Gyroscopic Investing

I see a bunch of long term federal canadian bonds in front of me. The stats are:

Bond#1: coupon: 3.5/Maturity:2045/offer price:108.973/Offer yield:3.073
Bond #2: coupon: 4.0/Maturity:2041/offer price:118.251/Offer yield:3.058
Bond #3: coupon: 5.0/Maturity:2037/offer price:133.819/Offer yield: 3.080

Which one is the best for PP and why?

Thanks,
Christina

The first one because it has the latest maturity.

Buying bonds, at least in the US, based on price or yield is almost pointless as the pricing is so efficient.  What you want to do, then, is get yourself into the longest bond possible to get the "good volatility" that you want when bringing bonds into the PP.  You won't be getting a better or worse bargain, but it's simply the most appropriate asset for the PP.

moda0306 wrote: The first one because it has the latest maturity.

Buying bonds, at least in the US, based on price or yield is almost pointless as the pricing is so efficient.  What you want to do, then, is get yourself into the longest bond possible to get the "good volatility" that you want when bringing bonds into the PP.  You won't be getting a better or worse bargain, but it's simply the most appropriate asset for the PP.

Exactly. And after 10 years the bond will no longer be as long as it was when you first bought it. So, in the year 2021 you will sell that bond for a fresh long bond (perhaps a bond that matures in 2055, or whatever's longest at that time).

OK. I shouldn't pay attention to coupon/yield because it has already been priced into the bond -- is that correct? So even though the 35-year bond (#1) has a slightly lower yield and lower coupon than the 25 -year bond (#3), the price of the bond will reflect these discrepancies.

christina wrote: OK. I shouldn't pay attention to coupon/yield because it has already been priced into the bond -- is that correct? So even though the 35-year bond (#1) has a slightly lower yield and lower coupon than the 25 -year bond (#3), the price of the bond will reflect these discrepancies.

That's correct. As I mentioned in my tutorial, the differences in the coupons have already been priced in by the market. But, the longer bond is always way more powerful in terms of its volatility, which is what we want. Every year, that bond will get a little less powerful as time goes on. That's why you'll need to replace it a decade from now with a longer bond — regardless over what the coupon is then.

Christina, that is exactly my approach to it too. I just have blind faith that the people buying billions of the things have bothered to do the sums and so the market has set an appropriate price and so I just get the longest time to maturity available.

Think of it this way. You can find 1 year Treasury bonds yielding 4% coupons on the market right now. (Obviously these Treasury bonds were first issued a few years ago, and their maturity has since dwindled down to just 1 year). But, are we really to believe that you'll get more money by buying a 1 year Treasury Bond yielding 4% rather than buying a 1 year Treasury yielding 0.12%?

No...of course not.

That's because the market is very liquid, and efficient, and has priced all 1 year Treasuries being traded on the market to yield the same amount when they mature. You pay a lot more for 1 year Treasury bonds yielding 4% and in one year you'll wind up with the same net amount as the 1 year Treasury yielding 0.12%. So, it doesn't matter if you buy the 1 year at 4% or the 1 year at 0.12%. The net yield is actually the same.

So, just buy the longest bond you can find. The duration is the only thing you need to worry about.

OK, yes, the duration is all that matters.
There is a lot of clutter around yield/coupons, etc...I'm kind of glad I can ignore it.

My initial reaction after looking at Vanguard's bond-purchasing interface was fear...

until I recently found out about bond-fund security lending... at which point I decided to dive into it.

It's nice to really be able to cancel out the noise of most of those numbers.

I'm not a fan of Vanguard's Bond Desk user interface. It sucks. And unless you're a Flagship member the fees suck too. Besides, HB recommended diversifying one's investments across more than one brokerage/investment firm, so I don't see a reason to have more than 25% of my money at Vanguard.

What maturity should we be buying to replace SHY portion of PP?