Treasury returns historically almost match corporate bonds?

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neomutiny06
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Treasury returns historically almost match corporate bonds?

Post by neomutiny06 » Sat Jan 07, 2017 8:59 am

I was reading Swedroe and Bernstein, and they say that it's almost neck and neck between treasuries and corporates after expenses. For total returns.

So if this is true, than for a long-term investor, corporates make no sense. Treasuries give you similar returns with much less risk.

For an investor needing yield, I understand the arguments for corporates. But for the long haul, I would prefer the superior investment with the best risk/return.

Furthermore, I'm not sure I see the argument for any bond fund that would stumble in a market crash. That is exactly the time I would want to rebalance into stocks.

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CyberBob
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Re: Treasury returns historically almost match corporate bonds?

Post by CyberBob » Sat Jan 07, 2017 9:16 am

You should check out the book Unconventional Success by David Swensen (who runs the endowment fund for Yale University).
He gives some reasons why Treasury bonds should be considered a 'core' asset class, while corporate bonds are 'non-core'.

Swelfie
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Re: Treasury returns historically almost match corporate bonds?

Post by Swelfie » Sat Jan 07, 2017 9:26 am

neomutiny06 wrote:for a long-term investor, corporates make no sense.


One reason is that if you invest in factors, the credit risk factor generally has positive returns but low correlation to stocks or bonds, so a smidgen can dampen volatility, and US Treasuries have no credit risk. Personally, the vast majority of my bonds are US Treasuries bit I do have a bit of BND and ANGL just for the low correlation.

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rustymutt
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Re: Treasury returns historically almost match corporate bonds?

Post by rustymutt » Sat Jan 07, 2017 9:40 am

And I'll just add my message. T bills did it with much less risk, for those with balanced portfolios.
Knowledge is knowing that the Tomato is a fruit. Wisdom is knowing better than to put the tomato in a fruit salad.

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rustymutt
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Re: Treasury returns historically almost match corporate bonds?

Post by rustymutt » Sat Jan 07, 2017 9:42 am

CyberBob wrote:You should check out the book Unconventional Success by David Swensen (who runs the endowment fund for Yale University).
He gives some reasons why Treasury bonds should be considered a 'core' asset class, while corporate bonds are 'non-core'.


This has been my take on bonds since becoming a buy and holder in the late 80's. The academics back this up.
Knowledge is knowing that the Tomato is a fruit. Wisdom is knowing better than to put the tomato in a fruit salad.

grok87
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Re: Treasury returns historically almost match corporate bonds?

Post by grok87 » Sat Jan 07, 2017 12:14 pm

Yep
Some numbers and discussion here "Grok's tip #14: Avoid long-term corporate bonds"
viewtopic.php?f=10&t=116549
Over the past 40 years, the average annual return since inception of the Barclays long term corporate bond index was 8.88%. Not too shabby. But wait- what was the return over the same period of the long-term treasury index? You guessed it, almost exactly the same, it clocked in at 8.78%. And of course you can buy and hold treasuries directly at no cost. Whereas even the ultra-low cost Vanguard ETF charges 12 bps annually- so after costs the corporate bonds lagged by 2bps.


So why does this anomaly persist?

1) Buyers fall for the illusion of higher expected returns

2) Sellers (ie wall st) make more money off trading/ selling corpoRate and other non-treasury bonds.
It's an illiquid murky swamp of a market where lying is rampant. See this bloomberg article.

https://www.bloomberg.com/amp/news/arti ... d-iwi1rbzi
A former Cantor Fitzgerald & Co. trader was charged with defrauding customers by lying about prices of mortgage-backed securities, becoming the latest target of a U.S. crackdown on deceptive practices in the bond market.
Last edited by grok87 on Sat Jan 07, 2017 1:58 pm, edited 4 times in total.
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stlutz
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Re: Treasury returns historically almost match corporate bonds?

Post by stlutz » Sat Jan 07, 2017 12:23 pm

This is actually somewhat difficult to measure because corporate bonds usually have call options and the term structure of corporate debt often differs from the structure of government debt. As such, simply comparing "corporate" and "government" bonds may not be comparing like vs. like in terms of duration risk. Prior to the mid-80s, the needed data to net these different factors out really doesn't exist.

There is a paper from AQR that does look into all of this is greater detail which we discussed here: viewtopic.php?t=194573

My takeaway has always been that corporate bonds as a standalone investment have and likely will produce somewhat higher returns than Treasuries. In a balanced portfolio of stocks and bonds however, adding corporate bonds increases portfolio-level volatility but does not provide additional return.

garlandwhizzer
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Re: Treasury returns historically almost match corporate bonds?

Post by garlandwhizzer » Sat Jan 07, 2017 12:49 pm

Treasuries have done wonderfully well over the past 3+ decades, offering not only safety but also excellent return especially adjusted for risk. However, like Bogle, I wouldn't rule out owning some corporate bonds. In an increasing interest rate, increasing inflation environment, which is what we expect the future to be at least for a while, two of the risks of corporates are reduced. Call option (no one calls a bond to issue a higher yielding bond. Default risk (as inflation rises, usually it is associated with increasing nominal corporate revenues, and in any case future interest payments are discounted in real terms by the inflation rate). So in an increasing interest rate, increasing inflation environment, corporates might be a tad more attractive relative to Treasuries than they have been shown to be on 35 year backtesting. At any rate, they have a higher expected return than Treasuries, your payment for accepting higher risk. Currently however Treasury-corporate spreads are a bit lower than average so, along with everything else including Treasuries, they're not screaming buys relative to Treasuries at the moment. Anticipation of future inflation and increased economic growth is already largely priced into that spread.

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Munir
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Re: Treasury returns historically almost match corporate bonds?

Post by Munir » Sat Jan 07, 2017 1:18 pm

If you look at the Vanguard chart for intermediate bond funds you can see the significant difference in total return between treasury and corporate funds i.e. corporates ahead. Theoretical arguments about long term scenarios are mere speculations. Call risks and defaults among the Vanguard quality corporate funds have been practically non-existent or of minimal impact. Some of us are not anxious to immediately rebalance whenever there is a dip in the equity market, and have the patience to wait a few months for corporates to recover (IF they fall at the same time as equities) and even beat treasuries as they did in 2008-2009. Why do you think does Jack Bogle urge raising the % of corporate bond ownership above what the sacrosanct Total Bond Market fund has? In summary, quality Vanguard corporate bond funds offer higher returns than treasuries at a minimal- if any-risk.

Safest course is to diversify among them in one's bond holdings just like we diversify equity holdings. Personally, I have about 70% corporates among my bond fund holdings because I'm too "chicken" to be all in corporates.

neomutiny06
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Re: Treasury returns historically almost match corporate bonds?

Post by neomutiny06 » Sat Jan 07, 2017 6:45 pm

Munir wrote:If you look at the Vanguard chart for intermediate bond funds you can see the significant difference in total return between treasury and corporate funds i.e. corporates ahead. Theoretical arguments about long term scenarios are mere speculations. Call risks and defaults among the Vanguard quality corporate funds have been practically non-existent or of minimal impact. Some of us are not anxious to immediately rebalance whenever there is a dip in the equity market, and have the patience to wait a few months for corporates to recover (IF they fall at the same time as equities) and even beat treasuries as they did in 2008-2009. Why do you think does Jack Bogle urge raising the % of corporate bond ownership above what the sacrosanct Total Bond Market fund has? In summary, quality Vanguard corporate bond funds offer higher returns than treasuries at a minimal- if any-risk.

Safest course is to diversify among them in one's bond holdings just like we diversify equity holdings. Personally, I have about 70% corporates among my bond fund holdings because I'm too "chicken" to be all in corporates.

I'm learning more about corporate bonds and I don't like them much for the long-term

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