Buying treasuries other than ultra short term?

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Hector
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Buying treasuries other than ultra short term?

Post by Hector » Wed May 29, 2019 9:42 am

The way treasury yield curve is today, what are benefits of buying treasuries with longer than few weeks duration?

These are Daily Treasury Yield Curve Rates today:
1 Mo...2 Mo...3 Mo...6 Mo...1 Yr....2 Yr...3 Yr....5 Yr...7 Yr....10 Yr...20 Yr...30 Yr
2.35...2.36....2.37...2.38....2.31...2.12...2.06...2.06...2.16...2.26....2.52.....2.70

dbr
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Re: Buying treasuries other than ultra short term?

Post by dbr » Wed May 29, 2019 9:57 am

Reinvestment risk. That means the risk that when the term is up and you reinvest interest rates will have dropped across the yield curve. Whether or not one thinks that risk amounts to much is a question. Long term rates are still pretty low, so it doesn't look like one is taking much risk to avoid longer term right now.

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Re: Buying treasuries other than ultra short term?

Post by Seasonal » Wed May 29, 2019 10:08 am

dbr wrote:
Wed May 29, 2019 9:57 am
Reinvestment risk. That means the risk that when the term is up and you reinvest interest rates will have dropped across the yield curve. Whether or not one thinks that risk amounts to much is a question. Long term rates are still pretty low, so it doesn't look like one is taking much risk to avoid longer term right now.
For a long time, people have been saying that rates have nowhere to go but up. If you have bought long-term treasuries when that statement started, you would be feeling very smart right now.

Reinvestment risk should include the risk of reinvesting interest payments, not just principal at maturity.

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Re: Buying treasuries other than ultra short term?

Post by vineviz » Wed May 29, 2019 10:26 am

dbr wrote:
Wed May 29, 2019 9:57 am
Long term rates are still pretty low, so it doesn't look like one is taking much risk to avoid longer term right now.
The level of current bond yields has no impact on how much interest rate risk an investor faces. Instead, that risk is defined by the mismatch between the duration of the bonds and the time horizon of the associated expenditure.

For an investor with an investment horizon that is long term (i.e. more than 10 years away), investing in long term bonds exposes them to LESS interest rate risk than investing in short term bonds.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Buying treasuries other than ultra short term?

Post by vineviz » Wed May 29, 2019 10:55 am

Seasonal wrote:
Wed May 29, 2019 10:08 am
dbr wrote:
Wed May 29, 2019 9:57 am
Reinvestment risk. That means the risk that when the term is up and you reinvest interest rates will have dropped across the yield curve. Whether or not one thinks that risk amounts to much is a question. Long term rates are still pretty low, so it doesn't look like one is taking much risk to avoid longer term right now.
For a long time, people have been saying that rates have nowhere to go but up. If you have bought long-term treasuries when that statement started, you would be feeling very smart right now.
Knowlegeable Bogleheads. have been pointing out the potential value in long term bonds for many years.

viewtopic.php?f=10&t=2409
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Re: Buying treasuries other than ultra short term?

Post by ohai » Wed May 29, 2019 11:02 am

5y treasuries are yielding 2.00% at the moment. You will pay Federal Income Tax on this interest while inflation is about 2%. So, not only are you earning zero real returns, but you are in effect, paying a wealth tax on top of that. Why would you lock in these terms? I'd rather have the reinvestment risk.

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Re: Buying treasuries other than ultra short term?

Post by TBillT » Wed May 29, 2019 11:11 am

If you follow economist (and TBond king) A. Gary Shilling the 30-yr rates could go as low 2% from where we are today.
So if the stock market goes down 20-30% chances are you might see 30-40% cap gain on 30-yr Treasuries if you invested in the zero coupon. I made up the 30-40% as I do not have the exact calc.

This is the TBond argument, big cap gains, not 2.7% interest.

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Re: Buying treasuries other than ultra short term?

Post by Hector » Wed May 29, 2019 11:20 am

TBillT wrote:
Wed May 29, 2019 11:11 am
If you follow economist (and TBond king) A. Gary Shilling the 30-yr rates could go as low 2% from where we are today.
So if the stock market goes down 20-30% chances are you might see 30-40% cap gain on 30-yr Treasuries if you invested in the zero coupon. I made up the 30-40% as I do not have the exact calc.

This is the TBond argument, big cap gains, not 2.7% interest.
I thought only treasury bills are zero coupon. What are long term zero coupon treasuries?

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Re: Buying treasuries other than ultra short term?

Post by Revision17 » Wed May 29, 2019 11:54 am

Hector wrote:
Wed May 29, 2019 11:20 am
TBillT wrote:
Wed May 29, 2019 11:11 am
If you follow economist (and TBond king) A. Gary Shilling the 30-yr rates could go as low 2% from where we are today.
So if the stock market goes down 20-30% chances are you might see 30-40% cap gain on 30-yr Treasuries if you invested in the zero coupon. I made up the 30-40% as I do not have the exact calc.

This is the TBond argument, big cap gains, not 2.7% interest.
I thought only treasury bills are zero coupon. What are long term zero coupon treasuries?
I'm not an expert in this but financial companies can make things called "STRIPS" where they repackage the coupon payments into their own zero coupon bonds. The vanguard ETF EDV invests in these. With the STRIPS you can just buy the longer maturity zero coupon bonds to effectively give you a longer duration than a regular 30 year treasury bond.

Investopedia has an article on this: https://www.investopedia.com/terms/c/co ... ipping.asp

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Re: Buying treasuries other than ultra short term?

Post by SovereignInvestor » Wed May 29, 2019 12:18 pm

The benefit of longer term Treasurys is no reinvestment risk. You get 2.7% for 30Y ones..if you by 1Y ones and next year rates plummet you may only get say 1.5% next year.

For a balanced portfolio longer term treasurys are a better hedge for Stocks usually. If the stock market tanKS due to recession like 2008, say it plummets 30%, then shorter treasurys likely won't budge but just give you the yield, but if market rates drop 0.5%, and you own 30Y treasurys with duration of around 20, they would rise 10%, which offsets/hedges the stocks.

Of course if it's a 1970s style inflation plunge in the stock market then the bonds would tank too. But in deflationary crashes or panics like 2008 or 2011, or 2015-16 or late 2018, long term treasurys protect best against downturns for stocks.

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Re: Buying treasuries other than ultra short term?

Post by tchoupitoulas » Wed May 29, 2019 12:35 pm

I posted this article in another thread but it answers your question.

https://portfoliocharts.com/2019/05/27/ ... convexity/

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Re: Buying treasuries other than ultra short term?

Post by vineviz » Wed May 29, 2019 12:42 pm

ohai wrote:
Wed May 29, 2019 11:02 am
5y treasuries are yielding 2.00% at the moment. You will pay Federal Income Tax on this interest while inflation is about 2%. So, not only are you earning zero real returns, but you are in effect, paying a wealth tax on top of that. Why would you lock in these terms?
Because 2% is better than 1.5%.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Buying treasuries other than ultra short term?

Post by vineviz » Wed May 29, 2019 12:44 pm

SovereignInvestor wrote:
Wed May 29, 2019 12:18 pm
The benefit of longer term Treasurys is no reinvestment risk.
I think you meant that the benefit of zero coupon bonds is that they have no reinvestment risk.

Any bond that makes coupon payments (including Treasury bonds) exposes the investor to reinvestment risk.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Buying treasuries other than ultra short term?

Post by robertmcd » Wed May 29, 2019 1:06 pm

The only bonds I own are 20-30 yr treasury strips thru EDV. I sleep way better than when I held a short term treasury or cash allocation out of interest rate fear. You need to own what balances your stock exposure the best, otherwise you are doing nothing other than market timing/ making active bets.

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Re: Buying treasuries other than ultra short term?

Post by TBillT » Wed May 29, 2019 2:48 pm

Hector wrote:
Wed May 29, 2019 11:20 am
TBillT wrote:
Wed May 29, 2019 11:11 am
If you follow economist (and TBond king) A. Gary Shilling the 30-yr rates could go as low 2% from where we are today.
So if the stock market goes down 20-30% chances are you might see 30-40% cap gain on 30-yr Treasuries if you invested in the zero coupon. I made up the 30-40% as I do not have the exact calc.

This is the TBond argument, big cap gains, not 2.7% interest.
I thought only treasury bills are zero coupon. What are long term zero coupon treasuries?
I am little rusty on terminology but STRPS I guess they call it. As pointed above, some ETF's make the investment. In general I am just saying what the argument for long term TBonds is.

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Re: Buying treasuries other than ultra short term?

Post by Hector » Wed May 29, 2019 3:44 pm

Revision17 wrote:
Wed May 29, 2019 11:54 am
Hector wrote:
Wed May 29, 2019 11:20 am
TBillT wrote:
Wed May 29, 2019 11:11 am
If you follow economist (and TBond king) A. Gary Shilling the 30-yr rates could go as low 2% from where we are today.
So if the stock market goes down 20-30% chances are you might see 30-40% cap gain on 30-yr Treasuries if you invested in the zero coupon. I made up the 30-40% as I do not have the exact calc.

This is the TBond argument, big cap gains, not 2.7% interest.
I thought only treasury bills are zero coupon. What are long term zero coupon treasuries?
I'm not an expert in this but financial companies can make things called "STRIPS" where they repackage the coupon payments into their own zero coupon bonds. The vanguard ETF EDV invests in these. With the STRIPS you can just buy the longer maturity zero coupon bonds to effectively give you a longer duration than a regular 30 year treasury bond.

Investopedia has an article on this: https://www.investopedia.com/terms/c/co ... ipping.asp
Seems like buying them only via fund/ETF is the only option and investors don't have option of holding individual bonds.

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Re: Buying treasuries other than ultra short term?

Post by Hector » Wed May 29, 2019 3:47 pm

tchoupitoulas wrote:
Wed May 29, 2019 12:35 pm
I posted this article in another thread but it answers your question.

https://portfoliocharts.com/2019/05/27/ ... convexity/
Interesting read. I still prefer to keep risk on equity side.

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Re: Buying treasuries other than ultra short term?

Post by welsie » Wed May 29, 2019 3:51 pm

ohai wrote:
Wed May 29, 2019 11:02 am
5y treasuries are yielding 2.00% at the moment. You will pay Federal Income Tax on this interest while inflation is about 2%. So, not only are you earning zero real returns, but you are in effect, paying a wealth tax on top of that. Why would you lock in these terms? I'd rather have the reinvestment risk.
+1

There is a lot of risk here if monetary policy changes as well, or if the credit rating of the Treasury changes. To me, these are exogenous variables that are far more worrisome than whether long term economic growth will continue on.

I am not willing to take 20 or 30 year bets on the fiscal prudence of the Federal government for a 0.4% increase in interest. Personally, I find the 20-30 year rates to be too low to warrant purchasing, but obviously the market disagrees.

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Re: Buying treasuries other than ultra short term?

Post by TBillT » Wed May 29, 2019 4:59 pm

Hector wrote:
Wed May 29, 2019 3:44 pm
Revision17 wrote:
Wed May 29, 2019 11:54 am
Hector wrote:
Wed May 29, 2019 11:20 am
TBillT wrote:
Wed May 29, 2019 11:11 am
If you follow economist (and TBond king) A. Gary Shilling the 30-yr rates could go as low 2% from where we are today.
So if the stock market goes down 20-30% chances are you might see 30-40% cap gain on 30-yr Treasuries if you invested in the zero coupon. I made up the 30-40% as I do not have the exact calc.

This is the TBond argument, big cap gains, not 2.7% interest.
I thought only treasury bills are zero coupon. What are long term zero coupon treasuries?
I'm not an expert in this but financial companies can make things called "STRIPS" where they repackage the coupon payments into their own zero coupon bonds. The vanguard ETF EDV invests in these. With the STRIPS you can just buy the longer maturity zero coupon bonds to effectively give you a longer duration than a regular 30 year treasury bond.

Investopedia has an article on this: https://www.investopedia.com/terms/c/co ... ipping.asp
Seems like buying them only via fund/ETF is the only option and investors don't have option of holding individual bonds.
I am pretty sure you can get them at Fidelity on the secondary market...not necessarily available every day

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Re: Buying treasuries other than ultra short term?

Post by SovereignInvestor » Wed May 29, 2019 5:00 pm

vineviz wrote:
Wed May 29, 2019 12:44 pm
SovereignInvestor wrote:
Wed May 29, 2019 12:18 pm
The benefit of longer term Treasurys is no reinvestment risk.
I think you meant that the benefit of zero coupon bonds is that they have no reinvestment risk.

Any bond that makes coupon payments (including Treasury bonds) exposes the investor to reinvestment risk.
Yes true. But relative to short term 30Y bonds have much less reinvestment risk.

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Re: Buying treasuries other than ultra short term?

Post by Hector » Wed May 29, 2019 6:00 pm

TBillT wrote:
Wed May 29, 2019 11:11 am
If you follow economist (and TBond king) A. Gary Shilling the 30-yr rates could go as low 2% from where we are today.
So if the stock market goes down 20-30% chances are you might see 30-40% cap gain on 30-yr Treasuries if you invested in the zero coupon. I made up the 30-40% as I do not have the exact calc.

This is the TBond argument, big cap gains, not 2.7% interest.
Zero coupon long term bond is sort of double edged sword. You can't reinvest coupon at higher rate when interest rate is going up because there is no coupon.

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Re: Buying treasuries other than ultra short term?

Post by venkman » Wed May 29, 2019 10:13 pm

ohai wrote:
Wed May 29, 2019 11:02 am
5y treasuries are yielding 2.00% at the moment. You will pay Federal Income Tax on this interest while inflation is about 2%. So, not only are you earning zero real returns, but you are in effect, paying a wealth tax on top of that. Why would you lock in these terms? I'd rather have the reinvestment risk.
5-year TIPS are yielding 0.46% real, so the market is predicting significantly less than 2% inflation over the next 5 years.

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Re: Buying treasuries other than ultra short term?

Post by Dialectical Investor » Wed May 29, 2019 10:43 pm

venkman wrote:
Wed May 29, 2019 10:13 pm
ohai wrote:
Wed May 29, 2019 11:02 am
5y treasuries are yielding 2.00% at the moment. You will pay Federal Income Tax on this interest while inflation is about 2%. So, not only are you earning zero real returns, but you are in effect, paying a wealth tax on top of that. Why would you lock in these terms? I'd rather have the reinvestment risk.
5-year TIPS are yielding 0.46% real, so the market is predicting significantly less than 2% inflation over the next 5 years.
Did not check rates today, but assuming the 2% includes some inflation risk premium, and assuming it is greater than the liquidity risk premium for TIPS, the market is predicting inflation to be even less than 1.54%.

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Re: Buying treasuries other than ultra short term?

Post by Northern Flicker » Wed May 29, 2019 10:52 pm

The level of current bond yields has no impact on how much interest rate risk an investor faces. Instead, that risk is defined by the mismatch between the duration of the bonds and the time horizon of the associated expenditure.
All else equal, a lower yielding bond has a higher modified duration than a higher yielding one.

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Re: Buying treasuries other than ultra short term?

Post by epilnk » Thu May 30, 2019 5:57 pm

Seasonal wrote:
Wed May 29, 2019 10:08 am
For a long time, people have been saying that rates have nowhere to go but up. If you have bought long-term treasuries when that statement started, you would be feeling very smart right now.
Can confirm. Shifted a portion of the bonds into long treasuries about 15 years ago, when everybody was saying that. Feel smart. Would feel smarter if I'd bought more.

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Re: Buying treasuries other than ultra short term?

Post by welderwannabe » Fri May 31, 2019 5:38 am

Hector wrote:
Wed May 29, 2019 6:00 pm

Zero coupon long term bond is sort of double edged sword. You can't reinvest coupon at higher rate when interest rate is going up because there is no coupon.
Long term zeroes are more volatile/risky. They effective duration is equal to the maturity. They have some value if you have a known expense at a specific date long out, but other than that I don't have any use for them.
I am not an investment professional, but I did stay at a Holiday Inn Express last night.

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Re: Buying treasuries other than ultra short term?

Post by MikeG62 » Fri May 31, 2019 7:29 am

dbr wrote:
Wed May 29, 2019 9:57 am
Reinvestment risk. That means the risk that when the term is up and you reinvest interest rates will have dropped across the yield curve.
^This.

Having said that, I personally am not buying Treasuries with a duration beyond 26 weeks - actually I've not bought any treasuries with maturities beyond 8 weeks in the last couple of months. Yesterday I opened an Ally select 15 month CD with an interest rate of 2.80%.

Maybe I will end up regretting not purchasing longer-term Treasuries. However, at a 2.0% yield, that is a risk I am willing to take.
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Re: Buying treasuries other than ultra short term?

Post by anoop » Fri May 31, 2019 8:15 am

During this rate increase cycle, my plan was to buy 10 year bonds if rates hit 4%. Unfortunately, looks like that will never happen.

Why buy the long end now? Look at Japan --
https://tradingeconomics.com/japan/30-year-bond-yield

If you believe that might happen in the US, the current 30-year is a steal.

Buying long bonds is always a risk since rates/inflation can always go higher, and OTOH one could be handsomely rewarded in the case of reduction in rates/deflation.

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Re: Buying treasuries other than ultra short term?

Post by z3r0c00l » Fri May 31, 2019 8:30 am

welsie wrote:
Wed May 29, 2019 3:51 pm
ohai wrote:
Wed May 29, 2019 11:02 am
5y treasuries are yielding 2.00% at the moment. You will pay Federal Income Tax on this interest while inflation is about 2%. So, not only are you earning zero real returns, but you are in effect, paying a wealth tax on top of that. Why would you lock in these terms? I'd rather have the reinvestment risk.
I am not willing to take 20 or 30 year bets on the fiscal prudence of the Federal government for a 0.4% increase in interest. Personally, I find the 20-30 year rates to be too low to warrant purchasing, but obviously the market disagrees.
Well the market meaning insurance companies, sovereign wealth funds, pension funds, etc. Their horizons run through the end of the century.

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Re: Buying treasuries other than ultra short term?

Post by vineviz » Fri May 31, 2019 8:36 am

anoop wrote:
Fri May 31, 2019 8:15 am
Buying long bonds is always a risk since rates/inflation can always go higher, and OTOH one could be handsomely rewarded in the case of reduction in rates/deflation.
Buying long bonds is not a risk1 if your investment horizon is similarly long.

The interest rate risk happens when you have a long-term investment horizon but buy short-term bonds instead.

1 Assuming we are all still talking exclusively about interest rate (or term risk).
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Buying treasuries other than ultra short term?

Post by robertmcd » Fri May 31, 2019 9:34 am

I am a 25 yr old investor, and I am currently around 60% EDV in my portfolio. About to be rebalancing into VTI again though. I can't afford to hold cash, and EDV is the highest possible return bond fund I can buy, and it has the best track record of being negatively correlated with stocks. If rates rise and stocks get killed it will hurt me much less than and older investor because I will be buying low. Real estate, stocks, and bonds will absolutely collapse if rates rise, and so I am betting that they cannot.

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Re: Buying treasuries other than ultra short term?

Post by Hector » Fri May 31, 2019 9:43 am

vineviz wrote:
Fri May 31, 2019 8:36 am
anoop wrote:
Fri May 31, 2019 8:15 am
Buying long bonds is always a risk since rates/inflation can always go higher, and OTOH one could be handsomely rewarded in the case of reduction in rates/deflation.
Buying long bonds is not a risk1 if your investment horizon is similarly long.

The interest rate risk happens when you have a long-term investment horizon but buy short-term bonds instead.

1 Assuming we are all still talking exclusively about interest rate (or term risk).
How is it that the long term bond has no interest risk when your investment horizon is also long?
I don't know what is going to happen tomorrow. But if I buy 30 year bond at little less than 3% today and if interest rate goes up tomorrow, I am either stuck with little less than 3% nominal return OR I sell it and incur capital loss.

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Re: Buying treasuries other than ultra short term?

Post by vineviz » Fri May 31, 2019 10:11 am

Hector wrote:
Fri May 31, 2019 9:43 am
How is it that the long term bond has no interest risk when your investment horizon is also long?
I don't know what is going to happen tomorrow. But if I buy 30 year bond at little less than 3% today and if interest rate goes up tomorrow, I am either stuck with little less than 3% nominal return OR I sell it and incur capital loss.
And if interest rate goes down tomorrow, you get MORE than 3% nominal return and/or sell it and realize a profit.

What people usually call "interest rate risk" really has two components (price risk and reinvestment risk), and they move in opposite directions.

• When interest rates rise, the price of the bond falls but you earn more money on reinvested coupon payments.

• When interest rates fall, the price of the bond increases but you earn less money on reinvested coupon payments.

Duration measures the point in time where those two countervailing forces are EXACTLY balanced, or when they precisely offset each other. At that one, single moment in time whatever gains or losses you have in bond price are zeroed out by the losses or gains you have from reinvestment. Ergo, if that point in time ALSO exactly matches your investment horizon you are perfectly immunized against any changes in interest rates.

But if your investment horizon is at any time before or after that point in time (a.k.a. the bond duration) you are no longer immune from changes in rates. If your bond duration is shorter than your investment horizon, when interest rates decline the loss in reinvestment earnings is bigger than any gain from price appreciation.

It's precisely because you DONT "know what is going to happen tomorrow" that the safest thing to do is to make sure the duration of your bond matches as closely as possible your investment horizon.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Buying treasuries other than ultra short term?

Post by Phineas J. Whoopee » Fri May 31, 2019 2:18 pm

Hector wrote:
Wed May 29, 2019 11:20 am
...
I thought only treasury bills are zero coupon. What are long term zero coupon treasuries?
Yes, only T-bills are inherently zero coupon. The longest maturities auctioned are 52 weeks, which multiplies out to 364 days, thus less than a year.

Each individual cash flow from a Treasury note or bond can be looked at as if it were a zero. A ten-year note has twenty coupons and one single payout of the original face value at maturity.

There is a program called STRIPS which enables large financial intermediaries to sell each cash flow separately. Naturally they do so to make a profit. How does that work? It's just like the corner grocery store: people will pay more to buy just the parts of the chicken they want than to buy a whole chicken.

PJW

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Re: Buying treasuries other than ultra short term?

Post by Dialectical Investor » Fri May 31, 2019 2:39 pm

vineviz wrote:
Fri May 31, 2019 10:11 am
Hector wrote:
Fri May 31, 2019 9:43 am
How is it that the long term bond has no interest risk when your investment horizon is also long?
I don't know what is going to happen tomorrow. But if I buy 30 year bond at little less than 3% today and if interest rate goes up tomorrow, I am either stuck with little less than 3% nominal return OR I sell it and incur capital loss.
And if interest rate goes down tomorrow, you get MORE than 3% nominal return and/or sell it and realize a profit.

What people usually call "interest rate risk" really has two components (price risk and reinvestment risk), and they move in opposite directions.

• When interest rates rise, the price of the bond falls but you earn more money on reinvested coupon payments.

• When interest rates fall, the price of the bond increases but you earn less money on reinvested coupon payments.

Duration measures the point in time where those two countervailing forces are EXACTLY balanced, or when they precisely offset each other. At that one, single moment in time whatever gains or losses you have in bond price are zeroed out by the losses or gains you have from reinvestment. Ergo, if that point in time ALSO exactly matches your investment horizon you are perfectly immunized against any changes in interest rates.

But if your investment horizon is at any time before or after that point in time (a.k.a. the bond duration) you are no longer immune from changes in rates. If your bond duration is shorter than your investment horizon, when interest rates decline the loss in reinvestment earnings is bigger than any gain from price appreciation.

It's precisely because you DONT "know what is going to happen tomorrow" that the safest thing to do is to make sure the duration of your bond matches as closely as possible your investment horizon.
Not to rehash the discussion in the other thread, but it should be pointed out that you've repeatedly used the term "investment horizon" when what matters is the time-weighted cash flow requirements, as I'm sure you know. These can be and usually are different things. Just because you plan to live for another 30 years and be invested during that time says nothing about what your bond duration should be.

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Re: Buying treasuries other than ultra short term?

Post by vineviz » Fri May 31, 2019 3:08 pm

Dialectical Investor wrote:
Fri May 31, 2019 2:39 pm
Not to rehash the discussion in the other thread, but it should be pointed out that you've repeatedly used the term "investment horizon" when what matters is the time-weighted cash flow requirements, as I'm sure you know. These can be and usually are different things.
Context matters, and in this context "investment horizon" and "time-weighted cash flow requirements" are definitionally identical. Synonyms, in other words, or a little more precisely: the latter is the definition of the former.

Some people assume (or perhaps intuit) that "investment horizon" refers to the onset of the liabilities, but of course this is not the case unless the entirety of the liability occurs in a single period.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Buying treasuries other than ultra short term?

Post by Dialectical Investor » Sat Jun 01, 2019 2:28 pm

vineviz wrote:
Fri May 31, 2019 3:08 pm
Dialectical Investor wrote:
Fri May 31, 2019 2:39 pm
Not to rehash the discussion in the other thread, but it should be pointed out that you've repeatedly used the term "investment horizon" when what matters is the time-weighted cash flow requirements, as I'm sure you know. These can be and usually are different things.
Context matters, and in this context "investment horizon" and "time-weighted cash flow requirements" are definitionally identical. Synonyms, in other words, or a little more precisely: the latter is the definition of the former.

Some people assume (or perhaps intuit) that "investment horizon" refers to the onset of the liabilities, but of course this is not the case unless the entirety of the liability occurs in a single period.
They are only definitionally identical because you just now defined them to be so. :) In this post, it appears you are using a different definition of "investment horizon", unless you think the time-weighted cash flow requirements of an investor age 65-70 is over 20 years. (I happen to think not.)

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Re: Buying treasuries other than ultra short term?

Post by vineviz » Sat Jun 01, 2019 2:57 pm

Dialectical Investor wrote:
Sat Jun 01, 2019 2:28 pm
They are only definitionally identical because you just now defined them to be so.
Don't be silly. I'm using the term "investment horizon" in the standard textbook manner, which is the weighted average holding period fo the investment . See here: https://ift.world/booklets/4-2-investme ... rate-risk/ or https://www.wiley.com/en-us/Modern+Port ... 1118417201

Dialectical Investor wrote:
Sat Jun 01, 2019 2:28 pm
In this post, it appears you are using a different definition of "investment horizon", unless you think the time-weighted cash flow requirements of an investor age 65-70 is over 20 years. (I happen to think not.)
The joint life expectancy of a 67 year old couple is nearly 26 years.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Buying treasuries other than ultra short term?

Post by Dialectical Investor » Sat Jun 01, 2019 3:21 pm

vineviz wrote:
Sat Jun 01, 2019 2:57 pm
Dialectical Investor wrote:
Sat Jun 01, 2019 2:28 pm
They are only definitionally identical because you just now defined them to be so.
Don't be silly. I'm using the term "investment horizon" in the standard textbook manner, which is the weighted average holding period fo the investment . See here: https://ift.world/booklets/4-2-investme ... rate-risk/ or https://www.wiley.com/en-us/Modern+Port ... 1118417201

Dialectical Investor wrote:
Sat Jun 01, 2019 2:28 pm
In this post, it appears you are using a different definition of "investment horizon", unless you think the time-weighted cash flow requirements of an investor age 65-70 is over 20 years. (I happen to think not.)
The joint life expectancy of a 67 year old couple is nearly 26 years.
I'm not being silly--I'm pointing out the inconsistencies in your terminology. In this very post you mention life expectancy of more than 20 years, which does not mean duration of more than 20 years.

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Re: Buying treasuries other than ultra short term?

Post by MotoTrojan » Sat Jun 01, 2019 3:28 pm

robertmcd wrote:
Fri May 31, 2019 9:34 am
I am a 25 yr old investor, and I am currently around 60% EDV in my portfolio. About to be rebalancing into VTI again though. I can't afford to hold cash, and EDV is the highest possible return bond fund I can buy, and it has the best track record of being negatively correlated with stocks. If rates rise and stocks get killed it will hurt me much less than and older investor because I will be buying low. Real estate, stocks, and bonds will absolutely collapse if rates rise, and so I am betting that they cannot.
Interesting portfolio. What’s the rest? Seems like way too much long bond (or bond at all) at your age.

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Re: Buying treasuries other than ultra short term?

Post by vineviz » Sat Jun 01, 2019 4:07 pm

Dialectical Investor wrote:
Sat Jun 01, 2019 3:21 pm
I'm not being silly--I'm pointing out the inconsistencies in your terminology. In this very post you mention life expectancy of more than 20 years, which does not mean duration of more than 20 years.
I'm going to ask you to back up a bit. The fact that you don't understand what a term means should not be used to substantiate an accusation that MY use of the term was ambiguous or inconsistent.

Life expectancy can, under a very reasonable and common set of assumptions, be used as a first-order approximation for an individual investor's investment horizon. The appropriate calculation differs somewhat from the way you'd calculate the duration of liabilities for an actuarial pool (i.e. a pension or insurance contract), but the details are way beyond the scope of this thread.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Buying treasuries other than ultra short term?

Post by Dialectical Investor » Sat Jun 01, 2019 8:41 pm

vineviz wrote:
Sat Jun 01, 2019 4:07 pm
Dialectical Investor wrote:
Sat Jun 01, 2019 3:21 pm
I'm not being silly--I'm pointing out the inconsistencies in your terminology. In this very post you mention life expectancy of more than 20 years, which does not mean duration of more than 20 years.
I'm going to ask you to back up a bit. The fact that you don't understand what a term means should not be used to substantiate an accusation that MY use of the term was ambiguous or inconsistent.

Life expectancy can, under a very reasonable and common set of assumptions, be used as a first-order approximation for an individual investor's investment horizon. The appropriate calculation differs somewhat from the way you'd calculate the duration of liabilities for an actuarial pool (i.e. a pension or insurance contract), but the details are way beyond the scope of this thread.
I understand perfectly what the term means. Your use of the term is not consistent with the actual definition.

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Re: Buying treasuries other than ultra short term?

Post by robertmcd » Tue Jun 04, 2019 10:22 am

MotoTrojan wrote:
Sat Jun 01, 2019 3:28 pm
robertmcd wrote:
Fri May 31, 2019 9:34 am
I am a 25 yr old investor, and I am currently around 60% EDV in my portfolio. About to be rebalancing into VTI again though. I can't afford to hold cash, and EDV is the highest possible return bond fund I can buy, and it has the best track record of being negatively correlated with stocks. If rates rise and stocks get killed it will hurt me much less than and older investor because I will be buying low. Real estate, stocks, and bonds will absolutely collapse if rates rise, and so I am betting that they cannot.
Interesting portfolio. What’s the rest? Seems like way too much long bond (or bond at all) at your age.
48% VTI/VXUS (40% international)
6% of portfolio in a single company stock that I was able to purchase before the IPO (holding for one year to sell the gains)
6% in a private company investment

Mainly I look at upside potential of either VTI/VXUS or EDV and vary my allocation based on that. My prediction is that stocks cannot make news highs until we reach new lows in interest rates across the curve.

Right now I would be looking to get exposure to the short end of the curve with leverage, but you cannot go shorter than the 2 yr treasury. I am looking into maybe eurodollars, or fed funds rate futures with a ton of leverage to hedge stock exposure at this point.

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Re: Buying treasuries other than ultra short term?

Post by robertmcd » Tue Jun 04, 2019 10:23 am

robertmcd wrote:
Tue Jun 04, 2019 10:22 am
MotoTrojan wrote:
Sat Jun 01, 2019 3:28 pm
robertmcd wrote:
Fri May 31, 2019 9:34 am
I am a 25 yr old investor, and I am currently around 60% EDV in my portfolio. About to be rebalancing into VTI again though. I can't afford to hold cash, and EDV is the highest possible return bond fund I can buy, and it has the best track record of being negatively correlated with stocks. If rates rise and stocks get killed it will hurt me much less than and older investor because I will be buying low. Real estate, stocks, and bonds will absolutely collapse if rates rise, and so I am betting that they cannot.
Interesting portfolio. What’s the rest? Seems like way too much long bond (or bond at all) at your age.
28% VTI/VXUS (40% international)
6% of portfolio in a single company stock that I was able to purchase before the IPO (holding for one year to sell the gains)
6% in a private company investment

Mainly I look at upside potential of either VTI/VXUS or EDV and vary my allocation based on that. My prediction is that stocks cannot make news highs until we reach new lows in interest rates across the curve.

Right now I would be looking to get exposure to the short end of the curve with leverage, but you cannot go shorter than the 2 yr treasury. I am looking into maybe eurodollars, or fed funds rate futures with a ton of leverage to hedge stock exposure at this point.

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Re: Buying treasuries other than ultra short term?

Post by MotoTrojan » Tue Jun 04, 2019 10:27 am

robertmcd wrote:
Tue Jun 04, 2019 10:22 am
MotoTrojan wrote:
Sat Jun 01, 2019 3:28 pm
robertmcd wrote:
Fri May 31, 2019 9:34 am
I am a 25 yr old investor, and I am currently around 60% EDV in my portfolio. About to be rebalancing into VTI again though. I can't afford to hold cash, and EDV is the highest possible return bond fund I can buy, and it has the best track record of being negatively correlated with stocks. If rates rise and stocks get killed it will hurt me much less than and older investor because I will be buying low. Real estate, stocks, and bonds will absolutely collapse if rates rise, and so I am betting that they cannot.
Interesting portfolio. What’s the rest? Seems like way too much long bond (or bond at all) at your age.
48% VTI/VXUS (40% international)
6% of portfolio in a single company stock that I was able to purchase before the IPO (holding for one year to sell the gains)
6% in a private company investment

Mainly I look at upside potential of either VTI/VXUS or EDV and vary my allocation based on that. My prediction is that stocks cannot make news highs until we reach new lows in interest rates across the curve.

Right now I would be looking to get exposure to the short end of the curve with leverage, but you cannot go shorter than the 2 yr treasury. I am looking into maybe eurodollars, or fed funds rate futures with a ton of leverage to hedge stock exposure at this point.
48+6+6=60%, I thought you were 60% EDV? Or was that before (now at 40%).

Smells like market timing to me, I would just set a fixed AA and rebalance per bands or time period. Not sure how you can determine the upside or downside potential of equity or treasury markets.

Good luck!

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Re: Buying treasuries other than ultra short term?

Post by robertmcd » Tue Jun 04, 2019 10:32 am

Sorry I fat fingered that. 60% EDV, 40% of mostly VTI/VXUS and some private investments. And yes I am market timing, but I believe there are definitely times where treasuries are undervalued relative to stocks. 2018 and 2019 was a great buying opportunity for treasuries. Much less so now, only issue is stocks haven't dropped near as far as they should have for this drop in yields.

I would like to have a lot of exposure to the ultra short end of the curve right now. Essentially a leveraged 3 month T-bill position to avoid the inversion in the curve if you were to use 2 yr futures.

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