Gyroscopic Investing

I looked at six periods of rising interest rates since 1977 and calculated the performance of the asset classes and the HBPP as a whole.  I also looked at where we are today.  I realize that HBPP veterans have done this 100 times.  I did not factor in any rebalancing.

In period one, 6/30/77 to 2/29/80 (a duration of 32 months), the yield on the 30-year T-bond rose from 7.58% to 12.25%.  This caused 30-year bonds to drop 18%.  But stocks gained 46%, gold rallied 348%, and short-term T-bills gained 23%.  Overall, a $1,000,000 investment in the HBPP doubled in value to $1,995,000.

In period two, 12/31/80 to 9/30/81 (a duration of nine months), the 30-year yield rose from 11.98% to 15.19%.  This caused 30-year bonds to drop 11%.  Stocks lost 11%, gold lost 28%, and T-bills gained 12%.  Overall, a $1,000,000 investment lost 10% to $904,000.

In period three, 4/30/83 to 5/31/84 (a duration of 13 months), the 30-year yield rose from 10.38% to 13.84%.  This caused 30-year bonds to drop 14%.  Stocks lost 6%, gold lost 11%, and T-bills gained 8%.  Overall, a $1,000,000 investment lost 5% to $945,000.

In period four, 8/31/86 to 9/30/87 (a duration of 13 months), the 30-year yield rose from 7.21% to 9.79%.  This caused 30-year bonds to drop 17%.  Stocks gained 27%, gold gained 19%, and T-bills gained 7%.  Overall, a $1,000,000 investment gained 9% to $1,089,000.

In period five, 10/31/93 to 11/30/94 (a duration of 13 months), the 30-year yield rose from 5.97% to 7.98%.  This caused 30-year bonds to drop 16%.  Stocks lost 1%, gold gained 4%, and T-bills gained 4%.  Overall, a $1,000,000 investment lost 2% to $977,000.

In period six, 12/31/08 to 3/31/10 (a duration of 15 months), the 30-year yield rose from 2.69% to 4.72%.  This caused 30-year bonds to drop 26%.  Stocks gained 36%, gold rose 28%, and T-bills gained nothing.  Overall, a $1,000,000 investment gained 10% to $1,098,000.

In period seven, 7/31/12 through yesterday (a duration of 12 1/2 months), the 30-year yield has risen from 2.58% to 3.90%.  This has caused 30-year bonds to drop 19%.  Stocks have gained 24%, gold has lost 15%, and T-bills have gained nothing.  Overall, a $1,000,000 investment has lost 3% to $973,000.

Conclusion:  none whatsoever.  The performance of the HBPP is all over the place in these periods of rising rates because the price of gold is all over the place (four up and three down), as is the performance of the stock market (four up and three down).  In every period except period five, gold and stocks moved in the same direction.  This was good in periods one, four, and six because they were moving in the same direction up, but bad in periods two and three because they were moving in the same direction down.  Despite it all, the largest decline was 10% (over a nine month duration).

I do see three things that might indicate that things are stacked against the HBPP in today's environment: 1) the effect of a 100 basis point move in the 30-year yield, on the value of the long-term bonds themselves, is magnified in this time of low rates, 2) the short-term T-bills are not throwing off cash like they did in earlier periods, and 3) it seems to be widely believed that if rates continue to rise, long-term bonds and the stock market will move in unison until rates start to approach their "natural" levels.

So in other words, the investments aren't highly correlated? Yes, that is what we would expect. But thanks for doing the math anyway!

I found some interesting data in that report. The steepest loss was around 10%. That was during the great tight money recession inflicted by the Fed when they acted to break the high inflation of the period. Most of the other losses were relatively minor. Also most of the losses seemed to be centered around periods where interest rates were rising independently of CPI.

Ad Orientem wrote: I found some interesting data in that report. The steepest loss was around 10%. That was during the great tight money recession inflicted by the Fed when they acted to break the high inflation of the period. Most of the other losses were relatively minor. Also most of the losses seemed to be centered around periods where interest rates were rising independently of CPI.

Exactly. Rising interest rates with or without inflation are distinct economic environments. Leaving this out of your analysis on rates as well as the yield on cash will result in an incorrect conclusion. I don't think we can look at the topic in isolation.