Ryan Melvey's Bond Duration as Leverage Article

[barrett]

I was just reading Ryan Melvey's article on Long Bonds here:

http://www.stableinvesting.com/

He makes the case that one can hold a lower percentage of LTTs (and still not alter the power of bonds to lift the entire portfolio) if they are of longer duration. I guess that is pretty obvious to most PPers, but I am curious if anyone on here lowers the percentage of LTTs they hold based on whether they hold them individually, as EDV, as TLT, or otherwise.

All my bonds are individual issues, mostly maturing 11/15/43, so just under 29 years from now. I confess that, when it comes to Long Bonds, I don't really get the difference between maturity and duration which I think Budd explained somewhere.

Right now I am almost exactly at 4X25. Can I take some profits off the table by selling a few bonds and not mess with the underlying ideas of the PP?

Thanks for any input.

[Pointedstick]

I used to use EDV instead of TLT on the justification that bonds have the lowest historical volatility of three three volatile assets, so I was trying to match them up better. In practice, I almost immediately got spooked by its much higher volatility and replaced it with TLT and real bonds. Every once in a while I toy with going back to the idea, especially in conjunction with GTU as the gold fund, but only after I figure out an adequate higher-volatility stock fund that still tracks the performance of the broad market.

[barrett]

I used to use EDV instead of TLT on the justification that bonds have the lowest historical volatility of three three volatile assets, so I was trying to match them up better. In practice, I almost immediately got spooked by its much higher volatility and replaced it with TLT and real bonds. Every once in a while I toy with going back to the idea, especially in conjunction with GTU as the gold fund, but only after I figure out an adequate higher-volatility stock fund that still tracks the performance of the broad market.

And long bonds are even more volatile when rates are this low. Really appreciate your input on this, PS!

The answer to my question seems to be that I should just let the portfolio work and go do something productive... either that or go back to the China/US manufacturing topic. )

[dualstow]

I confess that, when it comes to Long Bonds, I don't really get the difference between maturity and duration which I think Budd explained somewhere.

I think I remember rickb or kevinw explaining it, too. In any case, duration is the important one when you're looking at interest rate sensitivity, if I recall correctly.

[moda0306]

What ever happened to that guy... what a kid!  One of my favorite contributors to this forum.

[hoost]

I was just reading Ryan Melvey's article on Long Bonds here:

http://www.stableinvesting.com/

He makes the case that one can hold a lower percentage of LTTs (and still not alter the power of bonds to lift the entire portfolio) if they are of longer duration. I guess that is pretty obvious to most PPers, but I am curious if anyone on here lowers the percentage of LTTs they hold based on whether they hold them individually, as EDV, as TLT, or otherwise.

All my bonds are individual issues, mostly maturing 11/15/43, so just under 29 years from now. I confess that, when it comes to Long Bonds, I don't really get the difference between maturity and duration which I think Budd explained somewhere.

Right now I am almost exactly at 4X25. Can I take some profits off the table by selling a few bonds and not mess with the underlying ideas of the PP?

Thanks for any input.

I don't necessarily lower the %age of my bond holdings by extending duration, but I do hold some EDV to balance out Intermediate bonds that are the only option in my wife's 401k.  I would think if you needed to hold some extra cash, you could up the duration (if available) of a portion of your long bonds to maintain your target duration.  I usually just to try match the duration of TLT by computing a weighted average.

[sophie]

I was thinking along the same lines as PS for a while, but eventually I just used EDV as a counterbalance to the VUSTX I was holding in a retirement account.  Now that the retirement account is no longer part of the PP, I'm just sticking to individual bonds and TLT, with TLT serving as an accumulator/gateway.  Far simpler.

[barrett]

What ever happened to that guy... what a kid!  One of my favorite contributors to this forum.

Moda, He still posts articles from time to time on his site Stable Investing.

Here is the link:

http://www.stableinvesting.com/p/recent ... mance.html

Maybe he can be lured back onto the forum if we set up a bring back melveyr campaign!

[rickb]

I confess that, when it comes to Long Bonds, I don't really get the difference between maturity and duration which I think Budd explained somewhere.

I think I remember rickb or kevinw explaining it, too. In any case, duration is the important one when you're looking at interest rate sensitivity, if I recall correctly.

Maturity is simply how long until the bond matures.  Duration is a function of maturity and the bond's coupon interest rate and the bond's current price (it measures how long until the bond's current price plus the coupon payments equal the bond's face value).  How much a bond's value changes with current interest rates is a function of duration, so two bonds with the same maturity but different coupon rates will have different durations and a shorter bond with a lower interest rate might have a longer duration than a longer bond with a higher interest rate.

See http://www.investopedia.com/university/ ... dbond5.asp

[barrett]

Thanks, rickb! That is my homework tonight. Planning to light up the next party I am invited to with a talk on bond duration versus maturity. Seriously, this is much appreciated.

[MachineGhost]

What ever happened to that guy... what a kid!  One of my favorite contributors to this forum.

He's working and getting rich!

[MachineGhost]

I was just reading Ryan Melvey's article on Long Bonds here:

http://www.stableinvesting.com/

He makes the case that one can hold a lower percentage of LTTs (and still not alter the power of bonds to lift the entire portfolio) if they are of longer duration. I guess that is pretty obvious to most PPers, but I am curious if anyone on here lowers the percentage of LTTs they hold based on whether they hold them individually, as EDV, as TLT, or otherwise.

All my bonds are individual issues, mostly maturing 11/15/43, so just under 29 years from now. I confess that, when it comes to Long Bonds, I don't really get the difference between maturity and duration which I think Budd explained somewhere.

Right now I am almost exactly at 4X25. Can I take some profits off the table by selling a few bonds and not mess with the underlying ideas of the PP?

Thanks for any input.

EDV has a duration of 27 years vs 16/17 for normal T-Bonds.  I've backtested with 25% EDV before and it increases maximum drawdown.  You should read these threads for more insight:

http://gyroscopicinvesting.com/forum/pe ... /#msg96254
http://gyroscopicinvesting.com/forum/pe ... #msg110588

Frankly, I feel doing a 3x leveraged PP is a lot less hassle than any of the other "financial engineering" schemes.  And you get to hold more cash too, which is always a bonus!