Gyroscopic Investing

i'm trying to understand how the bonds work. i understand that interest rates & the price of bond are inversely related. i bought a bond which matures in 2039 this past January. this is 1st time i have owned a LTT directly.

if i look @ the TLT chart as a proxy (since 2003), i see that the price has been largely between $80 & $95 except for a few spikes, most notably in 2008 & the one we experience currently.

is it likely that the price of the bond will now stabilize in a higher price range? or should i expect it to revert to the price range of when i bought it?

Nobody knows what the price will do. If you are at your rebalance band you should rebalance though.

I am tempted at this price to sell a large chunk of my TLT holdings and buy 30 year bonds directly on the secondary market; maintaining this portfolio require so little effort on my part that I fight the urge to look for things to do with it, when I would be better off spending the time with family, friends and hobbies. That said, the expense ratio is becoming a larger percentage of the net yield, and doing things that make the portfolio more "pure" seems reasonable. TLT has been nigh on to idiot proof for me, though.

6 Iron wrote: maintaining this portfolio require so little effort on my part that I fight the urge to look for things to do with it...

Soooo true.

Who actually thought we'd see yields this low so quickly?

I thought we'd see lowering rates... maybe slowly into the mid-3% range over a couple years, but 2.75% in just a couple months?  I didn't expect this.

The thing about long-term bonds is, unlike stocks, they have that visible yield that reminds people that they're buying into "collecting X.X% for 30 years" and that leaves a bad taste in anyone's mouth.  As bonds perform better, that rate gets worse and worse.  So they're NEVER going to look appealing unless you can show someone a chart of TLT and VTI over the past decade and drill modern portfolio theory into their heads... easier said than done.

I am very surprised too moda! I understood that rates dropping was possible but I did not a expect this kind of a spike!

Also, it easy to forget that 3.5% nominal return can be a great return at key moments in history. We might be entering one of those moments 

moda0306 wrote:The thing about long-term bonds is, unlike stocks, they have that visible yield that reminds people that they're buying into "collecting X.X% for 30 years" and that leaves a bad taste in anyone's mouth.  As bonds perform better, that rate gets worse and worse.  So they're NEVER going to look appealing unless you can show someone a chart of TLT and VTI over the past decade and drill modern portfolio theory into their heads... easier said than done.

I'm not sure I would say "never". The good news is that the bonds aren't actually labeled as "30 year" bonds — they just have the date of maturity on their label (i.e. 2041). So, in ten years the bonds will just look like exactly like fresh 20 year bonds. And in 20 years they will look like fresh 10 year bonds. So, technically a bond issued today can't really tarnish the reputation of the 30 year bond for the long term.

http://www.bloomberg.com/news/2011-03-2 ... value.html

Warren Buffet was saying in March to get out of long-term bonds.

TLT has risen over 30% since then.

Oracle, or spectacle?

moda0306 wrote: http://www.bloomberg.com/news/2011-03-2 ... value.html

Warren Buffet was saying in March to get out of long-term bonds.

TLT has risen over 30% since then.

Oracle, or spectacle?

Sometimes I feel like everything Buffet says is a coded instruction to get people to buy BRK.A stock:

as in..

Buffett Says Don't buy Long Term Bonds (so buy Berkshire Hathaway)
Buffett Says U.S. Housing May Not Recover in 2011 (so buy Berkshire Hathaway)
Buffett Says European Banks Have Asked Him For Money (so buy Berkshire Hathaway)
Buffett Says 'Bet Heavily' Against Double-Dip Recession (so buy Berkshire Hathaway)
Buffett Says the Economy Will Recover (so buy Berkshire Hathaway)
Buffett says Berkshire has begun share buybacks (so buy Berkshire Hathaway)
Buffett says he remains optimistic about U.S. future (so buy Berkshire Hathaway)

In fact, I think you could probably add the words "so buy Berkshire Hathaway" to the end of almost any sentence Buffet says. It should be a game.

Buffett says rich people should pay more taxes (so buy Berkshire Hathaway).

How about...

"Derivatives are financial weapons of mass destruction"... so buy Berkshire Hathaway.

or

"I try to buy stock in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will"... so buy Berkshire Hathaway.

murphy, Japan shows that anything can happen. Japanese 20 year government bonds went down to 0.7% yield or something like that in the early 2000's. The 2008 US LTT price spike was only a spike rather than a step change but there is no certainty that this time it won't be a step change. Personally I think the PP strategy takes the sensible agnostic approach to avoiding making a prediction either way. The crazy thing is that a fall in yield from 1% to 0.7% corresponds to a significant price gain. You might be relying on just such an inexplicable LTT price gain to rebalance stock or gold losses in a couple of years time.

Clive, in recent years that would have worked nicely because the London and New York markets were joined at the hip. You'd be taking a big risk that that didn't break down in the future. Holding Japanese stocks and US bonds in the 1990s would have been catastrophic. Who knows, in the coming years the UK might have a debt deflation whilst the USA has a stock boom or vice versa. Am I right that the 1920s were a boom in the USA and a depression in the UK? Perhaps if the quest is for less currency concentrated risk, a suplimentary variable portfolio of say 35% Yen cash, 35% USD LTT, 20% emerging market stocks, 10% silver might work as a supliment to a UK PP?

very interesting, Clive. does the interest rate go up after 1954? through that period, i think the british pound was linked to gold? if so, was that the main factor for those rates (ie. no fear of inflation)?

just throwing more wood on the fire...

anyone know of any flaws in the data presented here?

http://www.zerohedge.com/news/bill-gros ... nd-auction

"it means that it was the Fed, via the Primary Dealer repo mechanism that once again took down a whopping 60.9% of the entire auction."

61% !!!  this sounds like the US gov't moving money from the left pocket into the right pocket (with middlemen to get their cut)?

unsustainable bubble? Is there a point that the Fed/Treasury loses credibility?
http://www.ritholtz.com/blog/wp-content ... /08/41.gif

MMT explosion in 5... 4... 3... 2...

Great addition, though.  I look forward to reading it.

It's just fear mongering and political whining. ZeroHedge thinks it's some big embarrassment and conspiracy if only the Primary Dealers are doing most of the bidding (it's not). And Bill Gross is probably the last person you'd want to get Long Term Treasury advice on. Remember, he shorted LTTs last year before they jumped 35%.

Primary Dealers are obligated to have more than enough reserves on hand to take down the entire auction on their own. That's their job. That's what they sign up for. They become Primary Dealers mostly because they want to easily drain their excess cash reserves, and they also get special treatment for providing the service.

And with the Primary Dealers' help, today's Treasury auction was still oversubscribed 2.60:1

http://www.treasurydirect.gov/instit/an ... 0112_1.pdf
(See bid-to-cover in the bottom left-hand corner)

Not quite the 3:1 or 4:1 you usually see, but still a success. The Primary Dealers themselves tendered twice the amount necessary to take down the entire auction on their own. Also, ZeroHedge is being misleading since not all of the Direct and Indirect bids that were tendered were actually accepted. The Direct and Indirect bids alone could have taken more than 60% of the entire auction if their tendered bids had been accepted.

In any case, if the Primary Dealers are so incompetent that the Fed had to loan them the liquidity they need to independently take down the entire auction twice over (as ZeroHedge/Gross alleges) then the Fed did their job. LTTs took a 0.7% hit and recovered as soon as people got back from their coffee break.

Learn more, here:

When Will The Bond Auctions Begin to Fail?
Breaking News: "Bankrupt" Nation's Bond Auction 3x Oversubscribed

All I know is last year I ignored all of this stuff and my LT bonds went up over 30% from where they started in January. And I was getting interest payments the entire time.

So while all these people were running around worrying about various future scenarios (that didn't happen BTW) I was sitting back and making money. That's why we invest, right?

Ignore this stuff.

craigr,

We like this stuff simply because of our interest in macroeconomics... I think we can mostly admit we're confident our PP will stay relatively safe even if we're wrong and we see troublesome inflation, high interest rates, or even a currency collapse.

I, for one, feel MMT is really onto something (descriptive... not perscriptive in all its forms), so whenever I hear reasonable challenges to it, I dig in... so does Gumby.  Don't interpret it as lack of confidence in the PP.

Old thread here. 2011. The first page is worth reading.

I have been hearing since at least 2008 how LTT are horrible and nobody should own them. Instead people were advised to buy short-term bonds because interest rates would be going up "any day now." In fact, I have heard LTT bonds are horrible to own for probably 20 years if I think back far enough.

Over that time since 2008, people sitting in short-term bonds waiting for the inevitable interest rates rise have been earning near 0% nominal and well into negative real interest territory.

Even worse are the people who got out of the stock market entirely to sit in cash. They got badly burned.

Predicting the markets is a fool's errand. Your primary protection is wide diversification and mechanical rebalancing.

I think in the short term long bonds are over-extended. On a Keltner Channel chart, they are tagging the 3 standard deviation line to the upside on a daily chart. I expect TLO or TLT to come down by 4%. Intermediate to long term, who knows?

ochotona wrote:I think in the short term long bonds are over-extended. On a Keltner Channel chart, they are tagging the 3 standard deviation line to the upside on a daily chart. I expect TLO or TLT to come down by 4%. Intermediate to long term, who knows?

Is it actionable?
I revert back to doing the math and hardly seems worthwhile pursuing even if you are correct.

1M USD invested in TLT
4% loss = 40K USD

Let's say I take 20% off the table now or 200K

4% loss = 8K USD saved if you're correct.
8K on a 1M TLT investment= 0.8%
Hardly seems worthwhile at all.
This is why I completely gave up on market timing.
Risk/reward is too low.

buddtholomew wrote:

ochotona wrote:I think in the short term long bonds are over-extended. On a Keltner Channel chart, they are tagging the 3 standard deviation line to the upside on a daily chart. I expect TLO or TLT to come down by 4%. Intermediate to long term, who knows?

Is it actionable?
I revert back to doing the math and hardly seems worthwhile pursuing even if you are correct.

1M USD invested in TLT
4% loss = 40K USD

Let's say I take 20% off the table now or 200K

4% loss = 8K USD saved if you're correct.
8K on a 1M TLT investment= 0.8%
Hardly seems worthwhile at all.
This is why I completely gave up on market timing.
Risk/reward is too low.

Short-term price is something to consider for someone who has intentions to chase long Treasuries, patience could pay off.

buddtholomew wrote:

ochotona wrote:I think in the short term long bonds are over-extended. On a Keltner Channel chart, they are tagging the 3 standard deviation line to the upside on a daily chart. I expect TLO or TLT to come down by 4%. Intermediate to long term, who knows?

This is why I completely gave up on market timing.
Risk/reward is too low.

The risk/reward is huge. But what you are talking about is really just tinkering.

Expecting something to move 4% is sort of comical in itself. That's awfully precise. And then making a portfolio adjustment based on that expected paltry move to potentially save 0.8%? With LTTs at all time highs, it strikes me it wouldn't even be worth the tax implications.

Successful market timers get rich or broke placing much bigger bets on much bigger ideas.