Gyroscopic Investing

Is today the day that deflation strengthened its case or do you believe other factors are contributing to the decline in long-term interest rates? Perhaps its a race to the bottom and we are getting a late start as others attribute the yield decline to our current rates relative to countries such as Germany (lower). I believe investors are holding LTT's to hedge their equity risk in-lieu of selling their stock positions.

Do we decide at any point that the risk to holding LTT's outweighs any potential benefit?

buddtholomew wrote: Is today the day that deflation strengthened its case or do you believe other factors are contributing to the decline in long-term interest rates? Perhaps its a race to the bottom and we are getting a late start as others attribute the yield decline to our current rates relative to countries such as Germany (lower). I believe investors are holding LTT's to hedge their equity risk in-lieu of selling their stock positions.

Do we decide at any point that the risk to holding LTT's outweighs any potential benefit?

I decided that a long time ago, but then I'm weird even around here. 

Libertarian666 wrote:

buddtholomew wrote: Is today the day that deflation strengthened its case or do you believe other factors are contributing to the decline in long-term interest rates? Perhaps its a race to the bottom and we are getting a late start as others attribute the yield decline to our current rates relative to countries such as Germany (lower). I believe investors are holding LTT's to hedge their equity risk in-lieu of selling their stock positions.

Do we decide at any point that the risk to holding LTT's outweighs any potential benefit?

I decided that a long time ago, but then I'm weird even around here. 

In retrospect, the PP was perfectly positioned to take advantage of the decline.

buddtholomew,

I don't really like owning LTTs at their current levels but I still think they are a good hedge against a prolonged bout of deflation. If long bond rates go really low (say 2%) and stay there for an extended time, the coupon payments on whatever 30-year issues you are holding will be nice to have. That is the only scenario I can see where the potential benefit outweighs the risk of holding them. I just don't have any idea how likely that is.

barrett wrote: buddtholomew,

I don't really like owning LTTs at their current levels but I still think they are a good hedge against a prolonged bout of deflation. If long bond rates go really low (say 2%) and stay there for an extended time, the coupon payments on whatever 30-year issues you are holding will be nice to have. That is the only scenario I can see where the potential benefit outweighs the risk of holding them. I just don't have any idea how likely that is.

We hold long-term treasuries for their volatility and not the coupon payments so I understand the deflation hedge. From a mathematical perspective, does this deflation protection (in percent return terms) lessen as yields move down? I realize the impact on bonds if rates return to historical norms.

bud, I think you are essentially looking at the same issue that I brought up in the recent thread 'Current LTT Upside.' It's the risk versus reward of holding LTTs at their current level, correct?. Here are some numbers that Fragile Bill posted in answer to my question on that thread:

"barrett, you provided a starting interest rate (3.24%), an ending interest rate (2.5%/2.0%) and a coupon rate (3.75%), but did not provide a time frame.  I'll assume 12 months.  If my formulas are right, a decline to 2.5% will cause the present value of your bonds to increase 15.2%.  Adding to that your coupon rate of interest gives a total 12-month return of about 19%.  A decline to 2.0% would result in a total 12-month return of about 31%."

If FB's numbers are correct, I have to conclude that the upside potential on the long bond is very limited at present but I do believe the coupon payments matter if interest rates go very low and stay there for a long time. I'm curious if anyone disagrees with this... that I am laying out the only scenario where holding 25% in LTTs is a good idea. I'd love to hear another perspective. At just over 3% I am getting antsy.

Bud, Unfortunately it seems there's not a lot of interest at the moment on this forum regarding different aspects of the PP. Last night I went back and read some of the bond threads from 2011 when rates on the long bond were also plunging. That was helpful.

barrett wrote: Bud, Unfortunately it seems there's not a lot of interest at the moment on this forum regarding different aspects of the PP.

I'm reading this thread with interest, 2011 stuff too. I just don't have anything useful to add. I'm holding bonds out of blind obedience to the pp, but when intelligent people question the wisdom of such a plan as rates plunge this low, I definitely pay attention. (I guess 5% of my eye is not blind.  ) Of course, I wish I had just sold bonds in 2011 when they had those fires in Birmingham (UK), but if I had I'd probably feel like I was missing out this year.

No one will ring a bell when rates bottom, but 20-30% upside is more than sufficient to hold treasuries.
I am interested to know why you think otherwise?

Dualstow, Thanks for posting. As someone who has not been through a long bond downturn, how does it feel? For example, how were 2012 and 2013? If you rebalanced after the run up in 2011, presumably you'd feel better about owning the LTTs, no? I was looking at the implications of rebalancing now and it just seemed like harvesting the YTD gains would not accomplish anything inasmuch as gold and the S&P have also moved up some. Thanks.

Bud, I just feel that 20% to 30% is just not a huge upside when compared to what gold or stocks might do. Of course I'd be thrilled to have that big of a gain in the LTTs. It just seems to me that it's equally likely to lose 50%. I'm no expert on risk so I just don't know how to balance these two potential scenarios. I am trying to develop more of a 'head in the sand' attitude. I am just not there yet.

barrett wrote: Dualstow, Thanks for posting. As someone who has not been through a long bond downturn, how does it feel?

It's not a lot of fun. But at least you're still getting your coupon payments. That, to me, makes it more fun than a gold downturn.

PS, I know from other posts that you love your coupon payments. Me too but almost all my bonds are the 11/15/43 issue so I only get the rush twice a year in May and November. I realize this is a function of being new to the PP... that eventually through some rebalancing i will have something resembling a natural ladder with the coupon blasts spread out a bit more.

barrett wrote: Bud, I just feel that 20% to 30% is just not a huge upside when compared to what gold or stocks might do. Of course I'd be thrilled to have that big of a gain in the LTTs. It just seems to me that it's equally likely to lose 50%. I'm no expert on risk so I just don't know how to balance these two potential scenarios. I am trying to develop more of a 'head in the sand' attitude. I am just not there yet.

A 50% loss equates to a PP loss of 12.5% (less coupon payments). Not catastrophic and also assumes the other assets do not limit losses further.

I personally hold more cash to maintain a duration of 5-7 years and leave the 4x25 unaltered. Cash is my VP you see.

barrett wrote: PS, I know from other posts that you love your coupon payments. Me too but almost all my bonds are the 11/15/43 issue so I only get the rush twice a year in May and November. I realize this is a function of being new to the PP... that eventually through some rebalancing i will have something resembling a natural ladder with the coupon blasts spread out a bit more.

I do love my coupon payments. If you prefer a more regularstream, the common long bond ETFs do monthly distributions rather than bi-annually. I admit I have TLO in my 401k instead of actual bonds due to Schwab's outrageous selling fee.

barrett wrote: Dualstow, Thanks for posting. As someone who has not been through a long bond downturn, how does it feel? For example, how were 2012 and 2013? If you rebalanced after the run up in 2011, presumably you'd feel better about owning the LTTs, no? I was looking at the implications of rebalancing now and it just seemed like harvesting the YTD gains would not accomplish anything inasmuch as gold and the S&P have also moved up some. Thanks.

I gritted my teeth and didn't rebalance. Wanted to, badly. I did sell my EDV at a profit, but only to swap it for directly held treasuries. 2012 and 2013 were ok. I watched my bond profit evaporate, but I was able to rebalance out of stocks last year. The total package is doing well.

Currently there's a strong temptation to sell some treasury bonds that are once again above water.

And how about today ? They are up 20 % YTD. That's is scary. And nowhere near a rebalance. I'm very confidence in the PP concept.
But now I'm in doubt. Sell some ?. Stay and pray. Sell all and buy cash(no), equities (no), gold (maybe).

I'm sure I saw somewhere that in 2003 Japanese 30 year JGB had a yield of 0.7%. That would be a big swing from 3% yields wouldn't it?

Saw a headline this morning about Germany paying zero.

Thomas Hoog wrote: ... They are up 20 % YTD. That's is scary...

You mean EDV? I looks like EDV is up more than 21% year-to-date and TLT is up 13%. Is that right?

If I choppped my bond share down to about 25% or maybe 20% in the name of rebalancing, I hate the idea that I'd have to put the proceeds into cash or gold. 

In addition to deliberating whether to fully rebalance, I'm also wondering which bonds to sell. I once asked if it made more sense to take profits in the bonds that have made the most gains or to get rid of the ones that are just about breakeven. (I have bonds in both taxable and tax-deferred, so taxes are not an issue. Also, I'm not in a high tax bracket).

I'm pretty sure MediumTex answered, "I don't think it really matters" and I think he's right. But here I am, wringing my hands over it again. I think it's a real have-your-bonds-and-sell-them-too situation.

Some rates in Europe went negative back in June. Here is one link (probably not the best):

http://www.ecb.europa.eu/home/html/faqi ... es.en.html

LTTs seem to be the asset that a certain group of us are most worried about at the moment. The individual bonds I bought back in January are up about 16.5% to date so I should be thrilled with them and the PP, right? Without holding gold, stocks and cash, I would NEVER own these damn bonds.

Japan of the 1990s and 2000s should be a lesson for us all but it's just hard to ignore the noise about "rates having to go up." We all believe it but it might not be for another 20 years. In that case, anyone in the PP would be in better shape than most other investors, at least that is my view.

I know there are some young investors on this forum who probably only know about the economic miracle in Japan from reading a bit of history. At the time - meaning throughout the 1980s more or less - we were all certain the Japanese were going to destroy us economically. I don't think anyone but the most astute foresaw their stock market collapse and ensuing deflation.

I was talking to a NY finance guy (JP Morgan derivative dude) at a wedding over the weekend. I asked him where he and the people he works with thought interest rates were headed and he said that they had no idea.

So for now I am sitting tight and watching (and trying not to check the day-to-day numbers too much). I really admire the people who can just park their $ in the PP and go away for months at a time.

MangoMan wrote: And perhaps shockingly, Decision Moose switched back to LTT today after briefly being in the commodity-heavy Latin America ETF. The weekly chart makes it look really strong as well.

Interesting...I am sitting here debating whether to reduce TLT exposure for a combination of gold and cash.

Bud, I would happily rebalance if my allocations were put of whack but my LTTs are only sitting at about 26%. Hardly makes any difference to sell a few bonds. You? Of course you don't have to answer but I am curious.

barrett wrote: Bud, I would happily rebalance if my allocations were put of whack but my LTTs are only sitting at about 26%. Hardly makes any difference to sell a few bonds. You? Of course you don't have to answer but I am curious.

All assets are within tolerance bands, but I manage around the edges when there are outsized gains or losses (tactical asset allocation). I would certainly re-balance if any component exceeded 15/35 thresholds.

Got it. From the numbers I have seen, the PP seems to work more or less the same even with narrow rebalancing bands. Someone else may feel differently - or know a lot more than I do - but I would say that if there aren't any tax implications, just do what makes you comfortable. Selling expensive stuff and buying cheap stuff is generally a good idea.