The Bond Dream Room

[Tortoise]

No big stupid screen, me no looky. No big shiny buttons, me no clicky.

[Kriegsspiel]

Yea the default Vanguard look is dumb. I click on the drop down menu at the top to look at their old style.

[ochotona]

DoubleLine thinks 10 year going to 6% in a few years. Oil to $90. Recession risk 2020.

[Cortopassi]

DoubleLine thinks 10 year going to 6% in a few years. Oil to $90. Recession risk 2020.

Then I will quit the PP and put everything into CDs...

[ochotona]

DoubleLine thinks 10 year going to 6% in a few years. Oil to $90. Recession risk 2020.

Then I will quit the PP and put everything into CDs...

Me too!

[dualstow]

Good point, pug. Well, the Fed just raised rates.
Stay tuned to my sig line for any breaking news.

[Dieter]

If 10yr to 6% I might have a hard time reballancing into LTT....

[Tortoise]

The only way 10y is going to 6% is if inflation is over 5%. Unlikely. And if it is, you will still want the PP.

Aren’t rising home prices, medical expenses, and college tuition a form of inflation?

[ochotona]

The only way 10y is going to 6% is if inflation is over 5%. Unlikely. And if it is, you will still want the PP.

Aren’t rising home prices, medical expenses, and college tuition a form of inflation?

And rising asset prices?

[eufo]

Yay for bonds today! Lol

[ochotona]

Schwab thinks yields may've peaked on the long end, though the short end may keep going up.

https://www.schwab.com/resource-center/ ... off-lights

"Duration outlook

We have favored keeping the average duration in portfolios in the short-to-intermediate range to mitigate the negative impact of rising rates. Now that longer-term yields have reached 3%, we’ve debated suggesting investors start to add some duration to portfolios. However, we aren’t quite ready to make that call. The economy is growing at a healthy pace and inflation expectations, which are central to bond yields, are still rising. In addition, the Treasury’s borrowing needs are rising due to the tax and spending bills passed earlier in the year, while the Fed is simultaneously reducing its buying, leaving more to be financed in the market.

Until there are signs of slower growth or rising risk aversion, we continue to favor maintaining average portfolio duration in the short to intermediate term, but we’re getting closer to a stage in the business cycle where modestly extending the average duration will begin to look more attractive. For now, the risk/reward trade-off in the yield curve looks most attractive in the two- to five-year range."

Great minds think alike, I was wondering the same myself recently.

[Cortopassi]

Here's what I'm thinking lately. As we've discussed, you can't take individual allocations in a vacuum, or you might drive yourself nuts watching one or more go down, seemingly forever (bonds and gold anyone???).

If you stick by Harry's original 25/25/25/25, and the 10%/40% rebalancing bands, here's the pain that must be endured, assuming you rebalanced at the beginning of the year and are waiting for a 10% band (40% drop). This assumes the other allocations in the portfolio have held steady.

Gold, 1/1/2018: ~$1312/oz.
--40% drop to reach rebalance band, gold would need to hit $787
TLT, 1/1/2018: ~125.50/sh
--40% drop to reach rebalance band, TLT would need to hit $75.30

When I look at those numbers, I'm not entirely sure the PP would save me from myself, which worries me. I cannot imagine gold dropping to $787. And pulling the trigger to buy at that level, while logically seems a no-brainer, I'm sure at the time would seem like lighting cash on fire.

[ochotona]

My what big rebalancing bands you have. Where did 10/40 come from ?

[Dieter]

My what big rebalancing bands you have. Where did 10/40 come from ?

That's the standard 15% lower bound.

A 40% shave from 25% gives 15%.

[Edit: ah, the math showing drop used 40%, but missed that 10% band... If 10% of portfolio is lower band, would need a 60% drop in asset value if everything else stayed the same, whole examples used 40% drop......]

[Cortopassi]

10/40 and 15/35 are both listed as option in peak to trough, and I know I've seen it elsewhere.

And it seemed typically, for any randomly long period 10/40 was a slight better CAGR than 15/35, as well as 20/30 and annual.

But I have been doing annual.

For example, from 1989 to now (yeah, last few months data on PtoT is invalid)

CAGR:
10/40: 7.5%
15/35: 7.31%
20/30: 6.87%
Annually: 6.91%

Basically the more cajones you have to withstand a larger drop before rebalancing, the better return you'll have over time, at least historically.

[Cortopassi]

My what big rebalancing bands you have. Where did 10/40 come from ?

That's the standard 15% lower bound.

A 40% shave from 25% gives 15%.

Dieter, correct on % but I did mean 10% left of 25% allocation, so 60% drop, or 1.6x increase to 40% allocation from 25%. +/-60% of original.

[Dieter]

My what big rebalancing bands you have. Where did 10/40 come from ?

That's the standard 15% lower bound.

A 40% shave from 25% gives 15%.

Dieter, correct on % but I did mean 10% left of 25% allocation, so 60% drop, or 1.6x increase to 40% allocation from 25%. +/-60% of original.

I think I edited my post at the same time you wrote this... Use of "40% drop" in the examples through me -- shouldn't those use 60%?

"If you stick by Harry's original 25/25/25/25, and the 10%/40% rebalancing bands, here's the pain that must be endured, assuming you rebalanced at the beginning of the year and are waiting for a 10% band (40% drop). This assumes the other allocations in the portfolio have held steady.

Gold, 1/1/2018: ~$1312/oz.
--40% drop to reach rebalance band, gold would need to hit $787
TLT, 1/1/2018: ~125.50/sh
--40% drop to reach rebalance band, TLT would need to hit $75.30
"

[barrett]

Let's say all assets have a starting value of $1,000 on 1/1/18

A 60% drop in any one of them with the other three assets staying flat leaves one with $3,400. The asset that has dropped 60% is at $400 which is still 11.8% of the total portfolio.

[jhogue]

The only way 10y is going to 6% is if inflation is over 5%. Unlikely. And if it is, you will still want the PP.

Aren’t rising home prices, medical expenses, and college tuition a form of inflation?

Not if you are the US government and want to keep Social Security increases to a minimum.

Actually, there is no single sufficient measure of inflation for the entire economy. The cost of both medical care and college tuition have both been rising faster than the Consumer Price Index for decades. The former disproportionally hurts retirees; the latter disproportionally hurts recent graduates in the form of student loans. If you don’t fall into those two categories, you might not feel those corresponding effects.

Something similar could be said for bond market interest rates. The flattening of the yield curve in the past year might look bad to a holder of 30 year Treasury bonds, but not so bad to a potential buyer of 1 year T bills.

I think MangoMan is right on both counts. The 10 year yield, which has been trading in a range of 2.90% to 3.00% for a while, seems unlikely to suddenly shoot up to 6%. But no matter what happens, you still want the PP -- and a barbell with Treasurys at both ends-- for protection against the possibility of inflation and the economic uncertainty that goes with it.

[Dieter]

Let's say all assets have a starting value of $1,000 on 1/1/18

A 60% drop in any one of them with the other three assets staying flat leaves one with $3,400. The asset that has dropped 60% is at $400 which is still 11.8% of the total portfolio.

Doh - right. Thanks. Of course, 10% of what you USED to have...

Would need to loose 66.7% I think....

Or 60%, gold flat, cash up 2% and stocks up 58%....

Haven't really thought about it from this angle before....

[ochotona]

I got reacquainted with peaktotrough.com. My, that 40/10 rebalance system is really the lazy person's system. Seven rebalances in half a century. I really like that. 35/15 is the best the way I did my test, but it trades way more.

[Cortopassi]

I got reacquainted with peaktotrough.com. My, that 40/10 rebalance system is really the lazy person's system. Seven rebalances in half a century. I really like that. 35/15 is the best the way I did my test, but it trades way more.

Lazy is the way I should have done things. Too active described me.

[dualstow]

Long bonds are going nuts today, even more so than when stocks were down.


EDIT: and...stocks are down.

[ochotona]

"FRANKFURT (Reuters) - The European Central Bank is considering buying more long-dated bonds from next year to keep euro zone borrowing costs in check even after it stops pumping fresh money into the economy, sources told Reuters."

I guess this will suppress US long bonds as well. The yield curve will be flattened further.

[barrett]

I guess this will suppress US long bonds as well. The yield curve will be flattened further.

The spread between yields on one-year treasuries and 30-year issues here in the US has narrowed from 98 basis points at the beginning of 2018 to just 64 basis points after yesterday's action.