When is it time to load up on bonds.

Discussion of the Bond portion of the Permanent Portfolio

Moderator: Global Moderator

ppnewbie
Executive Member
Executive Member
Posts: 855
Joined: Fri May 03, 2019 6:04 pm

Re: When is it time to load up on bonds.

Post by ppnewbie »

ppnewbie wrote: Fri Mar 03, 2023 12:11 pm I've been buying max duration LTT's at the moment. I am going with the thesis that the yield curve inversions are telling us something significant.
I repeat the inverted yield curve is telling us the world may be about to implode.
User avatar
vnatale
Executive Member
Executive Member
Posts: 9447
Joined: Fri Apr 12, 2019 8:56 pm
Location: Massachusetts
Contact:

Re: When is it time to load up on bonds.

Post by vnatale »

ppnewbie wrote: Wed Mar 15, 2023 10:28 pm
ppnewbie wrote: Fri Mar 03, 2023 12:11 pm
I've been buying max duration LTT's at the moment. I am going with the thesis that the yield curve inversions are telling us something significant.


I repeat the inverted yield curve is telling us the world may be about to implode.


How many other times was it implying the same and how many of those times did the world implode?
Above provided by: Vinny, who always says: "I only regret that I have but one lap to give to my cats." AND "I'm a more-is-more person."
User avatar
Cortopassi
Executive Member
Executive Member
Posts: 3338
Joined: Mon Feb 24, 2014 2:28 pm
Location: https://www.jwst.nasa.gov/content/webbL ... sWebb.html

Re: When is it time to load up on bonds.

Post by Cortopassi »

vnatale wrote: Wed Mar 15, 2023 10:30 pm
ppnewbie wrote: Wed Mar 15, 2023 10:28 pm
ppnewbie wrote: Fri Mar 03, 2023 12:11 pm I've been buying max duration LTT's at the moment. I am going with the thesis that the yield curve inversions are telling us something significant.
I repeat the inverted yield curve is telling us the world may be about to implode.
How many other times was it implying the same and how many of those times did the world implode?
Many others, but here is one chart showing recessions have always followed inversions, without fail seemingly.

https://www.currentmarketvaluation.com/ ... -curve.php
User avatar
vnatale
Executive Member
Executive Member
Posts: 9447
Joined: Fri Apr 12, 2019 8:56 pm
Location: Massachusetts
Contact:

Re: When is it time to load up on bonds.

Post by vnatale »

Cortopassi wrote: Thu Mar 16, 2023 7:23 am
vnatale wrote: Wed Mar 15, 2023 10:30 pm
ppnewbie wrote: Wed Mar 15, 2023 10:28 pm
ppnewbie wrote: Fri Mar 03, 2023 12:11 pm
I've been buying max duration LTT's at the moment. I am going with the thesis that the yield curve inversions are telling us something significant.


I repeat the inverted yield curve is telling us the world may be about to implode.


How many other times was it implying the same and how many of those times did the world implode?


Many others, but here is one chart showing recessions have always followed inversions, without fail seemingly.

https://www.currentmarketvaluation.com/ ... -curve.php


Many thanks for that. Extremely informative.

Here are the key portions I found in it:

****The US Treasury Yield Curve is currently inverted, meaning short term interest rates are moving up, closer to (or higher than) long term rates. This unusual occurrence, called a yield curve inversion, has historically been a very reliable indicator of an upcoming economic recession. Since World War II every yield curve inversion has been followed by a recession in the following 6-18 months, and recessions are naturally correlated with decreased stock market returns.

****Yield inversion is the term used when long term rates are lower than short term rates. This happens when investors are nervous about the future and expect short term rates to fall. When so many investors think rates are going to fall, they will crowd into the longer-dated bonds to try to lock in the 'high' rate for as long as possible.

****Inverted yield curves are very rare, occurring only once a decade or so, and almost always immediately before a recession.

****Again, in a normal rate environment the 10-year rate is much higher than the 3-month rate, so this spread will be a positive number. As the spread moves closer to zero, and as it turns negative, it reflects the 10-year rate falling below the three month rate, indicating that investors expect future economic slowdown in the near term. As you can see by the shaded recession areas, investors have almost always been correct in this prediction. For the last 50 years, every yield curve inversion has been soon followed by economic recession.

****The New York Federal Reserve uses the yield curve to calculate the probability that the US economy will be in a recession in 12 months. (Note: the calc is whether or not there we will be in a recession 12 months from the time of the calculation, not anytime in the subsequent 12 months). Currently, the NY Fed assigns a 57% probability that the US will be in a recession in Q1 2024.

****Clearly, you can see strong correlation where periods of inversion tend to precede stock market devaluations.


In sum there seems to be a strong correlation. However, it seems to not be a precise predictor? E.G., "following 6-18 month" and "assigns a 57% probability".

Also if one takes this as a signal to decrease equity investment .... what are the counter-signals to now increase equity investment?

I always come back to this whenever there is a recommendation to either get out of equity investments or decrease the amount of investment in them.

https://www.forbes.com/sites/simonmoore ... 8a3e2c7f89

Investing Just 4 Days Each Month Captures All The Market’s Gains, Research Suggests
Above provided by: Vinny, who always says: "I only regret that I have but one lap to give to my cats." AND "I'm a more-is-more person."
ppnewbie
Executive Member
Executive Member
Posts: 855
Joined: Fri May 03, 2019 6:04 pm

Re: When is it time to load up on bonds.

Post by ppnewbie »

One way to look at it is the entire global monetary system is willing to lend money for thirty years for less than they are willing to lend money for 2 years because many of the market participants may be experiencing a weak economic conditions. Or something like inflation will not go above 4 percent because the market is going to crash.
User avatar
sophie
Executive Member
Executive Member
Posts: 1960
Joined: Mon Apr 23, 2012 7:15 pm

Re: When is it time to load up on bonds.

Post by sophie »

Here's a big reason why I've been having a really hard time with the PP's bond allocation: That is the one asset that truly is dependent on the US dollar being the world's reserve currency.

Long bond rates are lower than the Fed would like because they are the universal flight from the stock market asset. That's also what makes bond values go up (and interest rates drop) when stocks are down.

If the USD is no longer the reserve currency, then the money will instead go to the bonds of the country whose currency took that honor.

There's no scenario I'm aware of where a country whose currency wasn't perceived as a world standard went through a financial crisis and had a big jump in its bond values. Japan's bonds didn't do all that well, for example. In Iceland, it was gold that saved investors, not bonds. Germany's long bonds did have a huge jump in value following the 2008 recession, but that was more about Germany being the best horse in the glue factory of the EU. If anything that's a cautionary example of what could happen if the US loses its reserve currency status. Not sure what exactly would cause that to happen, but the explosion of US debt seems a likely candidate.
User avatar
seajay
Executive Member
Executive Member
Posts: 432
Joined: Mon Aug 09, 2021 11:11 am

Re: When is it time to load up on bonds.

Post by seajay »

The UK went through loss of it being a major reserve currency after it disconnected gold/money (ended the gold standard) in 1931. Yet long dated treasuries still being included has worked out OK overall.

Analysed from a perspective of a new retiree drops two thirds into 'safe', one third into stocks/accumulation, and applying a 5% SWR, spending 'safe' first (third in stock left to accumulate) then the differences between PP as the 'safe' and thirds each stock/gold/T-Bills as the 'safe' in overall 30 year horizon outcomes were negligible. A coin-flip as to whichever was the (mildly) better case.

For all start calendar years 1932 onwards ...

With PP as 'safe' that starts with 50% stock (33% aside in accumulation until all of 'safe' has been spent, along with the 25% stock in the PP 'safe' element). For the thirds stock/gold/T-Bills that starts with 55% stock, so a little more initially aggressive. Both transitions to being 100% stock down the line (once all of 'safe' has been spent).

Both (time) averaged 85% overall stock exposure at the end of 30 years. So generally comparable to having started with 85% stock and rebalanced back to that each year, but with less stock exposure in the earlier years (so more like a 'bond tent' type style).

Worst case with the PP as safe saw that safe last 13 years, the thirds stock/gold/cash as the safe in the worst case saw that last 12 years. In the median case the with PP safe lasted 18 years whilst the thirds safe lasted 20 years (before all of 'safe' had been drawn/spent and you were reliant upon the remaining 'all-stock' to start/sustain the SWR withdrawals).

At the end of the 30 years the with PP the worst case had 1.1 times the inflation adjusted start date portfolio value still remaining, versus 1.3 times for the thirds. Median case the with PP ended with 5 times more than the inflation adjusted start date amount, compared to 5.4 times for the thirds.

Fundamentally the with PP as 'safe' was a bit less volatile, a bit less rewarding. But not that the thirds choice was consistently better, for individual cases it could have gone either way, but a overall similar outcome.

With bonds as 'safe' ... well drawing 5% SWR from a initial 66% of portfolio allocation = 5 / 0.66 = 7.5% effective SWR applied to just the PP (or thirds) element. Which if bonds were used instead and those bonds achieved a 0% real would see that last a bit under 9 years before all being spent ( 66.6 / 7.5 = 8.8 ). If bonds (perhaps TIPS) were priced to positive real yields then they'd last longer, if negative real yields they'd last less time before all having been spent.

If the Golden Butterfly were used instead as the 'safe' then that was another step up from the thirds choice, a bit more stock exposure, so a bit more volatility, a bit better reward/outcome.

All very much in the same ball-park. So fundamentally whichever might be the more cost/tax efficient is likely the better choice.

Note that's quite a aggressive style/method, as its broadly averaging 86/7/7 stock/gold/T-Bills overall (for the 'thirds' as 'safe' choice). But was historically safer, better worst case outcome, that constant rebalanced 86/7/7, largely because earlier year bad sequence of returns risk was lower (starting with just around 50% stock). Stock volatility/risk in later years, such as after 20 years, tends to be lower risk as by then often declines are more of a case of just giving back some of other peoples money rather than eating into ones own original capital base.

Lowering risk by lowering SWR to 4% instead of 5%, and that's 4 / 0.66 = 6% effective SWR applied to the initial 66% 'safe' allocation, which pushes 'safe' out further to lasting 19 years guaranteed. Stock total return accumulation initial 33% allocation only has to grow relatively little in order to cover the second leg 11 year period out to 30 years total. Assuming a 65 year old retiree gets to live another 19 years to age 84. Some wont.

The time to load up on bonds would tend to be when they're priced to good discounts/high yields, or when TIPS are paying a good positive real yield. 10 year north of 2% real and investors in general might migrate stock value over to TIPS. 2% real from TIPS and TIPS as 'safe' gets you through 15 years of drawdown in the above example style, guaranteed, no risk. Whilst 33% initial stock allocation left to accumulate for those 15 years will tend to have grown sufficiently in order to cover the second 15 year leg (or be redeployed in a manner/asset allocation that you deem appropriate to serve that objective). With TIPS at 3% real yields then stocks are going to suffer, as investors flock into TIPS as a 4% 30 year SWR will end the 30 years with nearly half the inflation adjusted start date portfolio value still available, guaranteed, no risk.
User avatar
ochotona
Executive Member
Executive Member
Posts: 3354
Joined: Fri Jan 30, 2015 5:54 am

Re: When is it time to load up on bonds.

Post by ochotona »

Why are long bonds getting hit today? It makes no sense, if there are recession fears, long yields should soften.
User avatar
Cortopassi
Executive Member
Executive Member
Posts: 3338
Joined: Mon Feb 24, 2014 2:28 pm
Location: https://www.jwst.nasa.gov/content/webbL ... sWebb.html

Re: When is it time to load up on bonds.

Post by Cortopassi »

From Bloomberg:

Speculators timed it just about perfectly before Friday’s strong US payrolls data, adding the most to their bets against benchmark Treasuries in just over a year. Net-short leveraged fund positions in 10-year futures climbed by almost 150,000 contracts in the week to last Tuesday, according to the latest report from the Commodity Futures Trading Commission. Treasuries slumped on Friday after the March labor data boosted expectations that the Federal Reserve will hike rates by a quarter point in early May. Overall, the March payrolls data — following strong readings in the prior two months — paint a picture of resilient labor demand that is particularly remarkable as other parts of the economy slow.
User avatar
joypog
Executive Member
Executive Member
Posts: 561
Joined: Wed Apr 27, 2022 7:42 pm

Re: When is it time to load up on bonds.

Post by joypog »

With that news I guess I’ll be buying more into long bonds on tomorrow when I do my regular purchase as I slowly bleed into the market.
1/n weirdo. US-TSM, US-SCV, Intl-SCV, LTT, STT, GLD (+ a little in MF)
boglerdude
Executive Member
Executive Member
Posts: 1314
Joined: Wed Aug 10, 2016 1:40 am
Contact:

Re: When is it time to load up on bonds.

Post by boglerdude »

And the house? Every day I come here for the house update.
ppnewbie
Executive Member
Executive Member
Posts: 855
Joined: Fri May 03, 2019 6:04 pm

Re: When is it time to load up on bonds.

Post by ppnewbie »

Bought some more LTT's (2053 Maturity) today at 3.835%
boglerdude
Executive Member
Executive Member
Posts: 1314
Joined: Wed Aug 10, 2016 1:40 am
Contact:

Re: When is it time to load up on bonds.

Post by boglerdude »

He did it!
User avatar
vnatale
Executive Member
Executive Member
Posts: 9447
Joined: Fri Apr 12, 2019 8:56 pm
Location: Massachusetts
Contact:

Re: When is it time to load up on bonds.

Post by vnatale »

boglerdude wrote: Sun Oct 08, 2023 8:04 pmHe did it!


Don't know who "He" is?

Does everyone else know except for me?
Above provided by: Vinny, who always says: "I only regret that I have but one lap to give to my cats." AND "I'm a more-is-more person."
whatchamacallit
Executive Member
Executive Member
Posts: 751
Joined: Mon Oct 01, 2012 7:32 pm

Re: When is it time to load up on bonds.

Post by whatchamacallit »

vnatale wrote: Mon Oct 09, 2023 8:38 am
boglerdude wrote: Sun Oct 08, 2023 8:04 pmHe did it!
Don't know who "He" is?

Does everyone else know except for me?
Yes.
boglerdude wrote: Tue Apr 11, 2023 7:06 pm And the house? Every day I come here for the house update.
User avatar
vnatale
Executive Member
Executive Member
Posts: 9447
Joined: Fri Apr 12, 2019 8:56 pm
Location: Massachusetts
Contact:

Re: When is it time to load up on bonds.

Post by vnatale »

whatchamacallit wrote: Mon Oct 09, 2023 10:45 am
vnatale wrote: Mon Oct 09, 2023 8:38 am
boglerdude wrote: Sun Oct 08, 2023 8:04 pmHe did it!


Don't know who "He" is?

Does everyone else know except for me?


Yes.

boglerdude wrote: Tue Apr 11, 2023 7:06 pm
And the house? Every day I come here for the house update.



This:

"Like Smith 1776 I just bought a house"

From another topic?
Above provided by: Vinny, who always says: "I only regret that I have but one lap to give to my cats." AND "I'm a more-is-more person."
Post Reply