50 Year Bonds? Change your PP Allocation?

[TripleB]

Posting in the main forum rather than Bonds since this affects the 4x25 structure.

If the Treasury issues 50 year bonds, would you use them? If so, would you reduce your bonds holding down to 15% or 20%? The more concentrated the bonds, the less you would use to get the same affect as a 30 year bond on a 25x4 structure.

I like the idea of 50 year bonds, because the Treasury did at one point stop issuing 30 year bonds. So if that happened in the future, at least I could hold my 50 year bonds until they got to 20 year maturity and just transition back into the 4x25 structure and consider them to be "30 year bonds" at that point.

I read on CNBC today that the Treasury might issue 50 year bonds, but in the article it said they are denying it. I think it would be a wise move on the Treasury's part to issue them, and lock in historically low interest rates for 50 years.

[doodle]

If the treasury wins....then you lose. I know, I know....look at the assets as a package not individually. But, I just have to believe that locking into 50 years at some of the the lowest rates this century is a risky proposition, especially given the central banks willingness to go to extremes to fight deflation.

[MediumTex]

If the treasury wins....then you lose. I know, I know....look at the assets as a package not individually. But, I just have to believe that locking into 50 years at some of the the lowest rates this century is a risky proposition, especially given the central banks willingness to go to extremes to fight deflation.

doodle,

How are you currently investing your money?

Are your returns beating the PP?

ALL THREE of the PP's volatile assets are risky.  That's why we buy them.  Pointing out that LT treasuries at current rates is risky is only stating the obvious.  They were just as risky when they were paying 4%, 5% and 6%.  Listen to old HB radio shows and you will hear people calling in saying that they would love to use the PP strategy, but they could never bring themselves to buy LT treasuries at 6.5%, since it was obvious that rates had nowhere to go but up.

The PP is up about 11% or so YTD.  A lot of that is because of LT treasuries.  Does it make any sense?  I don't know...compared to what?  The PP is making money and I am happy.  Did I think this would happen?  No.  Will I be equally surprised by some other weird move in the coming months and years?  I'm sure I will.

Don't sit on the sidelines too long.  Your skepticism at some point will start to cost you real money.  If I were you I would either commit to the PP and see how you like it, or just write it off as something that is not for you.  Right now, I feel like everyone but you is in the swimming pool and having a great time and you are walking around the edge of the pool repeatedly telling us that someone might drown.

[moda0306]

I think Clive just took a dump in the corner of the pool with his RS stuff...

[MediumTex]

I think Clive just took a dump in the corner of the pool with his RS stuff...

It's just a Baby Ruth bar.

No need to be alarmed.

[TripleB]

So back on topic - would you buy 50 year bonds if they were available or stick with 30? If you bought 50s, would you adjust your allocation or keep it at 25x4?

It should be trivial to calculate the duration of the 50s compared to the 30s and adjust your allocation appropriately to match the same duration-adjusted ratio of a 25x4. The duration formula requires the input of the coupon payment, so until the 50s are actually issued (if ever) we can't really calculate duration although someone can likely estimate it based on the current yield curve.

[Gumby]

Right now, I feel like everyone but you is in the swimming pool and having a great time and you are walking around the edge of the pool repeatedly telling us that someone might drown.

C'mon Doodle. The water's great!



Remember what HB said... Be sure to set aside a budget for enjoyment!

[doodle]

My (non-permanent) PP looks more like prpfx at the moment. The difference between mine and traditional PP is that I have the cash and bond portion 40% in 5 year ladder and then the other 10% split between some foreign Emg. Mkt currencies..mostly Asian, and agricultural commodities. I am slightly hedged against dollar devaluation.

I moved out of long treasuries too soon....a mistake I currently regret. However, my 5 year ladder combined with various high yielding credit union accounts gives me a total yield of around 1.5 percent. This is quite similar to the bond barbell split at the moment. I know I am forgoing the volatility of LT bonds, but currently it appears as if long bond rates already have a Fed Operation Twist baked in. I am going to wait a number of months and reevaluate after Obama jobs act gets debated and congressional super committee meet.

[MediumTex]

I am going to wait a number of months and reevaluate after Obama jobs act gets debated and congressional super committee meet.

Don't wait too long.

There is plenty of fun to be had with the PP right here and right now.

[Storm]

If the treasury wins....then you lose. I know, I know....look at the assets as a package not individually. But, I just have to believe that locking into 50 years at some of the the lowest rates this century is a risky proposition, especially given the central banks willingness to go to extremes to fight deflation.

doodle,

How are you currently investing your money?

Are your returns beating the PP?

ALL THREE of the PP's volatile assets are risky.  That's why we buy them.  Pointing out that LT treasuries at current rates is risky is only stating the obvious.  They were just as risky when they were paying 4%, 5% and 6%.  Listen to old HB radio shows and you will hear people calling in saying that they would love to use the PP strategy, but they could never bring themselves to buy LT treasuries at 6.5%, since it was obvious that rates had nowhere to go but up.

The PP is up about 11% or so YTD.  A lot of that is because of LT treasuries.  Does it make any sense?  I don't know...compared to what?  The PP is making money and I am happy.  Did I think this would happen?  No.  Will I be equally surprised by some other weird move in the coming months and years?  I'm sure I will.

Don't sit on the sidelines too long.  Your skepticism at some point will start to cost you real money.  If I were you I would either commit to the PP and see how you like it, or just write it off as something that is not for you.  Right now, I feel like everyone but you is in the swimming pool and having a great time and you are walking around the edge of the pool repeatedly telling us that someone might drown.

Doodle, it's time to:  Embrace the suck!  http://www.rockyourday.com/embrace-the- ... d-love-it/

Sure, all of the PP assets suck, but for some reason they go well together - like chocolate and peanut butter - like Baby Ruth bars floating in swimming pools... eww!  Did I just say that?

Seriously, the longer you stand on the sidelines the longer you are going to be wishing you bought LT treasuries at 4%, at 3%, at 2%, or at 1%.

I have to kick myself when I get a signal to buy gold at $1800 an ounce - but wtf, I bought gold at $1000 an ounce when "gold was in a bubble" - I bought it at $1200 when "gold had nowhere to go but down" - I bought gold at $1400 when "gold is a barbarous relic that never appreciates in value - I bought gold at $1600 when "the gold bubble was sure to pop any day now"...

The PP is all about giving up control.  By giving up control you give up the impulses and emotions that cause us to be terrible investors.  Instead of dumping all my stocks in fear because the market is tanking right now, interestingly enough I'm buying more stocks because I have a buy indicator since stocks are < 25% of my portfolio.  I'm sure a few months from now I will be thanking myself for buying them when the rest of the market was curled up in a fetal position praying for QE3.

6 weeks ago my portfolio indicated I should buy LT treasuries.  The market was sure they were going to be worthless when the US defaulted on their debt on August 2nd.  I followed the indicator and my LT treasuries are up about 20% since then.

The PP is emotionless, like Spock.  It is composed entirely of logic.  When an asset is down you buy, when it is up, you sell - to rebalance.  There is no emotion, fear, or greed.  Either embrace the suck, or spend an eternity sucking at investing because you follow your instincts instead of a plan.

[TripleB]

I know I am forgoing the volatility of LT bonds, but currently it appears as if long bond rates already have a Fed Operation Twist baked in.

That's what I thought last year when LTT bonds hit lows of 4.25%. I was very hesistant to go in with actual bonds instead of VUSTX. I knew that the PP would protect me when the bond bubble burst as my stocks would compensate. As it turns out, one year later, my bonds are up 20% as the interest rate was 3.25% this week.

Who is to say that next year the interest rate won't be 2.25%? And we will all say - DAMN for sure it can only go up now! Only to have it drop further. I don't know the future, and that's why I use the PP.

I guess no one wants to talk about 50 year bonds though :p

[Storm]

To the original question - if the US offers 50 year LT treasuries, I assume HB would have wanted us to own them as the 25% LTT portion of the portfolio.  The farther you are out on the maturity, the more leverage you have, so I assume 50 year treasuries give you more leverage just like 50 year gilts are used for UKPP.

So, would we then buy 50 year LTTs and sell them before they have 40 years until maturity?

[MediumTex]

I would definitely buy 50 year bonds.

I would probably just stick with 25% x 4 even with the 50 year bonds.

[melveyr]

Generally the 30 years have been less volatile than gold and stocks. Perhaps this indicates that a 50 year would not be certain overkill.

[cowboyhat]

If Harry Browne were alive the one question I would want to ask him about the PP is why not Strips instead of Long Bonds.... Well actually I would have more than one question, but that's the big one for me about an orthodox PP. Based on the historical US PP return data I've seen on this forum 30 year bonds haven't been volatile enough to trigger re-balancing events. To me that raises the question about the tree falling in the forest and no one hearing it.

If a PP component is not volatile enough to trigger re-balancing why not substitute it with something with similar returns but less volatility? For example, why not substitute Clive's 5 year rate tart approach for the cash+long bonds?

I guess the answer would be to understand whether or not something like Clive's rate tart approach (which lowers the volatility of a part of the portfolio) or a 25% long bond holding produces a lower Sharpe's ratio? Right? Because if we are not able to further maximize return we may be able to minimize volatility.

[Gumby]

Based on the historical US PP return data I've seen on this forum 30 year bonds haven't been volatile enough to trigger re-balancing events. To me that raises the question about the tree falling in the forest and no one hearing it.

Didn't LT Bonds trigger a rebalance at the end of 2008?

https://web.archive.org/web/20160324133 ... rebalance/

[AdamA]

If Harry Browne were alive the one question I would want to ask him about the PP is why not Strips instead of Long Bonds.

From Why the Best Laid Investment Plans Usually Go Wrong:

 
Use for Zero-Coupon Bonds

Zero-coupon bonds are roughly three times as volatile as conventional bonds of the same maturity.

That can make them attractive for the Permanent Portfolio, since the more volatile and investment is, the less money you have to risk in order to achieve a particular level of profit.  However, the usefulness of zero-coupon bonds is hampered by large commissions and buy-sell spreads.  

And although conventional long-term Treasury bonds don't provide as much volatility, they can provide enough volatility to protect against a deflation.  So for a portfolio that is generally liquid, there's no advantage in reducing the Treasury-bond budget (by using a more volatile alternative), since no other portion of the portfolio needs the capital that would be saved.

Zero-coupon bonds are advantageous only if you are overburdened with investments that are illiquid, leaving too little cash with which to hedge against a deflation.  In that case, you would need to use the available liquid capital in the most powerful way.  

[Storm]

If a PP component is not volatile enough to trigger re-balancing why not substitute it with something with similar returns but less volatility? For example, why not substitute Clive's 5 year rate tart approach for the cash+long bonds?

Even if it doesn't trigger a rebalancing band, you still need to sell your 30 years before they reach 20 and you can realize some profits that way.

[doodle]

Even if it doesn't trigger a rebalancing band, you still need to sell your 30 years before they reach 20 and you can realize some profits that way.

...or losses.

[Gumby]

Even if it doesn't trigger a rebalancing band, you still need to sell your 30 years before they reach 20 and you can realize some profits that way.

...or losses.

Which of course would be good for tax loss harvesting. Doodle, I hope you don't think that one can have a diversified portfolio, with low volatility, and not incur some losses in a portion of your assets. That would be foolish. If you're trying to avoid losses everywhere, you're just taking on more risk.

[stone]

I'm UK based and hold 50year gilts. The duration (volatility) of coupon paying bonds platues out so that 50year bonds don't behave all that differently from 30year bonds. It simply saves the hassle of updating them as often.
Even if they don't trigger a rebalance, the volatility means that there is more there to sell for buying stocks or to prevent you buying too much bonds or whatever the rebalance dictates.

[cowboyhat]

Thanks for the quote Adam. I didn't realize there was such specific advice.

EDV seems to be a way to invest in zero coupon bonds with low commissions and bid-ask spreads. According to posters on the forum volatility runs about 1.8x TLT.

I wasn't thinking of reducing long bond exposure, but rather finding the bonds with the most power to lift the PP when their time comes to do so, which I recall was also some HB advice.

Using a back test with a single initial investment in the 1970's and 1x per year re-balance, all the triggers came from stocks and gold. This isn't even close to a realistic simulation of a PP, but points out that the long bonds don't drive re-balancing activity nearly as much as the stocks and gold.

I guess my question is really if someone were considering buying 50 year bonds, why not just go ahead with a 25% EDV allocation now? This variant would have really paid off this year and in 2008. If not, if EDV is too volatile, then why not go for 50% allocation of rate tart 5 years, which will probably never trigger a re-balance. Why the 1/2 way choice with 25% TLT?

[doodle]

I have a dumb question that I could probably figure out the answer to, but I am too lazy (and tired) to think on a Friday night.

Would LT bond price appreciation be the same if interest rates dropped in half from 8% to 4% as they would from 3% to 1.5%? In other words does the halving of the interest rates in both of these cases lead to the same bond price appreciation?

[MediumTex]

I have a dumb question that I could probably figure out the answer to, but I am too lazy (and tired) to think on a Friday night.

Would LT bond price appreciation be the same if interest rates dropped in half from 8% to 4% as they would from 3% to 1.5%? In other words does the halving of the interest rates in both of these cases lead to the same bond price appreciation?

Not exactly, but it would be large moves in each case.

As you get closer to 0% smaller moves do generate larger changes in bond value than they would in a higher interest rate environment.

I would love to see a graph showing the amplitude of changes in value based upon the same basis point moves at different points on the yield curve.

[mkchiu]

As you get closer to 0% smaller moves do generate larger changes in bond value than they would in a higher interest rate environment.

I would love to see a graph showing the amplitude of changes in value based upon the same basis point moves at different points on the yield curve.

Theoretical graphs would look something like the below.
Par value: 1000 $
Payments per year, PPY: 2 payments/year
Years: 30 years
Payments: Payments per year*Years-1=2*30-1=59payments
Coupon payment, C: Par value*original yield/annual interest payments
PV(yield)=Par value*(1+yield/PPY)^payments + coupon payment * [-1+(1+yield/PPY)^payments] / [(yield/PPY)*(1+yield/PPY)^payments]
Percentage change in PV is calculated as: [PV(current yield)-PC(original yield)]/PV(current yield)

Assume no initial premiums or discounts on the bonds, and no premiums or discounts for bonds which have very different original yields than current yields. That is, in real life, I expect panic and greed to stretch the curves at the corners I circled when an event occurs--new bonds issued or economic events.

ED:
I noticed an error in the cell formula when reducing to PV(yield)=Par value*(1+yield/PPY)^payments + coupon payment * [1-(1+yield/PPY)^-payments] / [(yield/PPY)]
Graphs updated. Also, quoting was incorrect.