Gyroscopic Investing

Okay, now that I've been convinced to directly own bonds, I have a question. Obviously we all know that interest rates may go up, down, sideways, or inside out, so it doesn't make sense to try to predict them. Since the YTM is the same for bonds of all different interest rates, would it make sense to pay more for a bond with a higher coupon in order to provide more punch in the case of falling interest rates and a bigger cushion in the face of rising interest rates?

For example, if I buy a 4.3% coupon bond right now, then interest rates can still rise 1.5% before the bond itself becomes worth any less, but the YTM remains the same as a smaller coupon bond. Is the higher purchase price worth it?

i recall this question long ago (1-2 years?) in these threads. My recollection is to buy the one w/ lower coupon as this results in a more volatile bond! Counter-intuitive. Anyways...that's what I did yesterday. At the end of the day...I don't think it matters...just get the bond with close to 30 years on it (ideally in the IRA account)

PS,

A high coupon (premium) bond will pay more interest and have a capital loss if held until maturity.  So if held in a taxable account then the majority of the gains will be taxed as income rather than cap gains.  Best to go with the lowest coupon available, as long as it's yield is close enough to the other bonds.

Harry Browne said to buy the bond with the lower coupon.  The price will, of course, reflect the yield differential, but Browne said that the lower coupon bond should be slightly more volatile.

Right, and volatility is something we want because we harvest it with the rebalance bands. Got it now, thanks everyone!

MediumTex wrote: Harry Browne said to buy the bond with the lower coupon.  The price will, of course, reflect the yield differential, but Browne said that the lower coupon bond should be slightly more volatile.

Wait - the lowest coupon bond is a zero-coupon bond.  I didn't think we were supposed to go after those.  I would think the bond with the coupon closest to the yield, costing closest to par, would be the best way to implement the LTT portion of the PP.

We're splitting hairs here. Harry Browne's advice on LTTs, as laid out in Fail-Safe Investing, was quite simple (boldface added):

Since there may be times when the bond category will have to carry the entire Permanent Portfolio, you want a bond with the potential for big price movements. So put the 25% in the Treasury bond issue that currently has the longest time until it matures. That will be close to 30 years. Ten years later, the bond will have only 20 years to maturity. When it’s that close to maturity, replace it with whatever current Treasury bond has the longest time to maturity.

Source: Fail-Safe Investing, p. 74

In other words, just buy the bond with the longest time to maturity.

jimbojones wrote:

MediumTex wrote: Harry Browne said to buy the bond with the lower coupon.  The price will, of course, reflect the yield differential, but Browne said that the lower coupon bond should be slightly more volatile.

Wait - the lowest coupon bond is a zero-coupon bond.  I didn't think we were supposed to go after those.  I would think the bond with the coupon closest to the yield, costing closest to par, would be the best way to implement the LTT portion of the PP.

Zeroes are a complicated subject.  If held in an IRA, a zero coupon bond fund like EDV can be a good choice.

I would stick with 30 year coupon bonds and, as Tortoise notes above, buy the one with the longest time to maturity.