Gyroscopic Investing

Hi everyone,

I've been browsing the forums for ways to tackle the bond portion of my Portfolio (based roughly on Golden Butterfly). Given that interest rates are pretty low, I have already split the bond portion evenly between T-bills and TLT instead of only TLT.

ETF used for T-bills- iShares $ Treasury Bond 0-1yr UCITS ETF: YTM 0.14%, effective duration 0.36 yrs

The problem I'm facing, as I'm sure others here are too, is how to deal with the dual risk of both a rise in interest rates and inflation for long duration bonds. With rates this low, the upside provided by nominal long bonds is limited at the current yield. I have been thinking of replacing TLT with long duration TIPS. As of now, I have an option to choose between the following ETFs:

iShares $ Treasury Bond 20+yr UCITS ETF: YTM 1.53%, effective duration 18.84 yrs (data as of 13/11)
UBS ETF (LU) Bloomberg Barclays TIPS 10+ UCITS ETF: YTM 1.55%, modified duration 15.64 yrs (data as of 30/09)

I wasn't able to find more recent data for the second ETF above but comparing a similar index BCIT1T:IND on Bloomberg shows that the index has decreased slightly in value, so the yield should have increased, albeit marginally.

Given the YTM and effective duration above, I am thinking of replacing nominal long bonds entirely with TIPS.

I would greatly appreciate any input on the matter.

(As background info - I'm an EU based investor and have the following portfolio as of now excluding cash:
US Large Cap 25%
US Small cap 12.5%
EM (EMQQ) 12.5%
Gold 25%
T-bills 12.5%
LT treasuries 12.5%
)

Ok, so let's say you replace your TLT with TIPS. What happens if the current deflationary trend continues for another decade? You lose. It's an active bet. The PP is already hedged for an uptick in inflation and/or yields. I'm not saying I believe bonds are the most attractive investment in the world right now, but they could continue to surprise all of us. The idea of the PP is a portfolio that you don't manage or make bets in. Now you already have reduced TLT and cash to only 12% of your portfolio. Now you want to fully swap the TLT out for TIPS? That's the very definition of making a bet. I wouldn't say what you would have at that point would even be in the realm of a "permanent portfolio". So do you want a "permanent portfolio" or do you want a do it yourself buy and rebalance portfolio that includes whatever you want to make bets on? Not saying this is bad, I don't use a PP myself these days. But you really need to ask yourself what you want. If what you want is a PP, then you should keep TLT. If what you want is a DIY portfolio you make bets in, the VP section is below haha.

pmward wrote: ↑Mon Nov 16, 2020 4:25 pm I'm not saying I believe bonds are the most attractive investment in the world right now, but they could continue to surprise all of us.

+1

Rising interest rates and inflation are always threats for long bonds. The other assets are meant to carry the water in those scenarios.

Go ahead and buy fire insurance from the arsonists.

Go ahead and buy fire insurance from the arsonists.

Yes, the cause of inflation (government) gets to set the inflation rate used to determine the payoff on the TIPS. Not very enticing. I see that, for example, Vanguard's VTIP already has a SEC 30 day yield of -1.21% . It states that this excludes inflation adjustments to the principal. Does this mean that we could say that fund has approximately a -1.21 real yield, which means it is yielding 1.21% below the CPI?

I notice that the estimated average yield to maturity (which does include inflation adjustments to the principal) is a whopping 0.2%. Why bother with VTIP?

IMHO the only "TIPS" worth buying at present and for the foreseeable future are iBonds - which are currently paying the same 1.68% rate as 30 year Treasuries but with an inflation investment and no taxes on them until redemption.

EE's also are worth a look if you're young enough.