Long Term Treasury

[Tool-Time]

It appears most BH are not into LT treasuries at this time yet VG fund keeps going up. Can I get some help understanding? Thanks

[MotoTrojan]

Rates are dropping LTT funds will get crushed if they pop back up. Many Boglehead use them though or even get additional duration exposure via EDV, or leverage via TMF.

[dbr]

Long term bonds are risky. That means they can go up a lot when they go up and down a lot when they go down. Most people are investing in bonds to avoid that rather than to get that. But don't forget even a total bond market fund is about 20% bonds over ten years maturity.

LT bond funds are going up because interest rates are coming down. The return last year was 30% or so. That means as time goes on the person who buys LT bonds now might continue to make good returns but could also see a year with losses of 20%-30%-40%. A hard thing to appreciate with long bonds in the US is the long history of interest rates declining from an unprecedented high in 1980 for forty years today: https://www.macrotrends.net/2522/5-year ... ield-chart Note especially that little drop again at the tag end.

A plausible use of LT bonds is as a diversification partner in a high stock portfolio. That would be for a person investing at high risk altogether.

[dbr]

Long term bonds are risky. That means they can go up a lot when they go up and down a lot when they go down. Most people are investing in bonds to avoid that rather than to get that. But don't forget even a total bond market fund is about 20% bonds over ten years maturity.

LT bond funds are going up because interest rates are coming down. The return last year was 30% or so. That means as time goes on the person who buys LT bonds now might continue to make good returns but could also see a year with losses of 20%-30%-40%. A hard thing to appreciate with long bonds in the US is the long history of interest rates declining from an unprecedented high in 1980 for forty years today: https://www.macrotrends.net/2522/5-year ... ield-chart Note especially that little drop again at the tag end.

A plausible use of LT bonds is as a diversification partner in a high stock portfolio. That would be for a person investing at high risk altogether.

[atdharris]

I have about 10% in LTTs right now and had them before the market sell-off. I'm not sure what I will go to once I re-balance given rates do not have much further to fall at these levels. TLT has certainly made the crash less painful versus having a 100% equities portfolio.

[dbr]

If you have an asset allocation plan that drills down to specifying how much of which duration to hold, then you should probably be rebalancing to that target, if you believe in it. If you buy a bond index fund, the fund will do that for you.

[watchnerd]

Rates are dropping LTT funds will get crushed if they pop back up. Many Boglehead use them though or even get additional duration exposure via EDV, or leverage via TMF.

It appears most BH are not into LT treasuries at this time yet VG fund keeps going up. Can I get some help understanding? Thanks

Correct.

I hold 15% LTT. I pair them with short TIPS + cash in a barbell (see sig).

1. They are not a drop in substitute for Total Bond Market
2. They're highly volatile and will get crushed at some point
3. They're best used in high equity portfolios as part of a risk parity MVO/MPT strategy
4. 10-20% is the max I would ever recommend
5. Not for beginners

If you find yourself asking why long Treasuries are going up, they're probably not a good choice for you.

If you already know why, and have high equities, they might be.

[UpperNwGuy]

Long term bonds are risky. That means they can go up a lot when they go up and down a lot when they go down. Most people are investing in bonds to avoid that rather than to get that.

^^^This is why i don't buy long term treasuries or any other long term bonds.

[Seasonal]

It appears most BH are not into LT treasuries at this time yet VG fund keeps going up. Can I get some help understanding? Thanks

The more they go up the worse value they are. Over the long-term, bond returns are a function of their yields and, all else being equal, lower yields equals lower returns. You do get some principal value increase from lower yields, but over time the effect of lower yields overcomes that. Unless, of course, yields keep plummeting forever, which seems unlikely.

A recent price increase is usually a terrible reason to invest in something.

[watchnerd]

Long term bonds are risky. That means they can go up a lot when they go up and down a lot when they go down. Most people are investing in bonds to avoid that rather than to get that.

^^^This is why i don't buy long term treasuries or any other long term bonds.

Most people don't want to see +/- 20% swings in their bonds. I don't mind.

I find them useful, but I would not recommend LTT to most people.

[vineviz]

It appears most BH are not into LT treasuries at this time yet VG fund keeps going up. Can I get some help understanding? Thanks

Long-term Treasury funds have benefited from a long period of low inflation volatility, declining inflation expectations, and declining real yields. Will these conditions persist into the future? I don't know, and I don't think anyone does.

However . . . . . many Bogleheads remember the days when 20-year Treasuries were yielding 7%+ and they can't let go of their intuition that those days MUST return eventually. Many of these same Bogleheads believe (mistakenly) that if that return to high yields does occur that long-term Treasury bond funds will get "destroyed", decimated", or "crushed.

Please don't invest in long-term Treasuries because they have "kept going up" recently. Years in which LTTS return 30%, 15%, or even 7% are unusual, and are not likely to repeat. They could, certainly, but don't count on it.

That said, investors with long-term investment horizons should IMHO absolutely own long-termTreasury bonds — nominal and/or inflation-indexed — (if they own bonds). They reduce the volatility of the overall portfolio, more so than the favored "total bond market" type funds.

I've written my thoughts in other threads including:

First 20% of bonds in long-term Treasuries

De-Risking and Diversification aren't the same thing

[watchnerd]

The more they go up the worse value they are. Over the long-term, bond returns are a function of their yields and, all else being equal, lower yields equals lower returns. You do get some principal value increase from lower yields, but over time the effect of lower yields overcomes that. Unless, of course, yields keep plummeting forever, which seems unlikely.

A recent price increase is usually a terrible reason to invest in something.

Correct.

I hold them as part of my "risk portfolio".

They're not "ballast" in the traditional bond sense. I also barbell with them with short TIPS and cash, to also give a deflation / inflation axis.

I don't think anybody with less than <=60% stock should look at long Treasuries.

I don't think anybody with debt or a mortgage should look at long Treasuries, either.

[z3r0c00l]

If I could go back in time I would have been all in LTT. Unfortunately my reasons for not wanting them a year ago are 10x stronger now.

[watchnerd]

If I could go back in time I would have been all in LTT. Unfortunately my reasons for not wanting them a year ago are 10x stronger now.

This, too.

While they may continue to give benefits if rates go negative or we have deflation, there is increasing downside risk.

My LTT have blown past their rebalancing bands faster than expected.

[Pikel]

The more they go up the worse value they are. Over the long-term, bond returns are a function of their yields and, all else being equal, lower yields equals lower returns. You do get some principal value increase from lower yields, but over time the effect of lower yields overcomes that. Unless, of course, yields keep plummeting forever, which seems unlikely.

A recent price increase is usually a terrible reason to invest in something.

Correct.

I hold them as part of my "risk portfolio".

They're not "ballast" in the traditional bond sense. I also barbell with them with short TIPS and cash, to also give a deflation / inflation axis.

I don't think anybody with less than <=60% stock should look at long Treasuries.

I don't think anybody with debt or a mortgage should look at long Treasuries, either.

I agree with everything you've said. Curious, what are your rebalancing rules?

[watchnerd]

I agree with everything you've said. Curious, what are your rebalancing rules?

5% absolute / 25% relative / annually

[Tool-Time]

Very Informative thanks

[Pikel]

5% absolute / 25% relative / annually

Makes sense. It is probably more important with your strategy to stay on top of rebalancing. If someone gets weak in the knees when they go from 60/40 to 50/50 the long term loss in expected return is relatively small.

[sometimesinvestor]

I have noticed that TLT (20* year gov) is often up on days the stock market goes down >As others have pointed out they are somewhat risky but I think 1/10 the amount of stocks into TLT would be a reasonable hedge

[vineviz]

They're not "ballast" in the traditional bond sense.

I'm not sure what the "traditional bond sense" is, but I maybe you're referring to the "bonds are for safety" philosophy in which the role of bonds is to be dead weight in the portfolio?

My view is that the ballast metaphor refers to the fact that in sailing the role of ballast is to stabilize the boat (i.e. keep it from capsizing), in which case long-term Treasury bonds are the BEST ballast for a majority equity portfolio.

[Pikel]

They're not "ballast" in the traditional bond sense.

I'm not sure what the "traditional bond sense" is, but I maybe you're referring to the "bonds are for safety" philosophy in which the role of bonds is to be dead weight in the portfolio?

My view is that the ballast metaphor refers to the fact that in sailing the role of ballast is to stabilize the boat (i.e. keep it from capsizing), in which case long-term Treasury bonds are the BEST ballast for a majority equity portfolio.

It's not dead weight if it prevents your from buying high and selling low. 100% equity has way more dead weight if you are bailing out of the market right now only to return 5 years from now.

[vineviz]

It's not dead weight if it prevents your from buying high and selling low. 100% equity has way more dead weight if you are bailing out of the market right now only to return 5 years from now.

I suspect we agree: the "dead weight" comment refers to the lack of diversification that TBM funds provide relative to long-term Treasury funds. Most investors with average or below-average risk tolerance should probably not be counseled to be 100% in stocks.

My view is that an investor who is down 12% is less likely to "bail out of the market" than an investor who is down 18%. A 60/40 portfolio using BND is down 18.1% since Feb 12th, whereas a 60/40 portfolio using long-term Treasuries is down only 12.1%.

[watchnerd]

They're not "ballast" in the traditional bond sense.

I'm not sure what the "traditional bond sense" is, but I maybe you're referring to the "bonds are for safety" philosophy in which the role of bonds is to be dead weight in the portfolio?

Ballast in the way short bonds and cash equivalents are -- a low to zero volatility asset with near zero real return (unless deflation).

[dbr]

The right analysis is to compute the risk of a portfolio of two assets and note where in the math one sees the contribution from weighted standard deviation and where from the term including the covariance of the returns. See here for the classic formula: https://financetrain.com/how-to-calcula ... nd-return/

[Pikel]

It's not dead weight if it prevents your from buying high and selling low. 100% equity has way more dead weight if you are bailing out of the market right now only to return 5 years from now.

I suspect we agree: the "dead weight" comment refers to the lack of diversification that TBM funds provide relative to long-term Treasury funds. Most investors with average or below-average risk tolerance should probably not be counseled to be 100% in stocks.

My view is that an investor who is down 12% is less likely to "bail out of the market" than an investor who is down 18%. A 60/40 portfolio using BND is down 18.1% since Feb 12th, whereas a 60/40 portfolio using long-term Treasuries is down only 12.1%.

Hard to talk about recovery right now, and not predicting anything, but if we see a recovery long term treasuries could get slammed, and you will have to sell equity to rebalance into them. Not psychologically easy to say the least.

I like watchnerd's approach of 15/15 a lot more than 40% LT treasury. Also understand you are just giving an example and think we are in agreement.

[watchnerd]

Hard to talk about recovery right now, and not predicting anything, but if we see a recovery long term treasuries could get slammed, and you will have to sell equity to rebalance into them. Not psychologically easy to say the least.

I like watchnerd's approach of 15/15 a lot more than 40% LT treasury. Also understand you are just giving an example and think we are in agreement.

This is what I anticipate to happen, and one of the reasons why I think 10-20% is plenty.

That's the range I feel comfortable that I can hold them forever and deal with their "special needs" without too much behavioral angst.

[watchnerd]

It's not dead weight if it prevents your from buying high and selling low. 100% equity has way more dead weight if you are bailing out of the market right now only to return 5 years from now.

+1

In our case, the 15% short TIPS / cash end of the barbell could be approximated to dead weight, with inflation protection benefits.

It's low volatility, near zero real return. It's worth about 5 years of living expenses for us (even though we're working). 5 years is long enough for us to give us patience in bad markets.

Or to frame it differently, putting LTT in the risk asset bucket, we're:

85% risk portfolio / 15% "risk free"

[timboktoo]

Exercise great care and mindfulness when tempted to buy something that's going up. Past performance is a siren song.

That said, you can build a reasonable portfolio that includes both short and long term treasuries. For simplicity sake, Bogleheads tend to choose intermediate term bonds instead. They gives us some of the interest rate risk and reward.

We generally hold bonds for their relative safety of principle (compared to equities), to help us get to sleep at night and to ensure good behavior during bear markets. Long-term bonds, being more volatile than their intermediate and short-term counterparts, are less ideal for these needs.

- Tim

[vineviz]

Hard to talk about recovery right now, and not predicting anything, but if we see a recovery long term treasuries could get slammed, and you will have to sell equity to rebalance into them. Not psychologically easy to say the least.

This idea that long-term Treasuries will get “slammed” if rates go back up just doesn’t have any merit.

We’re talking long-term investors, right? A sharp increase in yields over the next 10-20 years will mean that LTTs modestly underperform intermediate and short term Treasuries.

[dbr]

Hard to talk about recovery right now, and not predicting anything, but if we see a recovery long term treasuries could get slammed, and you will have to sell equity to rebalance into them. Not psychologically easy to say the least.

This idea that long-term Treasuries will get “slammed” if rates go back up just doesn’t have any merit.

We’re talking long-term investors, right? A sharp increase in yields over the next 10-20 years will mean that LTTs modestly underperform intermediate and short term Treasuries.

Yes, people forget that investments in fixed income benefit from rates having gone up in the long run.

[Pikel]

Hard to talk about recovery right now, and not predicting anything, but if we see a recovery long term treasuries could get slammed, and you will have to sell equity to rebalance into them. Not psychologically easy to say the least.

This idea that long-term Treasuries will get “slammed” if rates go back up just doesn’t have any merit.

We’re talking long-term investors, right? A sharp increase in yields over the next 10-20 years will mean that LTTs modestly underperform intermediate and short term Treasuries.

I am not trying to predict interest rate risk. I am just saying short term psychology is extremely important for long term investors.

If I was a robot or a psychopath I would be 100% equity.

[z0iid]

Super green newbie here, but wanting to learn from those who haven't been idiots with their finances.

Does anyone have a good resource to help me understand what factors lead to ups and downs with TLT?

On a basic level, I think that when rates go up, then TLT goes down, and when rates go down, TLT goes up. So right now, 20yr bond is about 1%, and TLT is up 22% over the last 3 months.

Would the expectation be that TLT would stabilize/even out for the near future? What would introduce volatility, and other than rates going back up - what would cause it to go back down?

Sorry if this is the wrong place to ask, just trying to learn.

[dbr]

The relationship is mathematical, so the interest rate volatility of the bond fund is a direct translation of the volatility of yields in the market for long term bonds. That volatility in yields is large, so the volatility in the NAV of the bond fund large. The idea that interest rates "settle down" is probably a miss-perception. Here is a chart of yields by maturity. You can pull the red cursor to see the variation with time: https://stockcharts.com/freecharts/yieldcurve.php

Note it isn't just that yields change but also that yields for different maturities change differently. The shape of the yield curve is not constant.

[welderwannabe]

Correct.

I hold 15% LTT. I pair them with short TIPS + cash in a barbell (see sig).

1. They are not a drop in substitute for Total Bond Market
2. They're highly volatile and will get crushed at some point
3. They're best used in high equity portfolios as part of a risk parity MVO/MPT strategy
4. 10-20% is the max I would ever recommend
5. Not for beginners

If you find yourself asking why long Treasuries are going up, they're probably not a good choice for you.

If you already know why, and have high equities, they might be.

I do the permanent portfolio outside of my retirement asserts. The LT Treasuries have performed perfectly in the last few months...

[watchnerd]

Super green newbie here, but wanting to learn from those who haven't been idiots with their finances.

Does anyone have a good resource to help me understand what factors lead to ups and downs with TLT?

On a basic level, I think that when rates go up, then TLT goes down, and when rates go down, TLT goes up. So right now, 20yr bond is about 1%, and TLT is up 22% over the last 3 months.

Would the expectation be that TLT would stabilize/even out for the near future? What would introduce volatility, and other than rates going back up - what would cause it to go back down?

Sorry if this is the wrong place to ask, just trying to learn.

You're basically asking about bond duration and how it impacts pricing.

https://www.investopedia.com/terms/d/duration.asp

[Tyler9000]

Does anyone have a good resource to help me understand what factors lead to ups and downs with TLT?

If you’ve got a few minutes to hunker down and read, this article will walk you through how bonds work. It covers everything from the basic profit drivers like interest and capital appreciation all the way up to complicated concepts like bond convexity.

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

[z0iid]

The relationship is mathematical, so the interest rate volatility of the bond fund is a direct translation of the volatility of yields in the market for long term bonds. That volatility in yields is large, so the volatility in the NAV of the bond fund large. The idea that interest rates "settle down" is probably a miss-perception. Here is a chart of yields by maturity. You can pull the red cursor to see the variation with time: https://stockcharts.com/freecharts/yieldcurve.php

Note it isn't just that yields change but also that yields for different maturities change differently. The shape of the yield curve is not constant.

You're basically asking about bond duration and how it impacts pricing.

https://www.investopedia.com/terms/d/duration.asp

If you’ve got a few minutes to hunker down and read, this article will walk you through how bonds work. It covers everything from the basic profit drivers like interest and capital appreciation all the way up to complicated concepts like bond convexity.

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

Thank you, it gives me a good place to start. I guess I made a false assumption that as 20yr rates approached zero, TLT would have to stabilize (until the rates changed again).

[Willmunny]

As a short term play, who knows. Maybe long terms treasuries see some capital appreciation from here.

But long term, this seems to me to be the opposite of the early 80s (which, in hindsight, was the best time to pile into long term treasuries). The 30 year is yielding 1.31% today. The Fed tries to target 2% inflation. As a long term holding, long terms treasuries are locking in an approximate 0.7% annual loss in purchasing power if the Fed's targets are correct. If Fed targets are less than the actual inflation rate, then holders of long term treasuries will see an even more significant decline in purchasing power. Imagine holding a 30 year treasury yielding 1.31% and sometime in the next 30 years we see inflation of 10% or more like the 70s and early 80s. Your purchasing power will be crushed.

I would encourage you to read Larry Swedroe's great book on bonds before adding long term treasuries as a long term holding.

[watchnerd]

As a short term play, who knows. Maybe long terms treasuries see some capital appreciation from here.

But long term, this seems to me to be the opposite of the early 80s (which, in hindsight, was the best time to pile into long term treasuries). The 30 year is yielding 1.31% today. The Fed tries to target 2% inflation. As a long term holding, long terms treasuries are locking in an approximate 0.7% annual loss in purchasing power if the Fed's targets are correct. If Fed targets are less than the actual inflation rate, then holders of long term treasuries will see an even more significant decline in purchasing power. Imagine holding a 30 year treasury yielding 1.31% and sometime in the next 30 years we see inflation of 10% or more like the 70s and early 80s. Your purchasing power will be crushed.

I would encourage you to read Larry Swedroe's great book on bonds before adding long term treasuries as a long term holding.

i would agree.

People need to understand the risks involved and not engage in bear-market performance chasing.

I hold 15% in long Treasuries knowing that they could well be crushed by rising rates or inflation in the future.

[vineviz]

I hold 15% in long Treasuries knowing that they could well be crushed by rising rates or inflation in the future.

If I had a way to collect a dollar every time someone hypothesized that long-term bonds would get “crushed” under some scenario or other, I wouldn’t need to actually own any long term bonds.

[watchnerd]

I hold 15% in long Treasuries knowing that they could well be crushed by rising rates or inflation in the future.

If I had a way to collect a dollar every time someone hypothesized that long-term bonds would get “crushed” under some scenario or other, I wouldn’t need to actually own any long term bonds.

Well it was "could" not "would".

[jjj_22]

I don't think anybody with debt or a mortgage should look at long Treasuries, either.

I'm curious why this. I have a mortgage. I also have a modest (8%) allocation to LTTs. I don't think of them as bonds so much as alternatives, in the sense that they're there to dampen volatility of the equity slab of my portfolio.

I'm trying to understand why this should be different if I were still renting.

[watchnerd]

I don't think anybody with debt or a mortgage should look at long Treasuries, either.

I'm curious why this. I have a mortgage. I also have a modest (8%) allocation to LTTs. I don't think of them as bonds so much as alternatives, in the sense that they're there to dampen volatility of the equity slab of my portfolio.

I'm trying to understand why this should be different if I were still renting.

Mortgage holders already have a way to profit from declining interest rates in the form of mortgage refinancing, often at a sizeable fraction of their net worth and / or bond allocation

[Taylor Larimore]

Bogleheads:

To add to the discussion, yesterday, Morningstar published this article about long-term Treasuries:

Long Bonds Are For Fools

Best wishes.
Taylor

Jack Bogle's Words of Wisdom: "A single factor dominates the returns earned by investors in the bond market: the prevailing level of interest rates."

[abuss368]

It appears most BH are not into LT treasuries at this time yet VG fund keeps going up. Can I get some help understanding? Thanks

With bonds higher yield almost always means higher risk.

[abuss368]

It appears most BH are not into LT treasuries at this time yet VG fund keeps going up. Can I get some help understanding? Thanks

Any short or intermediate term investment grade bond fund that is low cost and diversified will provide safety and income to a portfolio.

[willthrill81]

A plausible use of LT bonds is as a diversification partner in a high stock portfolio. That would be for a person investing at high risk altogether.

The last 30+ years of data don't support the idea that the volatility of a portfolio tilted toward stocks is best minimized with shorter-term bonds than LTT, if that's what you're claiming.

Since 1987, a 60/40 portfolio with LTT used for bonds instead of TBM has had a virtually identical standard deviation (9.39% vs. 9.32%) but a better worst year (-13.22% vs. -20.20%) and a smaller maximum drawdown (-26.90% vs. -30.72%).

Some might claim that that was due to LTT benefiting from the long bull market from about 1981-2013. But if we do the same analysis from 2014 until now, all of the above metrics were even more strongly tilted in favor of the portfolio with LTT with regard to reducing volatility and maximum drawdown.

Any short or intermediate term investment grade bond fund that is low cost and diversified will provide safety and income to a portfolio.

Yes. And as the above data demonstrate, a long-term Treasuries fund has done that even better.

[NMBob]

long treasuries discussed many times.

viewtopic.php?t=287627
First 20% of bonds in long-term Treasuries

and leveraged long treasuries in a leveraged portfolio thread will have literally over a thousand posts, and maybe actually many thousands, on basic performance of long Ts, beside the other issues of leveraged T's and the leveraged portfolio.
viewtopic.php?f=10&t=272007
viewtopic.php?f=10&t=288192&start=4300

[abuss368]

A plausible use of LT bonds is as a diversification partner in a high stock portfolio. That would be for a person investing at high risk altogether.

The last 30+ years of data don't support the idea that the volatility of a portfolio tilted toward stocks is best minimized with shorter-term bonds than LTT, if that's what you're claiming.

Since 1987, a 60/40 portfolio with LTT used for bonds instead of TBM has had a virtually identical standard deviation (9.39% vs. 9.32%) but a better worst year (-13.22% vs. -20.20%) and a smaller maximum drawdown (-26.90% vs. -30.72%).

Some might claim that that was due to LTT benefiting from the long bull market from about 1981-2013. But if we do the same analysis from 2014 until now, all of the above metrics were even more strongly tilted in favor of the portfolio with LTT with regard to reducing volatility and maximum drawdown.

Any short or intermediate term investment grade bond fund that is low cost and diversified will provide safety and income to a portfolio.

Yes. And as the above data demonstrate, a long-term Treasuries fund has done that even better.

Thanks. Are you investing in Long Term Bonds?