Would you buy an even longer bond?

Discussion of the Bond portion of the Permanent Portfolio

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Smith1776
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Would you buy an even longer bond?

Post by Smith1776 » Thu Dec 22, 2022 11:50 am

I recall in Harry Browne's writings that he said not to do too much hand wringing when it came to term risk for the bond portion of the PP.

He said "Just buy the longest dated bond you possibly can." I believe that was in Fail-Safe Investing.

If that's the simple rule people are following, would that not mean that if the Treasury issued, say, a 50 year bond, or a 100 year bond, that that would be the new LTT of choice for the PP?

Who here would actually follow that particular heuristic and just buy a 50 year bond if it were issued?
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Re: Would you buy an even longer bond?

Post by Smith1776 » Thu Dec 22, 2022 11:54 am

Tangentially related: I've found that replacing LTT with total bond as a portfolio proposal makes the PP more palatable to people you're trying to sell the idea to.
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Re: Would you buy an even longer bond?

Post by welderwannabe » Thu Dec 22, 2022 12:46 pm

Total bond is like 2/3 Treasurys so it could be a substitute except for duration. Its roughly intermediate. The PP is a risk parity portfolio. I don't think it works if you don't get the volatility that LTT's provide in my opinion.

As to duration, I read the exact same thing as you regarding getting the longest term you could get. While there is no 50 year Treasury, one could purchase 30 year STRIPS or invest in an ETF like EDV which does.

TLT only has duration of about 18 years, where a 30 year strip has a duration of 30 years because its zero coupon. If a 50 year Treasury existed with a 3% coupon it would only have a duration of about 26 years, so a 30 year STRIP still beats it in regards to duration. So if you wanted to add more 'punch' to your bond portion, STRIPS or EDV is how to do it. I don't think STRIPS were available when HB wrote his book, or at least not in a Fed govt sanctioned way.

EDV does move up and down far more than TLT does. Its like TLT on crack. EDV is too much for my heart, but I do run a 3 year ladder of 30 year bonds instead so my duration is as high as possible using 30 year coupon treasurys.

Edit: Strips came out in 1985, so not sure why HB didnt recommend them
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Re: Would you buy an even longer bond?

Post by boglerdude » Thu Dec 22, 2022 11:20 pm

You could hold only enough to match the volatility of the other assets
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Re: Would you buy an even longer bond?

Post by PrimalToker » Thu Dec 22, 2022 11:47 pm

I would buy. I use EDV not TLT. 8)
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Hal
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Re: Would you buy an even longer bond?

Post by Hal » Fri Dec 23, 2022 1:06 pm

welderwannabe wrote:
Thu Dec 22, 2022 12:46 pm
Total bond is like 2/3 Treasurys so it could be a substitute except for duration. Its roughly intermediate. The PP is a risk parity portfolio. I don't think it works if you don't get the volatility that LTT's provide in my opinion.
+1. The Early Retirement Extreme site covers this issue.
<snip>
In such cases the lemonade modification to the PP could be used (as in "turn lemons into lemonade"). In theory, the cash and bond allocations, which are short- and long-term treasury bonds respectively, behave equivalently to intermediate term treasury bonds. So the cash and bond allocations could be merged into one large intermediate term treasury allocation:

25% stock
25% gold
50% intermediate Treasury bonds
Intermediate Treasury bonds are often available in 401(k) plans. A plan that has suitable stock and intermediate bond funds could house 75% of a PP, leaving only the gold to be located elsewhere.

If an intermediate Treasury fund is unavailable, a different intermediate bond fund could be substituted. Total bond market index funds are widely available and could fill this role. However, any deviation from Treasury bonds adds credit and liquidity risk (as discussed in the cash and bond sections above), so this should be considered a last resort.
<snip>
Aussie GoldSmithPP - 25% PMGOLD, 75% VDCO
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Re: Would you buy an even longer bond?

Post by Kbg » Sat Dec 24, 2022 8:15 am

You can also just use a total us bond fund if an itt fund isn’t available.
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Re: Would you buy an even longer bond?

Post by Smith1776 » Sat Dec 24, 2022 1:24 pm

A quick comparison. Here's how 3 different portfolios performed side by side:


1) Blue line - Normal Permanent Portfolio (plenty of duration risk)
2) Red Line - Permanent Portfolio but long treasury bonds replaced with intermediate term treasury bonds (middling duration risk)
3) Gold Line - Permanent Portfolio but long treasury bonds replaced with cash (no duration risk)


Take this with the usual grains of salt. But from this sample it looks like intermediate term bonds provided all the ballast the portfolio needed to give it similar characteristics to the vanilla PP. The only portfolio that demonstrated alarming behaviour was the third portfolio exhibited by the gold line that had the LTTs replaced with cash. This portfolio clearly didn't have enough offsetting assets to the volatility in the rest of the portfolio. (Just look at how deep the max drawdown is! :o )

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alsdkjflka;dsj.jpg (395.31 KiB) Viewed 1045 times


I bring this up because I have a bone to pick with Browne's advice that one should just "buy the longest dated treasury bond you can." The usual talking point that you need long term treasury bonds for their volatility also seems very slightly dubious. First, depending on what country and what regime one is in, what constitutes the "long term treasury" can vary wildly. In some regimes the longest dated treasury might be 10 years. In another it might be 50 years. In another there may even be perpetuities.

Second, we must consider the volatility of volatility. That is the, the term of a bond isn't really what specifies how volatile it is. Let's say we have a 30 year bond in one country that yields 5%. And we have another 30 year bond in a different country that yields 1%. The latter bond is MUCH more volatile, despite the fact that the term for both is the same. So since the volatility of the long bond is itself very volatile, does it really make sense to just blindly buy the 30 year treasury bonds with no regard to yield or valuation?

I'm still playing with all of this as a concept, but some of this exploration strengthens my feeling that total bond may make for a more palatable risk/reward balance for many investors considering the PP.
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Re: Would you buy an even longer bond?

Post by inok » Sun Dec 25, 2022 9:21 pm

The time from 1975 to 2022 has not included any serious deflationary period that is were long term would have their chance to shine. While TLT was down 30-34% this year, 50-year UK Gilts we’re done 58%. So assuming there is a deflation and interest rate goes down to 0% again TlT could easily double and carry out the whole portfolio. Total bond portfolio does not have the power to do that
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Re: Would you buy an even longer bond?

Post by welderwannabe » Mon Dec 26, 2022 7:35 am

Smith1776 wrote:
Sat Dec 24, 2022 1:24 pm
Let's say we have a 30 year bond in one country that yields 5%. And we have another 30 year bond in a different country that yields 1%. The latter bond is MUCH more volatile, despite the fact that the term for both is the same. So since the volatility of the long bond is itself very volatile, does it really make sense to just blindly buy the 30 year treasury bonds with no regard to yield or valuation?
What you're getting into there is duration, which is what I was referring to above. A 30 year zero coupon bond (STRIP) has a higher duration, and therefore swings more with interest rate changes, than a 50 year bond with a coupon.

Yes, I do think it makes sense, in the US at least, to blindly buy 30 year Treasurys regardless of yield (although I'm not sure I'd buy them if yields went negative like happened in Europe). You need them to swing wildly when stocks do poorly. I loved the performance of my LTT's during March of 2020, and in my case, emotionally, seeing those go up while stocks were going down gave me a lot of comfort and helped keep me from panic selling. It was a scary time for everyone on many fronts. I was also able to rebalance into stocks at that time and made a lot of money. Had I had 30 year STRIPS instead, I would have made even more.

I could see maybe going to intermediate duration Treasurys if you cant or dont want long term ones, but I am not a fan of using corporates in the PP, which Vanguard Total Bond is a decent slug of. Corporates don't respond as well during panics as they become more correlated with stocks.

You can see this performance difference by graphing Vanguard's LTT fund against Vanguards Long Term Index fund (which has corporates like BND has), and you will see a large difference in performance in March of 2020. When people are panicing they don't say to themselves, "Oh let me go buy a GE bonds". They say "Oh crap, I need to put my money in Treasurys".

Now what does the longest term bond you can buy mean in the context of the PP? Not sure, but it probably means 30 year bonds. In the 90's and 2000's the Treasury played around with 30 year bonds, reducing how often they were auctioned and eventually cancelling auctions/issuance of 30 year bonds outright. So the comment about getting the longest term you can get may have been in that context, as what that was defined as changed as the Treasury tinkered with what they would auction.

Its been a tough year to own LTT's for sure, they have been joined at the hip with stocks because of the Fed's rate increases.
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Re: Would you buy an even longer bond?

Post by whatchamacallit » Tue Dec 27, 2022 4:24 pm

I wanted to hear some context from Harry himself so I listened to this show

05-04-24 - The effects of interest-rate changes on the economy
https://youtu.be/R34Bct2OKFM?t=2224


It seems to me that the context is a world where the 30 year treasury bond is the longest dated bond. As welderwannabe mentioned above, there was a period where the 30 year was no longer being issued so the longest at the time of the show above was a 26 year bond you would have to buy on secondary market.
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Re: Would you buy an even longer bond?

Post by welderwannabe » Wed Dec 28, 2022 2:48 pm

whatchamacallit wrote:
Tue Dec 27, 2022 4:24 pm
I wanted to hear some context from Harry himself so I listened to this show

05-04-24 - The effects of interest-rate changes on the economy
https://youtu.be/R34Bct2OKFM?t=2224


It seems to me that the context is a world where the 30 year treasury bond is the longest dated bond. As welderwannabe mentioned above, there was a period where the 30 year was no longer being issued so the longest at the time of the show above was a 26 year bond you would have to buy on secondary market.
Thanks for that, I hadn't heard that audio before. Makes sense.

I do wonder if one could reduce the Bond holdings and use something like EDV, and apply the extra percentage from reduced bond to equities and gold. I will need to do some backtesting to see how that looked, although EDV hasn't been out for more than 10-15 years so it may be a short period.
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Re: Would you buy an even longer bond?

Post by Cortopassi » Thu Jan 12, 2023 8:15 am

I have recently bought a number of 40 to 100 year make whole bonds, for retirement income purposes. Duration is not much different than 30 year treasuries, I assume because of the higher coupon. Each are a maximum of 1% of my net worth, and I'm trying to diversify sectors. In the end I hope to hold 60-80 such long term bonds to fund retirement, and have value at the end, vs. my previous thinking of buying a fixed income annuity where I give up my principal.

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Re: Would you buy an even longer bond?

Post by seajay » Thu Jan 12, 2023 10:42 am

inok wrote:
Sun Dec 25, 2022 9:21 pm
The time from 1975 to 2022 has not included any serious deflationary period that is were long term would have their chance to shine. While TLT was down 30-34% this year, 50-year UK Gilts we’re down 58%. So assuming there is a deflation and interest rate goes down to 0% again TlT could easily double and carry out the whole portfolio. Total bond portfolio does not have the power to do that
A nice reiteration of a fundamental feature of the PP, a combination of assets that each can individually halve in price ... or double in price. Compounded alone 0%, as a combination of non-correlated you're more inclined to capture the average (+25%).
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