Treasury Bonds are the Only Bonds You Need

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CULater
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Treasury Bonds are the Only Bonds You Need

Post by CULater » Tue Jul 31, 2018 6:29 pm

Article argues that you should probably use Treasuries as your bond allocation and forget about aggregate bond index funds, for the two reasons below. I recall that Larry Swedroe made the same point about bonds. This has always been my approach since reading Larry, and I'm glad to see supporting evidence for it.
Treasury bonds perform nearly as well as investment-grade bonds over the long-term.
It is logical that the long-term performance difference of the two indices would be approximately the same, but it isn’t…not even close. Despite the Treasury index yielding 0.78% less, it performed just 0.15% annualized less over the full period.

Credit bonds work against you when you need them most
Consider performance between the two indices during large stock market losses. During the 10 largest S&P 500 drawdowns in the period since the index began, Treasury bonds have outperformed the AGG index in eight of those 10.
https://www.advisorperspectives.com/art ... s-you-need
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invst65
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Re: Treasury Bonds are the Only Bonds You Need

Post by invst65 » Tue Jul 31, 2018 6:32 pm

This is also the recommendation for the permanent portfolio strategy and something I follow.

Also do the same with T-Bills for cash.

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Re: Treasury Bonds are the Only Bonds You Need

Post by epilnk » Tue Jul 31, 2018 7:48 pm

This has been my philosophy for many years now - I don't know how long, but well before the 08 crash. Swenson also advocates holding fixed income in treasuries.

It has served me well. However past performance is no guarantee of future returns, and the world is changing. I've begun adding corporates.

Edit to add: actually not just treasuries - we also hold munis. High tax state, exposed portfolio.

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Re: Treasury Bonds are the Only Bonds You Need

Post by Grt2bOutdoors » Tue Jul 31, 2018 8:01 pm

401k doesn’t offer Treasury only, total bond market index is next best choice. The other bond funds are too expensive and corporate credit only.
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Re: Treasury Bonds are the Only Bonds You Need

Post by Kevin M » Tue Jul 31, 2018 8:07 pm

CULater wrote:
Tue Jul 31, 2018 6:29 pm
Article argues that you should probably use Treasuries as your bond allocation and forget about aggregate bond index funds, for the two reasons below. I recall that Larry Swedroe made the same point about bonds. This has always been my approach since reading Larry, and I'm glad to see supporting evidence for it.
Agreed that Larry has never been a fan of total US bond funds, or taking much if any corporate credit risk, but he's also advocated munis in taxable, and CDs when the yield premiums over Treasuries of same maturities are decent. Lately he's been more into alternative fixed income.

Kevin
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Re: Treasury Bonds are the Only Bonds You Need

Post by willthrill81 » Tue Jul 31, 2018 9:29 pm

Grt2bOutdoors wrote:
Tue Jul 31, 2018 8:01 pm
401k doesn’t offer Treasury only, total bond market index is next best choice. The other bond funds are too expensive and corporate credit only.
Same here in both my 401k and 457. Although these days, the stable value fund in my 401k paying 3.25% is a better deal anyway.
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Re: Treasury Bonds are the Only Bonds You Need

Post by whodidntante » Wed Aug 01, 2018 1:33 am

TBM is heavy on bonds that have a declared or assumed federal backing, so I wouldn't lift a mouse button to get into a Treasury only fund.

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Re: Treasury Bonds are the Only Bonds You Need

Post by hesson11 » Wed Aug 01, 2018 9:01 am

Thanks for this info, CULater. I find it very interesting. The chart showing Treasury performance during the biggest stock drawdowns is especially noteworthy and, if accurate, convincing. I have no reason to believe it is not accurate, but I also noticed that the author is president of an advisory firm "specializing in US Treasury bonds." Does anyone know whether the Advisor Perspective website checks facts?

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Re: Treasury Bonds are the Only Bonds You Need

Post by Rudedog » Wed Aug 01, 2018 3:17 pm

I think you can buy treasury bonds thru Vanguard, how do others buy and hold Treasury bonds ?

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Re: Treasury Bonds are the Only Bonds You Need

Post by friar1610 » Wed Aug 01, 2018 5:00 pm

Rudedog wrote:
Wed Aug 01, 2018 3:17 pm
I think you can buy treasury bonds thru Vanguard, how do others buy and hold Treasury bonds ?
Treasury Direct is one way. A lot of posters here complain about the web site being hard to use but I personally don't find it to be.
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Re: Treasury Bonds are the Only Bonds You Need

Post by CULater » Wed Aug 01, 2018 6:29 pm

Just buy a treasury fund or ETF.
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Re: Treasury Bonds are the Only Bonds You Need

Post by arcticpineapplecorp. » Wed Aug 01, 2018 6:37 pm

invst65 wrote:
Tue Jul 31, 2018 6:32 pm
This is also the recommendation for the permanent portfolio strategy and something I follow.

Also do the same with T-Bills for cash.
I had to double check this because I listened to every episode of the Harry Browne radio show and I remember him advocating for LONG bonds actually. So I did a quick search on the interweb and sure enough:
Why do I want to own bonds in my Permanent Portfolio?

Bonds help out under various economic conditions to protect the Permanent Portfolio. Under times of prosperity when the economy is stable and growing bonds provide a steady income stream in addition to the growth of stocks. When markets go through deflationary gyrations that are bad for stocks and gold in the portfolio, bonds can go up greatly in price offsetting losses in these other assets.

What kind of bonds should I own in the Permanent Portfolio?

You only want to own the highest quality long term bonds you can buy. For US investors that means you only want to purchase US Treasury Long Term bonds because they have no credit, default or call risk.

and

When you say “Long Term Bonds” how long do you mean?

Any bond 25-30 years to maturity is perfectly fine for the Permanent Portfolio.
source: http://www.thepermanentportfolio.com/pe ... ation-faq/
Maybe you're thinking treasuries for the "cash" part of the portfolio??? T-bills are short term, with maturities of less than one year.
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Re: Treasury Bonds are the Only Bonds You Need

Post by UpperNwGuy » Wed Aug 01, 2018 8:04 pm

whodidntante wrote:
Wed Aug 01, 2018 1:33 am
TBM is heavy on bonds that have a declared or assumed federal backing, so I wouldn't lift a mouse button to get into a Treasury only fund.
+1
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Re: Treasury Bonds are the Only Bonds You Need

Post by Doc » Thu Aug 02, 2018 10:34 am

UpperNwGuy wrote:
Wed Aug 01, 2018 8:04 pm
whodidntante wrote:
Wed Aug 01, 2018 1:33 am
TBM is heavy on bonds that have a declared or assumed federal backing, so I wouldn't lift a mouse button to get into a Treasury only fund.
+1
You might want to look what happens when there is market stress.

Intermediate Treasuries and Total Bond Market - 12 month rolling return chart.

Image

http://quotes.morningstar.com/chart/fun ... 22%3A12%7D

If you stick your head in the sand and don't rebalance in an equity bear market it may not make much difference.

Treasury bonds are the only bonds you need.
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Re: Treasury Bonds are the Only Bonds You Need

Post by Darth Xanadu » Thu Aug 02, 2018 11:02 am

willthrill81 wrote:
Tue Jul 31, 2018 9:29 pm
Grt2bOutdoors wrote:
Tue Jul 31, 2018 8:01 pm
401k doesn’t offer Treasury only, total bond market index is next best choice. The other bond funds are too expensive and corporate credit only.
Same here in both my 401k and 457. Although these days, the stable value fund in my 401k paying 3.25% is a better deal anyway.
In my 401k, I'm considering moving from Fidelity US Bond Index (FSITX) to a Guaranteed Interest option that pays 3.0% annually. Is this short-sighted of me, or are there any reasons not to do so?
"A courageous teacher, failure is."

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Re: Treasury Bonds are the Only Bonds You Need

Post by invst65 » Thu Aug 02, 2018 11:39 am

arcticpineapplecorp. wrote:
Wed Aug 01, 2018 6:37 pm
invst65 wrote:
Tue Jul 31, 2018 6:32 pm
This is also the recommendation for the permanent portfolio strategy and something I follow.

Also do the same with T-Bills for cash.
I had to double check this because I listened to every episode of the Harry Browne radio show and I remember him advocating for LONG bonds actually. So I did a quick search on the interweb and sure enough:
Why do I want to own bonds in my Permanent Portfolio?

Bonds help out under various economic conditions to protect the Permanent Portfolio. Under times of prosperity when the economy is stable and growing bonds provide a steady income stream in addition to the growth of stocks. When markets go through deflationary gyrations that are bad for stocks and gold in the portfolio, bonds can go up greatly in price offsetting losses in these other assets.

What kind of bonds should I own in the Permanent Portfolio?

You only want to own the highest quality long term bonds you can buy. For US investors that means you only want to purchase US Treasury Long Term bonds because they have no credit, default or call risk.

and

When you say “Long Term Bonds” how long do you mean?

Any bond 25-30 years to maturity is perfectly fine for the Permanent Portfolio.
source: http://www.thepermanentportfolio.com/pe ... ation-faq/
Maybe you're thinking treasuries for the "cash" part of the portfolio??? T-bills are short term, with maturities of less than one year.
I believe HB called for bonds with a maturity of a least 20 years.

As for the T-Bills, I actually said I use them for "cash".

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Re: Treasury Bonds are the Only Bonds You Need

Post by vineviz » Thu Aug 02, 2018 11:42 am

Darth Xanadu wrote:
Thu Aug 02, 2018 11:02 am
In my 401k, I'm considering moving from Fidelity US Bond Index (FSITX) to a Guaranteed Interest option that pays 3.0% annually. Is this short-sighted of me, or are there any reasons not to do so?
Unless you are currently in retirement, that's probably short-sighted.

As a rule, the duration of your bonds should match your investment horizon. If you are more 10 years from retirement, the bulk of your bonds should be intermediate or long-term bonds, not a cash-like pseudo-insurance product like a GIC.
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Re: Treasury Bonds are the Only Bonds You Need

Post by triceratop » Thu Aug 02, 2018 11:55 am

vineviz wrote:
Thu Aug 02, 2018 11:42 am
Darth Xanadu wrote:
Thu Aug 02, 2018 11:02 am
In my 401k, I'm considering moving from Fidelity US Bond Index (FSITX) to a Guaranteed Interest option that pays 3.0% annually. Is this short-sighted of me, or are there any reasons not to do so?
Unless you are currently in retirement, that's probably short-sighted.

As a rule, the duration of your bonds should match your investment horizon. If you are more 10 years from retirement, the bulk of your bonds should be intermediate or long-term bonds, not a cash-like pseudo-insurance product like a GIC.
Darth, is this a stable value or a fixed-interest product? 3% isn't bad for a 0-duration investment product. Total Bond exposes you to both substantial term and credit risk and still only gives you (right now) 3%.
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Re: Treasury Bonds are the Only Bonds You Need

Post by Darth Xanadu » Thu Aug 02, 2018 12:06 pm

triceratop wrote:
Thu Aug 02, 2018 11:55 am
Darth, is this a stable value or a fixed-interest product? 3% isn't bad for a 0-duration investment product. Total Bond exposes you to both substantial term and credit risk and still only gives you (right now) 3%.
This is a fixed-interest product, called a Guaranteed Interest Fund. It's been paying 3.0% for a number of years. They set the rate semi-annually, and for July 1-Dec 31 it is staying at 3.0%.

I'm not retired, this would be about half of my fixed income assets.
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Re: Treasury Bonds are the Only Bonds You Need

Post by willthrill81 » Thu Aug 02, 2018 12:26 pm

Darth Xanadu wrote:
Thu Aug 02, 2018 11:02 am
willthrill81 wrote:
Tue Jul 31, 2018 9:29 pm
Grt2bOutdoors wrote:
Tue Jul 31, 2018 8:01 pm
401k doesn’t offer Treasury only, total bond market index is next best choice. The other bond funds are too expensive and corporate credit only.
Same here in both my 401k and 457. Although these days, the stable value fund in my 401k paying 3.25% is a better deal anyway.
In my 401k, I'm considering moving from Fidelity US Bond Index (FSITX) to a Guaranteed Interest option that pays 3.0% annually. Is this short-sighted of me, or are there any reasons not to do so?
For intermediate-term bonds, the current yield is a good estimate of their return for the next 10 years. For the total bond market, that's about 2.56%. So getting a 'guaranteed' 3.0%, with no volatility, seems like a no-brainer to me. Just make sure that you can pull the money out of that option if you want; some of those have restrictions on getting out.
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Re: Treasury Bonds are the Only Bonds You Need

Post by Portfolio7 » Thu Aug 02, 2018 1:56 pm

vineviz wrote:
Thu Aug 02, 2018 11:42 am
As a rule, the duration of your bonds should match your investment horizon. If you are more 10 years from retirement, the bulk of your bonds should be intermediate or long-term bonds, not a cash-like pseudo-insurance product like a GIC.
I thought that guidance was meant primarily to prevent investment in bonds with a duration longer than your horizon, not so much the other way around? It works both ways, but when you aren't getting paid for the extra duration risk, why take it on? I'm not a disinterested observer btw, my Fixed Income is largely in a Stable Value fund earning about 3% as well. If I get paid for the duration, I like Intermediate Treasuries, and a skoosh of TIPS. However, I'm not going to claim any bond expertise, I've been slowly trying to build a framework to understand these trade-offs so this is an interesting discussion for me.
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Re: Treasury Bonds are the Only Bonds You Need

Post by fsh71 » Thu Aug 02, 2018 2:13 pm

Doc wrote:
Thu Aug 02, 2018 10:34 am
UpperNwGuy wrote:
Wed Aug 01, 2018 8:04 pm
whodidntante wrote:
Wed Aug 01, 2018 1:33 am
TBM is heavy on bonds that have a declared or assumed federal backing, so I wouldn't lift a mouse button to get into a Treasury only fund.
+1
You might want to look what happens when there is market stress.

Intermediate Treasuries and Total Bond Market - 12 month rolling return chart.

Image

http://quotes.morningstar.com/chart/fun ... 22%3A12%7D

If you stick your head in the sand and don't rebalance in an equity bear market it may not make much difference.

Treasury bonds are the only bonds you need.
Doc, can you (or someone else that understands this) elaborate on the above? You say that treasuries are all one needs, and seem to suggest to the posters advocating for TBM that they compare performance during stressed markets, but then the chart shows (unless I'm reading it wrong) that the aggregate index significantly outperformed treasuries during 2008. Am I misunderstanding your point?

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Re: Treasury Bonds are the Only Bonds You Need

Post by vineviz » Thu Aug 02, 2018 2:50 pm

Portfolio7 wrote:
Thu Aug 02, 2018 1:56 pm
vineviz wrote:
Thu Aug 02, 2018 11:42 am
As a rule, the duration of your bonds should match your investment horizon. If you are more 10 years from retirement, the bulk of your bonds should be intermediate or long-term bonds, not a cash-like pseudo-insurance product like a GIC.
I thought that guidance was meant primarily to prevent investment in bonds with a duration longer than your horizon, not so much the other way around? It works both ways, but when you aren't getting paid for the extra duration risk, why take it on?
With any financial topic there are layers upon layers of complexity, but I think about bond duration vs investment horizon primarily as a tradeoff between two dominant types of interest rate related uncertainty:
  • reinvestment risk
  • market price risk
Reinvestment risk is the uncertainty about what interest rate the investor will get when it is time to reinvest either the coupon payments or the principal payment of an expiring bond.

Market price risk is the uncertainty about what the value of a bond will be in the future (if it needs to be sold before maturity) due to changes in prevailing interest rates.

When the duration is less than the investment horizon, reinvestment risk dominates market price risk. When duration is longer than the investment horizon, market price risk dominates reinvestment risk. When duration EQUALS investment horizon, the two risks perfectly cancel out.

When people tell you that "you aren't getting paid for the extra duration risk" they are focused only on the market price risk and not paying any attention to the reinvestment risk. You ARE getting paid for the extra risk, based on what the market knows/believes about the future path of interest rates. Long term bonds, like any other asset, are priced at an equilibrium that reflects market consensus about the future.

In reality, immunizing a portfolio is hard to do for most of us which is why I recommend aiming your bond duration to be just a little shy of your investment horizon.

Picking a duration that is significantly shorter or longer than your investment horizon is an ACTIVE decision to make a bet on the direction of future interest rates (and in a complicated way that view investors understand).

I am boggled by investors who rail against active investing in equity portfolios but happily (or blindly) make huge active bets in their bond portfolio.

P.S. There are obviously other types of bond risk (including inflation risk, credit risk, liquidity risk, call risk, etc.) but I'm leaving those aside for a moment. I prefer to use long term Treasuries (including zero coupon bonds if appropriate) to simplify the portfolio construction around those risks.
"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: Treasury Bonds are the Only Bonds You Need

Post by Doc » Thu Aug 02, 2018 4:26 pm

fsh71 wrote:
Thu Aug 02, 2018 2:13 pm
Doc, can you (or someone else that understands this) elaborate on the above? You say that treasuries are all one needs, and seem to suggest to the posters advocating for TBM that they compare performance during stressed markets, but then the chart shows (unless I'm reading it wrong) that the aggregate index significantly outperformed treasuries during 2008. Am I misunderstanding your point?
The lag time resulting from the rollong return can be misleading. The outperformance you are seeing is the recovery after the fact. Switch the chart to a price chart to get a better idea of of the timing of the event. In the recovery period TBM looks really good because it did relatively poorly the year before.

It does us little good if a bond fund recovers nicely the year after we sold it to rebalance. :D
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Re: Treasury Bonds are the Only Bonds You Need

Post by fsh71 » Thu Aug 02, 2018 4:40 pm

Doc wrote:
Thu Aug 02, 2018 4:26 pm
The lag time resulting from the rollong return can be misleading. The outperformance you are seeing is the recovery after the fact. Switch the chart to a price chart to get a better idea of of the timing of the event. In the recovery period TBM looks really good because it did relatively poorly the year before.

It does us little good if a bond fund recovers nicely the year after we sold it to rebalance. :D
Thank you, this makes sense now. I see that each bar represents a 12-month rolling average return :oops:

The point regarding rebalancing is a good one as well, thanks!

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Re: Treasury Bonds are the Only Bonds You Need

Post by Noobvestor » Thu Aug 02, 2018 4:50 pm

vineviz wrote:
Thu Aug 02, 2018 2:50 pm

Picking a duration that is significantly shorter or longer than your investment horizon is an ACTIVE decision to make a bet on the direction of future interest rates (and in a complicated way that view investors understand).
I mean on this logic, any long-term investor should be entirely in long-term bonds, but there is a lot of literature from Boglehead authors suggesting intermediate is better - are you in fact arguing that a younger investor should be in ultra-long (say, 30-year) bonds?
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe

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Re: Treasury Bonds are the Only Bonds You Need

Post by arcticpineapplecorp. » Thu Aug 02, 2018 4:56 pm

invst65 wrote:
Thu Aug 02, 2018 11:39 am
I believe HB called for bonds with a maturity of a least 20 years.

As for the T-Bills, I actually said I use them for "cash".
Yes I see that, but since this post was about not using bonds and using treasuries instead, I wasn't sure if you were saying the permanent portfolio did not contain bonds, but did contain treasuries. Sorry if there was a miscommunication. But the point of bringing up the permanent portfolio goes against this post's recommendation, namely to avoid bonds and only use treasuries. That's not at all what the permanent portfolio recommends. And in my opinion the permanent portfolio takes on even more risk by owning long bonds. That might have helped the PP as rates came down over the past 30 years. I'm not sure it's going to help as rates head in the opposite direction.
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Re: Treasury Bonds are the Only Bonds You Need

Post by invst65 » Thu Aug 02, 2018 5:09 pm

arcticpineapplecorp. wrote:
Thu Aug 02, 2018 4:56 pm
invst65 wrote:
Thu Aug 02, 2018 11:39 am
I believe HB called for bonds with a maturity of a least 20 years.

As for the T-Bills, I actually said I use them for "cash".
Yes I see that, but since this post was about not using bonds and using treasuries instead, I wasn't sure if you were saying the permanent portfolio did not contain bonds, but did contain treasuries. Sorry if there was a miscommunication. But the point of bringing up the permanent portfolio goes against this post's recommendation, namely to avoid bonds and only use treasuries. That's not at all what the permanent portfolio recommends. And in my opinion the permanent portfolio takes on even more risk by owning long bonds. That might have helped the PP as rates came down over the past 30 years. I'm not sure it's going to help as rates head in the opposite direction.
We must have read different books about the Permanent Portfolio. As I recall it, both HB's original book and the subsequent book recently published by Craig Rowland and J.M. Lawson recommended U.S. Treasury Bonds of at least 20 years to maturity for the bond portion of the portfolio.

I'm not sure about what long bonds are going to do in a rising interest rate environment either. But then again, I'm also not sure how long we are going to be in a rising interest rate environment.

Like Mr. Bogle said - "Nobody knows nothin'"
Last edited by invst65 on Thu Aug 02, 2018 5:21 pm, edited 3 times in total.

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Re: Treasury Bonds are the Only Bonds You Need

Post by vineviz » Thu Aug 02, 2018 5:16 pm

Noobvestor wrote:
Thu Aug 02, 2018 4:50 pm
vineviz wrote:
Thu Aug 02, 2018 2:50 pm

Picking a duration that is significantly shorter or longer than your investment horizon is an ACTIVE decision to make a bet on the direction of future interest rates (and in a complicated way that view investors understand).
I mean on this logic, any long-term investor should be entirely in long-term bonds, but there is a lot of literature from Boglehead authors suggesting intermediate is better - are you in fact arguing that a younger investor should be in ultra-long (say, 30-year) bonds?
If we're talking about retirement savings, then yes: I'm definitely arguing that younger investors, to the extent they own ANY bonds, should definitely hold long-term bond funds either primarily or exclusively.

For retirement investors in their 20s, Ibbotson recommends that 80% of bond holdings be long-term, and I think that's reasonable. I'd probably recommend a fund like Vanguard Long-Term Treasury ETF (VGLT) or iShares 20+ Year Treasury Bond ETF (TLT) to a young investor with moderate or conservative risk tolerance, and something like Vanguard Extended Duration Trs ETF (EDV) or PIMCO 25+ Year Zero Coupon US Trs ETF (ZROZ) to a young investor with aggressive risk tolerance.

In fact, I'd say that investors under the age of 55 or so should probably have at least half of their retirement bond allocation in long-term bonds or bond funds.
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Re: Treasury Bonds are the Only Bonds You Need

Post by patrick013 » Thu Aug 02, 2018 5:49 pm

vineviz wrote:
Thu Aug 02, 2018 2:50 pm
I am boggled by investors who rail against active investing in equity portfolios but happily (or blindly) make huge active bets in their bond portfolio.
Because we don't want a 20 year TRSY that pays 3.1% YTM today. Even a
TRSY10 is projected to yield 4% or higher YTM in just a couple years while
2 year CD's are almost 3% yield while the time passes. Too much to gain
with nothing to lose. Duration doesn't help. No incentive for LT today for
me.
age in bonds, buy-and-hold, 10 year business cycle

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Re: Treasury Bonds are the Only Bonds You Need

Post by vineviz » Thu Aug 02, 2018 5:53 pm

patrick013 wrote:
Thu Aug 02, 2018 5:49 pm
vineviz wrote:
Thu Aug 02, 2018 2:50 pm
I am boggled by investors who rail against active investing in equity portfolios but happily (or blindly) make huge active bets in their bond portfolio.
Because we don't want a 20 year TRSY that pays 3.1% YTM today. Even a
TRSY10 is projected to yield 4% or higher YTM in just a couple years while
2 year CD's are almost 3% yield while the time passes. Too much to gain
with nothing to lose. Duration doesn't help. No incentive for LT today for
me.
This strategy has plenty of ways to lose, even for investors who can’t see it.
"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: Treasury Bonds are the Only Bonds You Need

Post by patrick013 » Thu Aug 02, 2018 6:01 pm

vineviz wrote:
Thu Aug 02, 2018 5:53 pm
patrick013 wrote:
Thu Aug 02, 2018 5:49 pm
vineviz wrote:
Thu Aug 02, 2018 2:50 pm
I am boggled by investors who rail against active investing in equity portfolios but happily (or blindly) make huge active bets in their bond portfolio.
Because we don't want a 20 year TRSY that pays 3.1% YTM today. Even a
TRSY10 is projected to yield 4% or higher YTM in just a couple years while
2 year CD's are almost 3% yield while the time passes. Too much to gain
with nothing to lose. Duration doesn't help. No incentive for LT today for
me.
This strategy has plenty of ways to lose, even for investors who can’t see it.
Well that doesn't add up.

The next rate increase has about a 90% probability within futures market.
At the same time the futures market is pricing a decrease in the 500 into
it's prices.
age in bonds, buy-and-hold, 10 year business cycle

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Re: Treasury Bonds are the Only Bonds You Need

Post by triceratop » Thu Aug 02, 2018 6:03 pm

At the same time the futures market is pricing a decrease in the 500 into
it's prices.
How is that possible?
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

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patrick013
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Re: Treasury Bonds are the Only Bonds You Need

Post by patrick013 » Thu Aug 02, 2018 6:06 pm

triceratop wrote:
Thu Aug 02, 2018 6:03 pm
At the same time the futures market is pricing a decrease in the 500 into
it's prices.
How is that possible?
They were talking about it on Bloomberg all morning. Did the
500 futures go back up ? I'll check in the morning again.
age in bonds, buy-and-hold, 10 year business cycle

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Re: Treasury Bonds are the Only Bonds You Need

Post by Kevin M » Thu Aug 02, 2018 6:51 pm

vineviz wrote:
Thu Aug 02, 2018 5:16 pm
Noobvestor wrote:
Thu Aug 02, 2018 4:50 pm
vineviz wrote:
Thu Aug 02, 2018 2:50 pm

Picking a duration that is significantly shorter or longer than your investment horizon is an ACTIVE decision to make a bet on the direction of future interest rates (and in a complicated way that view investors understand).
I mean on this logic, any long-term investor should be entirely in long-term bonds, but there is a lot of literature from Boglehead authors suggesting intermediate is better - are you in fact arguing that a younger investor should be in ultra-long (say, 30-year) bonds?
If we're talking about retirement savings, then yes: I'm definitely arguing that younger investors, to the extent they own ANY bonds, should definitely hold long-term bond funds either primarily or exclusively.

For retirement investors in their 20s, Ibbotson recommends that 80% of bond holdings be long-term, and I think that's reasonable. I'd probably recommend a fund like Vanguard Long-Term Treasury ETF (VGLT) or iShares 20+ Year Treasury Bond ETF (TLT) to a young investor with moderate or conservative risk tolerance, and something like Vanguard Extended Duration Trs ETF (EDV) or PIMCO 25+ Year Zero Coupon US Trs ETF (ZROZ) to a young investor with aggressive risk tolerance.

In fact, I'd say that investors under the age of 55 or so should probably have at least half of their retirement bond allocation in long-term bonds or bond funds.
Horrible advice. Way too much inflation risk. If you want to match long term real liabilities with minimal risk, use long term TIPS.

Kevin
Wiki ||.......|| Suggested format for Asking Portfolio Questions (edit original post)

fsh71
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Re: Treasury Bonds are the Only Bonds You Need

Post by fsh71 » Thu Aug 02, 2018 7:26 pm

Kevin M wrote:
Thu Aug 02, 2018 6:51 pm
vineviz wrote:
Thu Aug 02, 2018 5:16 pm
Noobvestor wrote:
Thu Aug 02, 2018 4:50 pm
vineviz wrote:
Thu Aug 02, 2018 2:50 pm

Picking a duration that is significantly shorter or longer than your investment horizon is an ACTIVE decision to make a bet on the direction of future interest rates (and in a complicated way that view investors understand).
I mean on this logic, any long-term investor should be entirely in long-term bonds, but there is a lot of literature from Boglehead authors suggesting intermediate is better - are you in fact arguing that a younger investor should be in ultra-long (say, 30-year) bonds?
If we're talking about retirement savings, then yes: I'm definitely arguing that younger investors, to the extent they own ANY bonds, should definitely hold long-term bond funds either primarily or exclusively.

For retirement investors in their 20s, Ibbotson recommends that 80% of bond holdings be long-term, and I think that's reasonable. I'd probably recommend a fund like Vanguard Long-Term Treasury ETF (VGLT) or iShares 20+ Year Treasury Bond ETF (TLT) to a young investor with moderate or conservative risk tolerance, and something like Vanguard Extended Duration Trs ETF (EDV) or PIMCO 25+ Year Zero Coupon US Trs ETF (ZROZ) to a young investor with aggressive risk tolerance.

In fact, I'd say that investors under the age of 55 or so should probably have at least half of their retirement bond allocation in long-term bonds or bond funds.
Horrible advice. Way too much inflation risk. If you want to match long term real liabilities with minimal risk, use long term TIPS.

Kevin
So I officially don't know what to think. I'm a mid-30s investor, 80/20 allocation, 25-30 year horizon, 67% tax-advantaged / 33% taxable. Currently in TBM. Given the aforementioned, should I tilt more / all towards intermediate-term treasuries? TBM is 65% treasuries already if I'm not mistaken.

I hold 20% of my taxable in intermediate-term corporate bonds currently, and if I could reduce correlation and preserve principle in this chunk of my taxable account during a market downturn, I'd certainly prefer that, as this would be where I'd draw from in the event of a emergency / crisis after exhausting my emergency fund.

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Re: Treasury Bonds are the Only Bonds You Need

Post by vineviz » Thu Aug 02, 2018 8:09 pm

Kevin M wrote:
Thu Aug 02, 2018 6:51 pm
vineviz wrote:
Thu Aug 02, 2018 5:16 pm
Noobvestor wrote:
Thu Aug 02, 2018 4:50 pm
vineviz wrote:
Thu Aug 02, 2018 2:50 pm

Picking a duration that is significantly shorter or longer than your investment horizon is an ACTIVE decision to make a bet on the direction of future interest rates (and in a complicated way that view investors understand).
I mean on this logic, any long-term investor should be entirely in long-term bonds, but there is a lot of literature from Boglehead authors suggesting intermediate is better - are you in fact arguing that a younger investor should be in ultra-long (say, 30-year) bonds?
If we're talking about retirement savings, then yes: I'm definitely arguing that younger investors, to the extent they own ANY bonds, should definitely hold long-term bond funds either primarily or exclusively.

For retirement investors in their 20s, Ibbotson recommends that 80% of bond holdings be long-term, and I think that's reasonable. I'd probably recommend a fund like Vanguard Long-Term Treasury ETF (VGLT) or iShares 20+ Year Treasury Bond ETF (TLT) to a young investor with moderate or conservative risk tolerance, and something like Vanguard Extended Duration Trs ETF (EDV) or PIMCO 25+ Year Zero Coupon US Trs ETF (ZROZ) to a young investor with aggressive risk tolerance.

In fact, I'd say that investors under the age of 55 or so should probably have at least half of their retirement bond allocation in long-term bonds or bond funds.
Horrible advice. Way too much inflation risk. If you want to match long term real liabilities with minimal risk, use long term TIPS.

Kevin
.

First, I’m talking about something much more akin to immunization than liability matching. There’s no way a 30 year old investor should be trying to do liability matching, and couldn’t if they wanted to.

Second, if your investment horizon is far enough out to be holding 20+ year treasury bonds then you also are holding enough stocks to make inflation risk a negligible concern. If an investor wanted to use long-term TIPS instead of nominal treasuries it’d be hard to object. But IMHO TIPS haven’t really proven to be to be the superior inflation hedge that I think people expected.
"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: Treasury Bonds are the Only Bonds You Need

Post by vineviz » Thu Aug 02, 2018 8:36 pm

fsh71 wrote:
Thu Aug 02, 2018 7:26 pm
So I officially don't know what to think. I'm a mid-30s investor, 80/20 allocation, 25-30 year horizon, 67% tax-advantaged / 33% taxable. Currently in TBM. Given the aforementioned, should I tilt more / all towards intermediate-term treasuries? TBM is 65% treasuries already if I'm not mistaken.

I hold 20% of my taxable in intermediate-term corporate bonds currently, and if I could reduce correlation and preserve principle in this chunk of my taxable account during a market downturn, I'd certainly prefer that, as this would be where I'd draw from in the event of a emergency / crisis after exhausting my emergency fund.

Here's what I'd say.

First, never make big changes to your portfolio rashly.

Second, never make big changes to your portfolio based on what some random dude on the internet (that's me) says.

Third, I'd say your investment horizon isn't the time until you START retirement but rather is the time until the MIDDLE of your retirement. You can think of that as your life expectancy if you'd like (the point at which you are equally likely to die before as after). Your investment horizon is closer to 50 years, I'd guess.

Fourth, there is no right or wrong answer here. Do what makes the most sense to you, within reason.

Fifth, I think it is smart at your age to take on more duration in your bond portfolio. For someone who is 30 to 40 years old, having 50% of your bonds in an intermediate fund like TBM and 50% of your bonds in a long-term Treasury fund would be an entirely reasonable thing to do. The future will not look like the past, but in the past 15 years or so long-term treasuries have had a lower correlation with stocks (thus better diversification) and higher returns than TBM. https://www.portfoliovisualizer.com/ass ... ingDays=60

As a result, an 80/10/10 portfolio of total stocks/total bonds/long treasuries had higher returns and lower volatility compared to 80/20 total stock/total bond. https://www.portfoliovisualizer.com/bac ... tion3_2=10

Like I said, the future won't look exactly like the past but moving half your bonds to long term treasuries isn't a crazy move IMHO.

Good luck. I hope this discussion helps.
"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: Treasury Bonds are the Only Bonds You Need

Post by palaheel » Thu Aug 02, 2018 9:36 pm

I have a naive question: When y'all speak of "Treasury bonds," do you include other government-backed securities? For example, PIMCO GNMA and Government Securites (PDMIX) is available in my 401k. Should I view VFIUX (Vanguard Intermediate Treasuries Admiral) as safer?
Markets crash. Markets recover. Inflation takes your money FOREVER.

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Re: Treasury Bonds are the Only Bonds You Need

Post by AerialWombat » Thu Aug 02, 2018 11:33 pm

whodidntante wrote:
Wed Aug 01, 2018 1:33 am
TBM is heavy on bonds that have a declared or assumed federal backing, so I wouldn't lift a mouse button to get into a Treasury only fund.
Sorry, but I don’t understand this. Could you elaborate on “assumed federal backing”? Thanks!

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Re: Treasury Bonds are the Only Bonds You Need

Post by AerialWombat » Thu Aug 02, 2018 11:38 pm

Portfolio7 wrote:
Thu Aug 02, 2018 1:56 pm
vineviz wrote:
Thu Aug 02, 2018 11:42 am
As a rule, the duration of your bonds should match your investment horizon. If you are more 10 years from retirement, the bulk of your bonds should be intermediate or long-term bonds, not a cash-like pseudo-insurance product like a GIC.
I thought that guidance was meant primarily to prevent investment in bonds with a duration longer than your horizon, not so much the other way around? It works both ways, but when you aren't getting paid for the extra duration risk, why take it on? I'm not a disinterested observer btw, my Fixed Income is largely in a Stable Value fund earning about 3% as well. If I get paid for the duration, I like Intermediate Treasuries, and a skoosh of TIPS. However, I'm not going to claim any bond expertise, I've been slowly trying to build a framework to understand these trade-offs so this is an interesting discussion for me.
You’re in a SVF at 3%? May I ask which one? Thanks!

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Re: Treasury Bonds are the Only Bonds You Need

Post by mongstradamus » Fri Aug 03, 2018 12:28 am

[/quote]

So I officially don't know what to think. I'm a mid-30s investor, 80/20 allocation, 25-30 year horizon, 67% tax-advantaged / 33% taxable. Currently in TBM. Given the aforementioned, should I tilt more / all towards intermediate-term treasuries? TBM is 65% treasuries already if I'm not mistaken.

I hold 20% of my taxable in intermediate-term corporate bonds currently, and if I could reduce correlation and preserve principle in this chunk of my taxable account during a market downturn, I'd certainly prefer that, as this would be where I'd draw from in the event of a emergency / crisis after exhausting my emergency fund.
[/quote]

I am in a similar conundrum about what to do with my Fixed income, originally I had a 50/50 break with 5 year cds and intermediate corp fund. I am starting to think about simplifying it to either intermediate or long term treasury. I have been trying to figure out what the downsides of the longer term treasury other than interest rate risk ?

If the time horizon is long enough say 40 years or so is a long term treasury fund adequate, I was looking at VCLT, vanguard long term treasury, and EDV, vanguards extended duration treasury as possible places to put my fixed income part of my IRA, but I am not sure I am understanding everything.

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Re: Treasury Bonds are the Only Bonds You Need

Post by whodidntante » Fri Aug 03, 2018 1:00 am

AerialWombat wrote:
Thu Aug 02, 2018 11:33 pm
whodidntante wrote:
Wed Aug 01, 2018 1:33 am
TBM is heavy on bonds that have a declared or assumed federal backing, so I wouldn't lift a mouse button to get into a Treasury only fund.
Sorry, but I don’t understand this. Could you elaborate on “assumed federal backing”? Thanks!
Bonds issued by federal agencies could default, but most investors assume the federal government won't allow that to happen. For one thing, it would cost federal agencies more to borrow in the future because investors would have to bear credit risk. Also, mortgage backed securities often have assumed federal backing because they are guaranteed by Fannie, Freddie, or Ginnie Mae. Of those, only Ginnie Mae is properly a government agency, however.

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Re: Treasury Bonds are the Only Bonds You Need

Post by Valuethinker » Fri Aug 03, 2018 2:49 am

fsh71 wrote:
Thu Aug 02, 2018 7:26 pm
Kevin M wrote:
Thu Aug 02, 2018 6:51 pm
vineviz wrote:
Thu Aug 02, 2018 5:16 pm
Noobvestor wrote:
Thu Aug 02, 2018 4:50 pm
vineviz wrote:
Thu Aug 02, 2018 2:50 pm

Picking a duration that is significantly shorter or longer than your investment horizon is an ACTIVE decision to make a bet on the direction of future interest rates (and in a complicated way that view investors understand).
I mean on this logic, any long-term investor should be entirely in long-term bonds, but there is a lot of literature from Boglehead authors suggesting intermediate is better - are you in fact arguing that a younger investor should be in ultra-long (say, 30-year) bonds?
If we're talking about retirement savings, then yes: I'm definitely arguing that younger investors, to the extent they own ANY bonds, should definitely hold long-term bond funds either primarily or exclusively.

For retirement investors in their 20s, Ibbotson recommends that 80% of bond holdings be long-term, and I think that's reasonable. I'd probably recommend a fund like Vanguard Long-Term Treasury ETF (VGLT) or iShares 20+ Year Treasury Bond ETF (TLT) to a young investor with moderate or conservative risk tolerance, and something like Vanguard Extended Duration Trs ETF (EDV) or PIMCO 25+ Year Zero Coupon US Trs ETF (ZROZ) to a young investor with aggressive risk tolerance.

In fact, I'd say that investors under the age of 55 or so should probably have at least half of their retirement bond allocation in long-term bonds or bond funds.
Horrible advice. Way too much inflation risk. If you want to match long term real liabilities with minimal risk, use long term TIPS.

Kevin
So I officially don't know what to think. I'm a mid-30s investor, 80/20 allocation, 25-30 year horizon, 67% tax-advantaged / 33% taxable. Currently in TBM. Given the aforementioned, should I tilt more / all towards intermediate-term treasuries? TBM is 65% treasuries already if I'm not mistaken.

I hold 20% of my taxable in intermediate-term corporate bonds currently, and if I could reduce correlation and preserve principle in this chunk of my taxable account during a market downturn, I'd certainly prefer that, as this would be where I'd draw from in the event of a emergency / crisis after exhausting my emergency fund.
Your key issue is perhaps tax minimization?

By holding US Treasuries in your taxable account, you have lower interest compared to other higher risk bonds and therefore a lower tax bill?

Your alternative would be an appropriate tax free municipal bond fund? Or bank CDs, FDIC insured.

In your tax advantaged accounts, TBM is OK. Switching to intermediate term US Treasuries is preferable from a portfolio construction perspective but it won't make a big difference to your final outcomes. You will endure greater volatility at times of market disruption or significant changes in interest rates.

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Re: Treasury Bonds are the Only Bonds You Need

Post by jginseattle » Fri Aug 03, 2018 3:34 am

palaheel wrote:
Thu Aug 02, 2018 9:36 pm
I have a naive question: When y'all speak of "Treasury bonds," do you include other government-backed securities? For example, PIMCO GNMA and Government Securites (PDMIX) is available in my 401k. Should I view VFIUX (Vanguard Intermediate Treasuries Admiral) as safer?
GNMAs are mortgage-backed securities and subject to prepayment risk, unlike treasury bills, notes and bonds. I would consider them to be more risky, but risk can be subjective.

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Re: Treasury Bonds are the Only Bonds You Need

Post by vineviz » Fri Aug 03, 2018 7:03 am

mongstradamus wrote:
Fri Aug 03, 2018 12:28 am
I have been trying to figure out what the downsides of the longer term treasury other than interest rate risk ?
Check out my post above: there are multiple offsetting aspects to "interest rate risk", and long term treasuries don't have more or less overall just a different balance point between them.

If your investment horizon is long enough, longer term treasuries should be at least a large component of your bond allocation.
"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: Treasury Bonds are the Only Bonds You Need

Post by corn18 » Fri Aug 03, 2018 7:42 am

Threads like these make my head hurt. Whenever I get cornfused, I run back to TSM, TBM and TISM. 60/40 all day long baby!

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Re: Treasury Bonds are the Only Bonds You Need

Post by acegolfer » Fri Aug 03, 2018 8:06 am

vineviz wrote:
Thu Aug 02, 2018 2:50 pm
When the duration is less than the investment horizon, reinvestment risk dominates market price risk. When duration is longer than the investment horizon, market price risk dominates reinvestment risk. When duration EQUALS investment horizon, the two risks perfectly cancel out.
Can you explain "perfectly"?

I understand that as interest rate increases, the market portfolio value will decrease and the reinvestment value will increase. Will they move by the same amount at the duration?

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Re: Treasury Bonds are the Only Bonds You Need

Post by CULater » Fri Aug 03, 2018 8:17 am

According to Vanguard, the Total Bond Market fund has an average duration of about 6 years, while the Intermediate Term Treasury fund has average duration of 5 years. So, the ITT fund has lower term risk than TBM (risk of rising interest rates). Over the period 1987 - present (30 years), an allocation equally divided between U.S. stocks and bonds, rebalanced annually, had a small advantage in total return, volatility, worst drawdown, and risk-adjusted return if the bond portion was intermediate treasuries vs. TBM. This is the case even though the average yield of TBM was higher than for ITT. I don't see any compelling reason to invest in TBM vs. Intermediate Treasuries based on these data so if I had the choice I'd do 5 year treasuries. They'll probably hold up a little better during rising interest rates and also offer better drawdown protection than TBM.
May you have the hindsight to know where you've been, The foresight to know where you're going, And the insight to know when you've gone too far. ~ Irish Blessing

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Re: Treasury Bonds are the Only Bonds You Need

Post by spdoublebass » Fri Aug 03, 2018 8:25 am

Vineviz:

You’re saying long investing horizon 20+ years.... I know what you mean, but typically they say if your investing horizon is twice the bond funds duration you’re ok. For VGLT (Long treasury Etf) the duration is 17.2 years. To me, it seems you could get burned unless you have over 30 years to go.

Another question I have is that it’s easy to say I’ll hold LOng term treasury bonds (fund) now, but you still have to plan how to exit them. You could hold them for 20 year then have them drop. With An IT bond fund, it could still drop but not by as much, also it would have a shorter recovery time. What I’m saying is that with a LT bond fund your duration never shortens. So you’ll always have that 17.2 duration. Yes you can add shorter term bonds to shorten your overall duration. I get that. But if you’re suggestion younger investors go with LT bonds they need to understand that. You have to have an exit strategy. I could never think of a solid exit plan, so I’ve stayed away.

These are just two honest questions I have, I’ve always been tempted to add LT Treas. But haven’t as of yet.
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