensive tool available to us.

Wow! Thanks for posting this 2010 post from Med. Tex! So important when the Long Bonds is 1.30%. He had a lot of special posts but this one is tops!

[pp4me]

I have one set of LTT's that have an interest rate of 4.25%. The maturity date is 2040 which means, according to HB's strategy, I'm suppose to sell and re-purchase this year.

So, would you do that?

I'm thinking NOT. I understand deflation protection and have even seen it work (in 2008) but the idea of trading in the 4.25% coupon payments I see in my IRA twice each year for practically zilch is a hard pill to swallow.

You are not trading away the 4.25% coupon... you are pulling all those years of the difference in yield forward and collecting them today instead of at a later date. There really is no net difference. If this were a taxable account it would actually be a positive difference, as that would be logged as a long term capital gain vs interest.

So you're saying you would do it then?

[Xan]

I have one set of LTT's that have an interest rate of 4.25%. The maturity date is 2040 which means, according to HB's strategy, I'm suppose to sell and re-purchase this year.

So, would you do that?

I'm thinking NOT. I understand deflation protection and have even seen it work (in 2008) but the idea of trading in the 4.25% coupon payments I see in my IRA twice each year for practically zilch is a hard pill to swallow.

You are not trading away the 4.25% coupon... you are pulling all those years of the difference in yield forward and collecting them today instead of at a later date. There really is no net difference. If this were a taxable account it would actually be a positive difference, as that would be logged as a long term capital gain vs interest.

So you're saying you would do it then?

For what it's worth, I wouldn't hesitate. Treasury Bonds are the most liquid market in the world. It's worth what it's worth.

[pp4me]

I have one set of LTT's that have an interest rate of 4.25%. The maturity date is 2040 which means, according to HB's strategy, I'm suppose to sell and re-purchase this year.

So, would you do that?

I'm thinking NOT. I understand deflation protection and have even seen it work (in 2008) but the idea of trading in the 4.25% coupon payments I see in my IRA twice each year for practically zilch is a hard pill to swallow.

You are not trading away the 4.25% coupon... you are pulling all those years of the difference in yield forward and collecting them today instead of at a later date. There really is no net difference. If this were a taxable account it would actually be a positive difference, as that would be logged as a long term capital gain vs interest.

So you're saying you would do it then?

For what it's worth, I wouldn't hesitate. Treasury Bonds are the most liquid market in the world. It's worth what it's worth.

HB said not to invest in anything you don't understand and I have to confess I haven't yet wrapped my head around why I would do this. When my parents retired they could have bought LTT's @14% but didn't, because CD's were paying 18%. If they had, I think I would have had a hard time convincing them to adopt the PP and sell their guaranteed return of 14% for what would have been the rest of their lives for something called "deflation protection". And I'm not sure it would have been a good idea for them.

Seems like a very non-intuitive aspect of the PP and I'm going to have to think harder about it.

[AdamA]

So you're saying you would do it then?

You could keep them and buy more in the 15-20 year range with the goal of having 50% of your portfolio in 10-15 year treasury bonds in the next 5-10 years.

50% 10 year treasuries, 25% stock and 25% gold is another way to basically hold the PP.

I think people have posted about this in the past, and, in your situation, it might not be a bad idea.

[mathjak107]

So you're saying you would do it then?

You could keep them and buy more in the 15-20 year range with the goal of having 50% of your portfolio in 10-15 year treasury bonds in the next 5-10 years.

50% 10 year treasuries, 25% stock and 25% gold is another way to basically hold the PP.

I think people have posted about this in the past, and, in your situation, it might not be a bad idea.

it does lose some effectiveness in these flight to safeties though ... the fear , greed and perception factor works a lot harder in the longer end then the intermediate range .

if you compare 100% of the bond budget in the intermediate range vs the barbell you will find the barbell has greater pull most times

[pmward]

So you're saying you would do it then?

You could keep them and buy more in the 15-20 year range with the goal of having 50% of your portfolio in 10-15 year treasury bonds in the next 5-10 years.

50% 10 year treasuries, 25% stock and 25% gold is another way to basically hold the PP.

I think people have posted about this in the past, and, in your situation, it might not be a bad idea.

it does lose some effectiveness in these flight to safeties though ... the fear , greed and perception factor works a lot harder in the longer end then the intermediate range .

if you compare 100% of the bond budget in the intermediate range vs the barbell you will find the barbell has greater pull most times

Yeah, the barbell is an average maturity of ~12 years where the ITT's are an average maturity of ~7.5 years. So the barbell on the whole will have more volatility. Volatility isn't necessarily a bad thing though, I mean Harry chose volatile assets for a reason.

[mathjak107]

but remember fear , greed and perception drive the long end .... that is why it swings more than stocks do at times