LTT during great depression...did this balance the crash of the stock market?

[murphy_p_t]

I was just reading that the S&P declined 85% during the Great Depression. I then found this chart to look at the 30 year bond. http://www.ritholtz.com/blog/2011/03/20 ... nd-yields/

Suppose an investor during that period (late 20s thru WWII) held 50% stock market & 50% LTT. Would the performance of those have been fairly balanced out to avoid major losses, or even a small gain?

From that chart, it looks like bonds moved from about 5% down to 3%...did this result in sufficient capital appreciation to offset the S&P component of this portfolio?

[melveyr]

Rule of thumb is that for every 1 percentage point change in interest rates, the price of the bond will change roughly the same as its duration. So a bond with a duration of 10 would go up 10% if interest rates moved down 1%.

Now I don't think the Treasury issued very long duration bonds back then. But hypothetically if there was a 30 year Treasury and its duration was approximately 20, the move from 5% to 3% yields would mean roughly a 40% appreciation in price. I don't think that was enough to wipe out stock losses but it would have helped!

[D1984]

Now I don't think the Treasury issued very long duration bonds back then. But hypothetically if there was a 30 year Treasury and its duration was approximately 20, the move from 5% to 3% yields would mean roughly a 40% appreciation in price. I don't think that was enough to wipe out stock losses but it would have helped!

There were several "long-term" Treasury bonds available as of the start of the Depression in 1929 and 1930. Two examples of these matured in the mid-1950s and were callable in the late 1940s. The 4.25% issue of 1922 (refunding issue for WWI debt) matured in 1952 but was callable in 1947; the 3.75% issue of 1926 matured in 1956 but was callable in 1946. These were basically 30-year bonds that were callable in twenty or twenty-five years. There was also a 50-year bond issued in 1911 at 3%; it was used to fund the Panama Canal and matured in 1961 (it was non-callable). As of late 1929 it would have a maturity of a little over 31 years.

Note that the first two bonds mentioned above were partly Federal tax-exempt and the 50-year one was fully Federal tax-exempt; this may have effected bond prices as taxes rose in 1932.

If you want to calculate durationof these bonds based on future values of cash flows keep in mind that interest rates on any long term Treasury issues that matured and/or were callable in 12 years or more averaged out at around 3.60% in September-October 1929 around the time of the peak and Crash. By late December of 1932 they were down to about 3.30% although they fluctuated wildly in between these times (a low of 3.19% in November 1930 and highs of over 4% in late 1931 and early 1932; they actually reached 4.26% in January of 1932). 1931 (the worst year of the Depression in terms of stock price losses) actually saw negative retuns on long government bonds as the year opened at just over 3.20% and ended just under 4%; this was probably due to the facts that:

We were still on the gold standard at the time and default was actually possible

Rates had to rise to prevent gold outflows

Mid to late 1931 was when the CreditAnstalt went under (the Lehman bankruptcy of its day) and rates rose as people and businesses rushed to raise cash and anything not immediately liquid and safe saw its yield rise as its price fell...plus everyone was scared to lend anyone money, credit froze up, and interest rates to even "safe" borrowers (well, as safe as a borrower can be under the gold standard) like the Government increased.

Most of the actual fall in long-term Treasury rates happened from between mid-1932 (from about 3.8%) to 1941 (just under 2%), not during the worst of the Depression from 1929-1932.

[MachineGhost]

From that chart, it looks like bonds moved from about 5% down to 3%...did this result in sufficient capital appreciation to offset the S&P component of this portfolio?

No, a theoretical, fiat money 30-year Treasury bond at the time would have a duration of about 18 years, so 18 * 2 = 36%.

[HB Reader]

Interesting question.  I have pondered the same thing, although I doubt there is a definitive answer.

In addition to the question of the general availabilty of LTTs in that era, I wonder: What exactly does the "S&P declined 85%" mean?  From peak (late 1929) to trough (1932-33)?  From peak (1929) to some other year prior to WWII?

In addition to the period of time covered, I think we'd also probably need to look at additional factors (such as actual consumer price deflation) in figuring whether LTTs (and their interest payments) really balanced the stock market decline.

I suspect the Great Depression experience doesn't provide more than very general guidance (with respect to this issue) today since we were, as D1984 points out, on a gold standard.  So it may well be an apples/oranges type of comparison.  I haven't researched it, but I suspect for a variety of reasons that market interest rates (and their swings) play a bigger and/or more immediate role in economic developments today and the gold standard served to moderate interest rate swings back then.