Treasury Bonds are the Only Bonds You Need

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Theoretical
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Re: Treasury Bonds are the Only Bonds You Need

Post by Theoretical » Mon Aug 06, 2018 3:27 pm

A market may be priced efficiently, but that doesn’t mean it’s a good investment for the risk that investor is undertaking. Different investors have very different needs.

ThrustVectoring
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Re: Treasury Bonds are the Only Bonds You Need

Post by ThrustVectoring » Mon Aug 06, 2018 3:40 pm

gmaynardkrebs wrote:
Mon Aug 06, 2018 3:06 pm
ThrustVectoring wrote:
Mon Aug 06, 2018 2:37 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?
There's structural and theoretic reasons for long-term bonds to underperform going forward. Nominal liability matching from institutional investors (insurance companies, etc) means that there's a ton of money buying long-term bonds regardless of price. Also, people who have liquidity limits and want a lot of exposure to duration will buy long-term bonds to get the most risk per dollar - this is the "Bet Against Beta" factor, high volatility stocks are overbought for the same reason.

Combined this means that long-term bond holders are not being fairly compensated for the duration risk they're taking. Long term bonds are trash, and you should be shorting them if your investment strategy allows it. I haven't done a full analysis of treasury futures vs 30-year mortgage, but both choices are likely good. The mortgage has you paying more in carry costs but has valuable embedded options, the treasury future is highly liquid and has better funding constraints (you'd get a zero to short duration portfolio by going long shorter-term treasury futures - this has the added advantage of getting margin credited to you for taking offsetting risk).
Markets usually are made up of buyers with differing elasticities of demand, including highly inelastic buyers. Even relatively small, localized markets have been proven to price efficiently under such circumstances. You're arguing that the deepest, most liquid, most widely traded, and most efficient market in the world can't do the same?
There are two trillion dollars worth of treasury bonds out there. Open interest on treasury bond futures is only about $180 billion. So yes, I am arguing that - prices are only correct when the mechanisms to correct the price has enough power to correct it. Houses got overpriced in the run up to 2007/2008, but there was no good way to bet against it so it basically continued unchecked. And the long-term treasury market has enough participation from companies that get fined if they don't meet their long-term nominal obligations that everyone interested in shorting it reaches their position size limits before the correct price is reached.

Insurance companies are still willing to pay CAGR in order to guarantee that they meet their long-term US dollar denominated obligations. You don't have this constraint.
Theoretical wrote:
Mon Aug 06, 2018 3:27 pm
A market may be priced efficiently, but that doesn’t mean it’s a good investment for the risk that investor is undertaking. Different investors have very different needs.
Correct. Insurance companies get fined serious money if they take too much risk that their nominal dollar obligations don't get covered by their investments. It's a structural reason for them to sell this risk, even at a price that is not particularly attractive.
Current portfolio: 60% VTI / 40% VXUS

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gmaynardkrebs
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Re: Treasury Bonds are the Only Bonds You Need

Post by gmaynardkrebs » Mon Aug 06, 2018 3:44 pm

deleted
Last edited by gmaynardkrebs on Tue Aug 07, 2018 8:02 am, edited 1 time in total.

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gmaynardkrebs
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Re: Treasury Bonds are the Only Bonds You Need

Post by gmaynardkrebs » Mon Aug 06, 2018 3:47 pm

ThrustVectoring wrote:
Mon Aug 06, 2018 3:40 pm
''
Correct. Insurance companies get fined serious money if they take too much risk that their nominal dollar obligations don't get covered by their investments. It's a structural reason for them to sell this risk, even at a price that is not particularly attractive.
How much of the marginal demand for long bonds do you think they control? It took the Fed trillions of dollars to change long rates by a small amount, and they owned a printing press.

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Re: Treasury Bonds are the Only Bonds You Need

Post by ThrustVectoring » Mon Aug 06, 2018 3:51 pm

vineviz wrote:
Mon Aug 06, 2018 3:12 pm
gmaynardkrebs wrote:
Mon Aug 06, 2018 3:06 pm
ThrustVectoring wrote:
Mon Aug 06, 2018 2:37 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?
There's structural and theoretic reasons for long-term bonds to underperform going forward. Nominal liability matching from institutional investors (insurance companies, etc) means that there's a ton of money buying long-term bonds regardless of price. Also, people who have liquidity limits and want a lot of exposure to duration will buy long-term bonds to get the most risk per dollar - this is the "Bet Against Beta" factor, high volatility stocks are overbought for the same reason.

Combined this means that long-term bond holders are not being fairly compensated for the duration risk they're taking. Long term bonds are trash, and you should be shorting them if your investment strategy allows it. I haven't done a full analysis of treasury futures vs 30-year mortgage, but both choices are likely good. The mortgage has you paying more in carry costs but has valuable embedded options, the treasury future is highly liquid and has better funding constraints (you'd get a zero to short duration portfolio by going long shorter-term treasury futures - this has the added advantage of getting margin credited to you for taking offsetting risk).
Markets usually are made up of buyers with differing elasticities of demand, including highly inelastic buyers. Even relatively small, localized markets have been proven to price efficiently under such circumstances. You're arguing that the deepest, most liquid, most widely traded, and most efficient market in the world can't do the same?
Exactly.

Price is set by the marginal buyer, so the notion that the long-term treasury holders are not being "properly" compensated for their risk is laughable. Also laughable is the idea that all markets are efficient EXCEPT this one.
Other markets also have this relatively small inefficiency. Market participants with tighter leverage and margin constraints own riskier assets in general, overpay for them slightly, and pay a premium to those who can lever up low-risk assets and short high-risk ones. There's a solid argument for having your stock investment be a levered-up minimum volatility fund.

http://pages.stern.nyu.edu/~lpederse/pa ... stBeta.pdf

That all said, executing these strategies successfully is more difficult to use the correct position sizes and otherwise execute correctly than dumping money into VTSAX. Personally, I'm not invested in this way at this moment.
Current portfolio: 60% VTI / 40% VXUS

Theoretical
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Re: Treasury Bonds are the Only Bonds You Need

Post by Theoretical » Mon Aug 06, 2018 6:03 pm

gmaynardkrebs wrote:
Mon Aug 06, 2018 3:44 pm
Theoretical wrote:
Mon Aug 06, 2018 3:27 pm
. Different investors have very different needs.
Agreed, different hopes, for different dopes. And compared to the market, I admit that I'm a dope No. 1. :wink:
Well what I mean by that is that an insurance company buying for a nominal future liability does not care about the return and certainly does not care about inflation or rising rates. In that respect, they differ from an investor saving for retirement or the like.

It simply means that that kind of demand makes the risk-return profile of all long bonds really bad for most retail investors in a way they are not for an insurance/pension.

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gmaynardkrebs
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Re: Treasury Bonds are the Only Bonds You Need

Post by gmaynardkrebs » Mon Aug 06, 2018 6:11 pm

Theoretical wrote:
Mon Aug 06, 2018 6:03 pm
gmaynardkrebs wrote:
Mon Aug 06, 2018 3:44 pm
Theoretical wrote:
Mon Aug 06, 2018 3:27 pm
. Different investors have very different needs.
Agreed, different hopes, for different dopes. And compared to the market, I admit that I'm a dope No. 1. :wink:
Well what I mean by that is that an insurance company buying for a nominal future liability does not care about the return and certainly does not care about inflation or rising rates. In that respect, they differ from an investor saving for retirement or the like.

It simply means that that kind of demand makes the risk-return profile of all long bonds really bad for most retail investors in a way they are not for an insurance/pension.
Every day of the week, a sizeable number of office workers who are extremely hungry have a highly inelastic demand for lunch. Do you seriously think that raises the market price of lunch?
Last edited by gmaynardkrebs on Mon Aug 06, 2018 10:02 pm, edited 1 time in total.

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Re: Treasury Bonds are the Only Bonds You Need

Post by welderwannabe » Mon Aug 06, 2018 6:22 pm

acegolfer wrote:
Mon Aug 06, 2018 1:32 pm
Practical question. Currently, I invest $1k in TBM per month using Vanguard automatic investment. How do I auto-invest $1k per month in Treasury?
Just invest $1k into Vanguard Intermediate-Term Treasury Index Fund Admiral Shares (VSIGX). This fund has a $10K minimum though, so you would need to start out with $10K. Its expense ration is only .07%.

If you don't have $10K, you can invest in Vanguard's actively managed Treasury fund Vanguard Intermediate-Term Treasury Fund Investor Shares (VFITX). It only has a $3K minimum but has a higher expense ratio at .2%.
I am not an investment professional, but I did stay at a Holiday Inn Express last night.

ThrustVectoring
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Re: Treasury Bonds are the Only Bonds You Need

Post by ThrustVectoring » Mon Aug 06, 2018 6:39 pm

acegolfer wrote:
Mon Aug 06, 2018 1:32 pm
Practical question. Currently, I invest $1k in TBM per month using Vanguard automatic investment. How do I auto-invest $1k per month in Treasury?
Create an account at TreasuryDirect and set up recurring purchases with direct deposit. The instructions are on their website:

https://www.treasurydirect.gov/indiv/pr ... chases.pdf
https://www.treasurydirect.gov/indiv/re ... q.htm#work
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Re: Treasury Bonds are the Only Bonds You Need

Post by acegolfer » Wed Aug 08, 2018 6:31 am

Q on Vanguard Long-Term Treasury Fund Admiral Shares (VUSUX)

https://advisors.vanguard.com/web/c1/fa ... ucts/VUSUX

It says the fund holds 59 bonds and the turnover rate is 102.70%. Why would this fund need to replace 100% of its bond holdings every year? For example, a 20-yr T-bond will become 19-yr T-bond after 1 year and should still be in the fund.

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Re: Treasury Bonds are the Only Bonds You Need

Post by aristotelian » Wed Aug 08, 2018 7:56 am

welderwannabe wrote:
Mon Aug 06, 2018 6:22 pm
acegolfer wrote:
Mon Aug 06, 2018 1:32 pm
Practical question. Currently, I invest $1k in TBM per month using Vanguard automatic investment. How do I auto-invest $1k per month in Treasury?
Just invest $1k into Vanguard Intermediate-Term Treasury Index Fund Admiral Shares (VSIGX). This fund has a $10K minimum though, so you would need to start out with $10K. Its expense ration is only .07%.

If you don't have $10K, you can invest in Vanguard's actively managed Treasury fund Vanguard Intermediate-Term Treasury Fund Investor Shares (VFITX). It only has a $3K minimum but has a higher expense ratio at .2%.
Vanguard has an ETF version, VGIT, with no minimum.

UpperNwGuy
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Re: Treasury Bonds are the Only Bonds You Need

Post by UpperNwGuy » Wed Aug 08, 2018 9:34 am

Fidelity has a Treasury fund with a recently lowered expense ratio. I believe it now has no minimum purchase requirement.

acegolfer
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Re: Treasury Bonds are the Only Bonds You Need

Post by acegolfer » Thu Aug 09, 2018 9:15 am

FYI, market beta are

VBTLX (TBM) = -0.02
VUSUX (long-term treasury) = -0.17
VFITX (intermediate-term treasury) = -0.11

source: marketwatch.com

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Mursili
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Re: Treasury Bonds are the Only Bonds You Need

Post by Mursili » Sun Aug 19, 2018 10:08 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.
This statement seems to be a major sub-current within this thread. If it is true that "the duration of your bonds should match your investment horizon" then are there target date bond funds? Do other target date funds do this? It seems to me that, if it made much of a difference at all, such funds would be available. Maybe they are - I have not been searching for them.
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vineviz
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Re: Treasury Bonds are the Only Bonds You Need

Post by vineviz » Mon Aug 20, 2018 7:06 am

Mursili wrote:
Sun Aug 19, 2018 10:08 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.
This statement seems to be a major sub-current within this thread. If it is true that "the duration of your bonds should match your investment horizon" then are there target date bond funds? Do other target date funds do this? It seems to me that, if it made much of a difference at all, such funds would be available. Maybe they are - I have not been searching for them.
It’s relatively simple to approximately match duration to investment horizon using conventional pooled mutual funds and ETFs. Both Vanguard and Blackrock offer treasury ETFs that target at least 4 different duration ranges, for example.

Also, because US treasuries are presumed to have low default risk and can be purchased with low spreads, many people opt to use individual bonds if they desire to more specifically match duration.

For municipal and corporate bonds, where diversification is important, target maturity bond funds are available
"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 Call_Me_Op » Mon Aug 20, 2018 7:13 am

vineviz wrote:
Thu Aug 02, 2018 8:09 pm
But IMHO TIPS haven’t really proven to be to be the superior inflation hedge that I think people expected.
What makes you say that? TIPS have done exactly what they advertise to do. It's just that inflation has been very low.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

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vineviz
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Re: Treasury Bonds are the Only Bonds You Need

Post by vineviz » Mon Aug 20, 2018 7:44 am

Call_Me_Op wrote:
Mon Aug 20, 2018 7:13 am
vineviz wrote:
Thu Aug 02, 2018 8:09 pm
But IMHO TIPS haven’t really proven to be to be the superior inflation hedge that I think people expected.
What makes you say that? TIPS have done exactly what they advertise to do. It's just that inflation has been very low.
Morningstar published a pretty balanced view of TIPS that goes into more detail than I can.

https://www.morningstar.com/articles/80 ... vered.html

I’m not saying TIPS have been a complete failure, but they’ve been far from a perfect inflation hedge.
"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 » Mon Aug 20, 2018 9:35 am

vineviz wrote:
Mon Aug 20, 2018 7:44 am
Morningstar published a pretty balanced view of TIPS that goes into more detail than I can.
Thanks for the link.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.

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Re: Treasury Bonds are the Only Bonds You Need

Post by Call_Me_Op » Mon Aug 20, 2018 9:41 am

vineviz wrote:
Mon Aug 20, 2018 7:44 am
Call_Me_Op wrote:
Mon Aug 20, 2018 7:13 am
vineviz wrote:
Thu Aug 02, 2018 8:09 pm
But IMHO TIPS haven’t really proven to be to be the superior inflation hedge that I think people expected.
What makes you say that? TIPS have done exactly what they advertise to do. It's just that inflation has been very low.
Morningstar published a pretty balanced view of TIPS that goes into more detail than I can.

https://www.morningstar.com/articles/80 ... vered.html

I’m not saying TIPS have been a complete failure, but they’ve been far from a perfect inflation hedge.
Look at the first figure in that article. It shows TIPS beating inflation by a wide margin over the past 20 years. What more do you want?
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

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Re: Treasury Bonds are the Only Bonds You Need

Post by willthrill81 » Mon Aug 20, 2018 10:00 am

Call_Me_Op wrote:
Mon Aug 20, 2018 9:41 am
vineviz wrote:
Mon Aug 20, 2018 7:44 am
Call_Me_Op wrote:
Mon Aug 20, 2018 7:13 am
vineviz wrote:
Thu Aug 02, 2018 8:09 pm
But IMHO TIPS haven’t really proven to be to be the superior inflation hedge that I think people expected.
What makes you say that? TIPS have done exactly what they advertise to do. It's just that inflation has been very low.
Morningstar published a pretty balanced view of TIPS that goes into more detail than I can.

https://www.morningstar.com/articles/80 ... vered.html

I’m not saying TIPS have been a complete failure, but they’ve been far from a perfect inflation hedge.
Look at the first figure in that article. It shows TIPS beating inflation by a wide margin over the past 20 years. What more do you want?
He may be referring to TIPS funds, like Vanguard's, having returned less than inflation in five of the last 17 years. And 2018 is likely to be the sixth.

I don't think that many folks would be content having to hold TIPS for 20 years in order to get a real return (not that this has been necessary, but if it was, few would go for TIPS I think, which is why few buy EE bonds these days). Historically, they would have an extremely high probability of that occurring with stocks but with far greater upside than what TIPS could likely provide.
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Re: Treasury Bonds are the Only Bonds You Need

Post by Doc » Mon Aug 20, 2018 10:43 am

Call_Me_Op wrote:
Mon Aug 20, 2018 9:41 am
Look at the first figure in that article. It shows TIPS beating inflation by a wide margin over the past 20 years. What more do you want?
TIPS were "sold" as being just like nominal Treasuries except for the inflation protection. Yes they mostly kept up with inflation but so did other market segments and the TIPS did not perform the same as nominal Treasuries in other areas. From my view the big place that TIPS failed is in the liquidity area where they did not perform like nominals.

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Re: Treasury Bonds are the Only Bonds You Need

Post by Call_Me_Op » Mon Aug 20, 2018 11:01 am

Doc wrote:
Mon Aug 20, 2018 10:43 am
Call_Me_Op wrote:
Mon Aug 20, 2018 9:41 am
Look at the first figure in that article. It shows TIPS beating inflation by a wide margin over the past 20 years. What more do you want?
TIPS were "sold" as being just like nominal Treasuries except for the inflation protection. Yes they mostly kept up with inflation but so did other market segments and the TIPS did not perform the same as nominal Treasuries in other areas. From my view the big place that TIPS failed is in the liquidity area where they did not perform like nominals.

Imageimagehosting
I don't know who "sold" them as such. As far as I know, Treasury sells these and has defined the the CPI-linked formula that determines face value, and determines the fixed rate (real component) at time of issue. The secondary market determines the day-day up and downs, as well as determines liquidity. I understand that there was a (possibly isolated) liquidity issue in 2008, but that was the first time these bonds were tested (by an extreme event) and was relatively early in their existence. However, that does not affect the bond values at maturity or their payment rates.

I know you know all of this Doc, so just responding for the broader audience.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

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Re: Treasury Bonds are the Only Bonds You Need

Post by Doc » Mon Aug 20, 2018 11:24 am

Call_Me_Op wrote:
Mon Aug 20, 2018 11:01 am
I don't know who "sold" them as such. As far as I know, Treasury sells these and has defined the the CPI-linked formula that determines face value, and determines the fixed rate (real component) at time of issue. The secondary market determines the day-day up and downs, as well as determines liquidity. I understand that there was a (possibly isolated) liquidity issue in 2008, but that was the first time these bonds were tested (by an extreme event) and was relatively early in their existence. However, that does not affect the bond values at maturity or their payment rates.
The "selling" was due to many "pundits" like Bogleheads for example. The divergence of TIPS returns from nominal Treasuries has occurred at least twice as is shown in the graph and in the previous web referenced article. You are correct that TIPS work as expected if held to maturity in all likelihood. (I don't belive any of the thirties have matured yet. And the twenties are no longer available.)

If you are trying to create a long term real return liability matching portfolio like Grok opines on they may be very good. But for a single bond sector that is the jist of this thread - not so much.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.

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Re: Treasury Bonds are the Only Bonds You Need

Post by vineviz » Mon Aug 20, 2018 1:13 pm

Call_Me_Op wrote:
Mon Aug 20, 2018 9:41 am
vineviz wrote:
Mon Aug 20, 2018 7:44 am
Call_Me_Op wrote:
Mon Aug 20, 2018 7:13 am
vineviz wrote:
Thu Aug 02, 2018 8:09 pm
But IMHO TIPS haven’t really proven to be to be the superior inflation hedge that I think people expected.
What makes you say that? TIPS have done exactly what they advertise to do. It's just that inflation has been very low.
Morningstar published a pretty balanced view of TIPS that goes into more detail than I can.

https://www.morningstar.com/articles/80 ... vered.html

I’m not saying TIPS have been a complete failure, but they’ve been far from a perfect inflation hedge.
Look at the first figure in that article. It shows TIPS beating inflation by a wide margin over the past 20 years. What more do you want?
Any investable asset that has not outpaced inflation over the lad 20 years would have been a complete failure. That’s not the measure of success for a security specifically created as an inflation hedge.
"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 Call_Me_Op » Mon Aug 20, 2018 1:43 pm

vineviz wrote:
Mon Aug 20, 2018 1:13 pm
Call_Me_Op wrote:
Mon Aug 20, 2018 9:41 am
vineviz wrote:
Mon Aug 20, 2018 7:44 am
Call_Me_Op wrote:
Mon Aug 20, 2018 7:13 am
vineviz wrote:
Thu Aug 02, 2018 8:09 pm
But IMHO TIPS haven’t really proven to be to be the superior inflation hedge that I think people expected.
What makes you say that? TIPS have done exactly what they advertise to do. It's just that inflation has been very low.
Morningstar published a pretty balanced view of TIPS that goes into more detail than I can.

https://www.morningstar.com/articles/80 ... vered.html

I’m not saying TIPS have been a complete failure, but they’ve been far from a perfect inflation hedge.
Look at the first figure in that article. It shows TIPS beating inflation by a wide margin over the past 20 years. What more do you want?
Any investable asset that has not outpaced inflation over the lad 20 years would have been a complete failure. That’s not the measure of success for a security specifically created as an inflation hedge.
It's not? What then is the measure of success - that it meets someone's expectations?

TIPS are designed for protection against unexpected inflation. We really have not had that in the recent past, but TIPS do in fact perform that function.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

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CULater
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Re: Treasury Bonds are the Only Bonds You Need

Post by CULater » Mon Aug 20, 2018 2:02 pm

For those contemplating international government bonds, take a look at the price chart for IGOV on stockcharts. This thing looks quite volatile compared to Vanguard's international bond fund (not a government bond fund). Best I can figure, it might be due to fact that Vanguard hedges it's bond fund back to U.S. currency while IGOV does not hedge so you have currency volatility. Vanguard believe that foreign bonds should be hedged to mitigate currency risk and reduce volatility. Looks like they might be right.
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Re: Treasury Bonds are the Only Bonds You Need

Post by willthrill81 » Mon Aug 20, 2018 2:09 pm

CULater wrote:
Mon Aug 20, 2018 2:02 pm
For those contemplating international government bonds, take a look at the price chart for IGOV on stockcharts. This thing looks quite volatile compared to Vanguard's international bond fund (not a government bond fund). Best I can figure, it might be due to fact that Vanguard hedges it's bond fund back to U.S. currency while IGOV does not hedge so you have currency volatility. Vanguard believe that foreign bonds should be hedged to mitigate currency risk and reduce volatility. Looks like they might be right.
I thought that Bogleheads should ignore past performance. :wink:
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Bill Bernstein
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Re: Treasury Bonds are the Only Bonds You Need

Post by Bill Bernstein » Mon Aug 20, 2018 2:18 pm

It all depends on how "hands on" you are. If you're a "hands off" kind of person, there's nothing wrong with Total Bond Market.

If you're "hands on," then a hand-made treasury ladder is optimal for rebalancing/buy-at-the-fire sale/emergency and, best of all, free if you have the requisite brokerage minimum at V, Fido, etc., or don't mind the hassle of T-direct.

TIPS have a completely different purpose, which is defeasing your spending needs at maturity. As others on the thread have pointed out, they, along with corporates and, to a lesser extent, munis, may take it in the shorts just when you need them most.
Bill

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Re: Treasury Bonds are the Only Bonds You Need

Post by ThrustVectoring » Mon Aug 20, 2018 2:54 pm

acegolfer wrote:
Wed Aug 08, 2018 6:31 am
Q on Vanguard Long-Term Treasury Fund Admiral Shares (VUSUX)

https://advisors.vanguard.com/web/c1/fa ... ucts/VUSUX

It says the fund holds 59 bonds and the turnover rate is 102.70%. Why would this fund need to replace 100% of its bond holdings every year? For example, a 20-yr T-bond will become 19-yr T-bond after 1 year and should still be in the fund.
"On the run" bonds are far more liquid than "off the run" ones that were issued many years ago. They need to sell some bonds at some point before maturity and invest the proceeds in new ones, and the best time to do that is near the time they were issued. How much they sell and replace depends on the specifics of market liquidity, the fund's duration and target duration, inflow/outflow, etc.
Current portfolio: 60% VTI / 40% VXUS

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Re: Treasury Bonds are the Only Bonds You Need

Post by Kevin M » Mon Aug 20, 2018 4:12 pm

Mursili wrote:
Sun Aug 19, 2018 10:08 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.
This statement seems to be a major sub-current within this thread.
Really? Without re-reading the entire thread, I think this is a minority opinion--at least with respect to nominal bonds. Most Bogleheads use short-term or intermediate-term bonds or bond funds for their fixed income, regardless of their investment horizon. Some use long-term TIPS as part of a liability matching strategy, but we don't see many posts advocating using long-term nominal bonds, regardless of investment horizon--too much inflation risk for long investment horizons.

Larry Swedroe did co-author a paper suggesting that long-term Treasuries (nominal) could be suitable for portfolios with very high equity allocations, but I haven't seen many posts by Bogleheads who are actually doing this. And Larry seems to prefer using shorter-term fixed income in the "Larry Portfolio", which uses mostly small-cap value stocks for the equity portion of the portfolio.

Another subset who might by holding long-term nominal Treasuries are those who use something like a permanent portfolio, but then they also hold an equal amount of cash or short-term Treasuries, so it has nothing to do with investment horizon.
If it is true that "the duration of your bonds should match your investment horizon" then are there target date bond funds? Do other target date funds do this?
Vanguard target retirement funds don't do it, because it's not true. Vanguard uses total bond funds (US and international) in its target retirement funds, as well as in its LifeStrategy balanced funds. These bond funds are intermediate-term funds, and are used even in the TR funds with the longest target retirement date. In the shorter-dated funds, they also use a short-term TIPS fund.

There are target date bond funds though, in which the bonds mature by a certain date, although I've never looked at them.

Kevin
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Re: Treasury Bonds are the Only Bonds You Need

Post by fortfun » Mon Aug 20, 2018 4:14 pm

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.
Does Fidelity have such a fund?

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Re: Treasury Bonds are the Only Bonds You Need

Post by munemaker » Mon Aug 20, 2018 4:26 pm

Kevin M wrote:
Mon Aug 20, 2018 4:12 pm
Mursili wrote:
Sun Aug 19, 2018 10:08 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.
This statement seems to be a major sub-current within this thread.
Really? Without re-reading the entire thread, I think this is a minority opinion--at least with respect to nominal bonds. Most Bogleheads use short-term or intermediate-term bonds or bond funds for their fixed income, regardless of their investment horizon. Some use long-term TIPS as part of a liability matching strategy, but we don't see many posts advocating using long-term nominal bonds, regardless of investment horizon--too much inflation risk for long investment horizons.

Larry Swedroe did co-author a paper suggesting that long-term Treasuries (nominal) could be suitable for portfolios with very high equity allocations, but I haven't seen many posts by Bogleheads who are actually doing this. And Larry seems to prefer using shorter-term fixed income in the "Larry Portfolio", which uses mostly small-cap value stocks for the equity portion of the portfolio.

Another subset who might by holding long-term nominal Treasuries are those who use something like a permanent portfolio, but then they also hold an equal amount of cash or short-term Treasuries, so it has nothing to do with investment horizon.
If it is true that "the duration of your bonds should match your investment horizon" then are there target date bond funds? Do other target date funds do this?
Vanguard target retirement funds don't do it, because it's not true. Vanguard uses total bond funds (US and international) in its target retirement funds, as well as in its LifeStrategy balanced funds. These bond funds are intermediate-term funds, and are used even in the TR funds with the longest target retirement date. In the shorter-dated funds, they also use a short-term TIPS fund.

There are target date bond funds though, in which the bonds mature by a certain date, although I've never looked at them.

Kevin
Currently I see these rates for Treasuries on the Vanguard site:
1 year - 2.44%
2 year - 2.59%
3 year - 2.65%
5 year - 2.72%
7 year - 2.78%
10 year - 2.82%
20 year - 2.95%
30 year - 2.99%

DO people really mean they would go with long term treasuries. Would anyone go out 10, 20 or 30 years with these rates? No matter what point I was at in my life, I wouldn't be locking in for 10, 20, 30 years for under 3%. You can get 2.05% on a MMF and 3.00% on a 3 year CD.

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Re: Treasury Bonds are the Only Bonds You Need

Post by Doc » Mon Aug 20, 2018 4:42 pm

Kevin wrote:Larry Swedroe did co-author a paper suggesting that long-term Treasuries (nominal) could be suitable for portfolios with very high equity allocations, but I haven't seen many posts by Bogleheads who are actually doing this.
munemaker wrote:
Mon Aug 20, 2018 4:26 pm
DO people really mean they would go with long term treasuries. Would anyone go out 10, 20 or 30 years with these rates? No matter what point I was at in my life, I wouldn't be locking in for 10, 20, 30 years for under 3%. You can get 2.05% on a MMF and 3.00% on a 3 year CD.
Yes people really mean they would go with long Treasuries "with very high equity allocations". If you have 80% equities the purpose of the fixed income is to give you the best negative correlation with those equites not to maximize the return on your FI. What difference does it make for your overall portfolio if that that 20% FI returns 2% or 3%? Answer, too small a difference in the overall portfolio to lose any sleep over.
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Re: Treasury Bonds are the Only Bonds You Need

Post by willthrill81 » Mon Aug 20, 2018 4:42 pm

fortfun wrote:
Mon Aug 20, 2018 4:14 pm
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.
Does Fidelity have such a fund?
I have no idea. To my knowledge, the SVF I have with TIAA has been one of the best out there.
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Re: Treasury Bonds are the Only Bonds You Need

Post by vineviz » Mon Aug 20, 2018 4:46 pm

Kevin M wrote:
Mon Aug 20, 2018 4:12 pm
Mursili wrote:
Sun Aug 19, 2018 10:08 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.
This statement seems to be a major sub-current within this thread.
Really? Without re-reading the entire thread, I think this is a minority opinion--at least with respect to nominal bonds. Most Bogleheads use short-term or intermediate-term bonds or bond funds for their fixed income, regardless of their investment horizon. Some use long-term TIPS as part of a liability matching strategy, but we don't see many posts advocating using long-term nominal bonds, regardless of investment horizon--too much inflation risk for long investment horizons.

Larry Swedroe did co-author a paper suggesting that long-term Treasuries (nominal) could be suitable for portfolios with very high equity allocations, but I haven't seen many posts by Bogleheads who are actually doing this. And Larry seems to prefer using shorter-term fixed income in the "Larry Portfolio", which uses mostly small-cap value stocks for the equity portion of the portfolio.

Another subset who might by holding long-term nominal Treasuries are those who use something like a permanent portfolio, but then they also hold an equal amount of cash or short-term Treasuries, so it has nothing to do with investment horizon.
If it is true that "the duration of your bonds should match your investment horizon" then are there target date bond funds? Do other target date funds do this?
Vanguard target retirement funds don't do it, because it's not true. Vanguard uses total bond funds (US and international) in its target retirement funds, as well as in its LifeStrategy balanced funds. These bond funds are intermediate-term funds, and are used even in the TR funds with the longest target retirement date. In the shorter-dated funds, they also use a short-term TIPS fund.

There are target date bond funds though, in which the bonds mature by a certain date, although I've never looked at them.

Kevin
There are firms with asset allocation expertise besides Vanguard, many of whom realize the wisdom of matching duration.

The concept of matching bond duration to investment horizon is literally in the fixed income text books. Why Vanguard fails to do this is anyone’s guess.
"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 spdoublebass » Mon Aug 20, 2018 5:23 pm

vineviz wrote:
Mon Aug 20, 2018 4:46 pm
Kevin M wrote:
Mon Aug 20, 2018 4:12 pm
Mursili wrote:
Sun Aug 19, 2018 10:08 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.
This statement seems to be a major sub-current within this thread.
Really? Without re-reading the entire thread, I think this is a minority opinion--at least with respect to nominal bonds. Most Bogleheads use short-term or intermediate-term bonds or bond funds for their fixed income, regardless of their investment horizon. Some use long-term TIPS as part of a liability matching strategy, but we don't see many posts advocating using long-term nominal bonds, regardless of investment horizon--too much inflation risk for long investment horizons.

Larry Swedroe did co-author a paper suggesting that long-term Treasuries (nominal) could be suitable for portfolios with very high equity allocations, but I haven't seen many posts by Bogleheads who are actually doing this. And Larry seems to prefer using shorter-term fixed income in the "Larry Portfolio", which uses mostly small-cap value stocks for the equity portion of the portfolio.

Another subset who might by holding long-term nominal Treasuries are those who use something like a permanent portfolio, but then they also hold an equal amount of cash or short-term Treasuries, so it has nothing to do with investment horizon.
If it is true that "the duration of your bonds should match your investment horizon" then are there target date bond funds? Do other target date funds do this?
Vanguard target retirement funds don't do it, because it's not true. Vanguard uses total bond funds (US and international) in its target retirement funds, as well as in its LifeStrategy balanced funds. These bond funds are intermediate-term funds, and are used even in the TR funds with the longest target retirement date. In the shorter-dated funds, they also use a short-term TIPS fund.

There are target date bond funds though, in which the bonds mature by a certain date, although I've never looked at them.

Kevin
There are firms with asset allocation expertise besides Vanguard, many of whom realize the wisdom of matching duration.

The concept of matching bond duration to investment horizon is literally in the fixed income text books. Why Vanguard fails to do this is anyone’s guess.
I'm only writing here because I'm curious. I've followed along on this conversation because I'm interested but want to state up front I am a novice and not trying to come across otherwise.

I've read many times on this forum "the duration of your bonds should match your investment horizon".......but I've also read that that 2X the duration should match your investment horizon.

If a bond fund can drop my the duration amount with a single rate increase, yes if you hold to duration you can make up the difference. However, there is no guarantee that a second or third rate increase won't happen.

This is where I always get lost. Being 20 years out from retirement, I would have no problem holding a long term fund, I wouldn't care about the volatility. I would care if it keep going down and never recouping.

I also wouldn't know when to switch out of the fund, because the duration is constant and my investment horizon is not. So If I'm holding a bond fund with a 15 year duration, and it takes a hit, am I supposed to sell it for a shorter duration bond fund anyway when I'm at 14 years to retirement?

I think I understand the theory behind matching duration, but it only makes sense to me from an individual bond perspective. Not a bond fund with a constant duration.

However, there are the iShares term bond etf's which are pretty neat. There are one that every bond matures in Dec 2027 for example. This makes sense to me because the duration is not constant.

Maybe I'm missing something I don't know. Again, I only chimed in because I am interested and am in no way an expert.
I'm trying to think, but nothing happens

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Re: Treasury Bonds are the Only Bonds You Need

Post by munemaker » Mon Aug 20, 2018 5:25 pm

Doc wrote:
Mon Aug 20, 2018 4:42 pm
Kevin wrote:Larry Swedroe did co-author a paper suggesting that long-term Treasuries (nominal) could be suitable for portfolios with very high equity allocations, but I haven't seen many posts by Bogleheads who are actually doing this.
munemaker wrote:
Mon Aug 20, 2018 4:26 pm
DO people really mean they would go with long term treasuries. Would anyone go out 10, 20 or 30 years with these rates? No matter what point I was at in my life, I wouldn't be locking in for 10, 20, 30 years for under 3%. You can get 2.05% on a MMF and 3.00% on a 3 year CD.
Yes people really mean they would go with long Treasuries "with very high equity allocations". If you have 80% equities the purpose of the fixed income is to give you the best negative correlation with those equites not to maximize the return on your FI. What difference does it make for your overall portfolio if that that 20% FI returns 2% or 3%? Answer, too small a difference in the overall portfolio to lose any sleep over.
Thanks Doc. Now I get it. Not for me, but I do understand the concept.

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Re: Treasury Bonds are the Only Bonds You Need

Post by JackoC » Mon Aug 20, 2018 5:47 pm

willthrill81 wrote:
Mon Aug 20, 2018 10:00 am

He may be referring to TIPS funds, like Vanguard's, having returned less than inflation in five of the last 17 years. And 2018 is likely to be the sixth.

I don't think that many folks would be content having to hold TIPS for 20 years in order to get a real return (not that this has been necessary, but if it was, few would go for TIPS I think, which is why few buy EE bonds these days). Historically, they would have an extremely high probability of that occurring with stocks but with far greater upside than what TIPS could likely provide.
Surely referring to funds. Individual TIPS issues which have matured definitely delivered the promised returns, inflation plus in the great majority of cases where the market yield at purchase was inflation plus. Although, for period in 2012-13 market real yields were significantly below zero out to 10 yrs. Of course then it wasn't/won't be anything unexpected that the hold to maturity return of those was/will be less than inflation.

And when referring to funds in case of nominal bonds that's a trap for the bad kind of performance chasing. If there's another bull market in nominal rates anything like the last 30 or so years it will be a horrible time for investors if they have anything but nominal bonds (especially stocks). It's very unlikely. It's generally even more unwise to judge fixed income instruments on past performance than stocks.

TIPS have not performed well on a mark to market basis in times of liquidity crisis. But the only govt risk instruments where this matters are ones the investor is actually going to sell in such times. Otherwise it's psychological. Same goes for bank CD's which were the best deals can be a distinctly superior investment to nominal treasuries on a hold to maturity basis: right now the best direct 5yr CD is .75% above the treasury curve but I bought one a bit past 5yrs some months ago 1.29% above the T curve, for virtually the same credit risk (nowhere remotely near 1% of difference anyway), and with a put option (to break the CD and invest in another at a higher enough rate to overcome the interest penalty if rates skyrocket). That's a big premium, mainly for illiquidity. But you don't need absolute liquidity for *every* piece of the FI portfolio, or most people don't.

For securities the investor will buy and hold there is serious competition in the govt risk space to nominal treasuries. Whether corporate credit makes any sense is an open question (answer might be: 'for short maturities, high grade, yes'). The attractiveness of muni credit depends on individual's tax rate and if taxable accounts are even being discussed. But IMO the main muni problem is that credit will deteriorate in (if there is) a future stock market debacle because pension promises depend on equity-heavy pension fund returns. The pension funding issue isn't reflected in past results so another case of unwise to analyze fixed income just based on past results. I have some muni's, but this is not a far fetched concern IMO.

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Re: Treasury Bonds are the Only Bonds You Need

Post by Doc » Mon Aug 20, 2018 6:36 pm

JackoC wrote:
Mon Aug 20, 2018 5:47 pm
Surely referring to funds. Individual TIPS issues which have matured definitely delivered the promised returns, inflation plus in the great majority of cases where the market yield at purchase was inflation plus.
Yes they may have returned the promised returns. But that promise was the coupon plus the actual inflation rate. That does not mean that you didn't pay some kind of insurance premium for protection against unexpected inflation. Since we didn't have unexpected inflation recently that insurance premium may have been too high. :?:
JackoC wrote:
Mon Aug 20, 2018 5:47 pm
But the only govt risk instruments where this matters are ones the investor is actually going to sell in such times.
Right but the Boglehead mantra is rebalance. How many of us don't rebalance when the stock market drops by 20% in a few days. Bye bye Bogleheads birdy. :annoyed
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Re: Treasury Bonds are the Only Bonds You Need

Post by Kevin M » Mon Aug 20, 2018 7:07 pm

vineviz wrote:
Mon Aug 20, 2018 4:46 pm
There are firms with asset allocation expertise besides Vanguard, many of whom realize the wisdom of matching duration.
Sure, like banks, insurance companies, and pension funds, all of whom have long-term nominal liabilities, and for whom duration matching the long-term nominal liabilities with long term nominal bonds makes perfect sense.
The concept of matching bond duration to investment horizon is literally in the fixed income text books.
Sure it is, and the context is related to matching the duration of nominal assets to the duration of nominal liabilities in a fixed-income portfolio, typically for institutions, not people. I have an investment textbook in front of me, and all the examples used for duration matching are for banks, pension companies, and insurance companies who must immunize themselves against interest-rate risk by matching the duration of assets to liabilities.
Why Vanguard fails to do this is anyone’s guess.
No, it's obvious. The target retirement and LifeStrategy funds are for people, who typically have long-term real liabilities; they are not for institutions, with long-term nominal liabilities. The funds rely on the equity portion of the portfolio for the long-term real growth, while using the fixed-income portion to reduce portfolio risk.

We can debate the merits of using short-term, intermediate-term, or long-term bonds to adjust portfolio risk, but it this has nothing to do with investment horizon.

Kevin
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Re: Treasury Bonds are the Only Bonds You Need

Post by Kevin M » Mon Aug 20, 2018 7:19 pm

Doc wrote:
Mon Aug 20, 2018 4:42 pm
Yes people really mean they would go with long Treasuries "with very high equity allocations". If you have 80% equities the purpose of the fixed income is to give you the best negative correlation with those equites not to maximize the return on your FI. What difference does it make for your overall portfolio if that that 20% FI returns 2% or 3%? Answer, too small a difference in the overall portfolio to lose any sleep over.
First, how many Bogleheads do you think actually do this? I bet not many. I bet a lot more go with a 3-fund portfolio using TBM for the bonds, or even just use a target retirement fund that uses intermediate-term bonds, even if they are at 90% stocks.

My adult children have 80/20 portfolios, and I sure don't have them using long-term Treasuries for the fixed-income portion. I doubt there are even options to do so in their 401k plans. In an extended family member's 401k, the only sensible, low-cost choice for bonds is the LifeStrategy Income fund, which is 80% total market bonds (US and international). The only other options are high-cost, intermediate-term nominal or inflation-hedged bond funds.

Second, although we sometimes see negative correlation between stocks and long-term Treasuries during stock downturns, as we did in late 2008, that's not always the case. The biggest risk is a period like the 1970s where inflation kills both stocks and bonds, and it hurts long-term bonds a lot more than short-term bonds.

Kevin
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Re: Treasury Bonds are the Only Bonds You Need

Post by patrick013 » Mon Aug 20, 2018 7:22 pm

vineviz wrote:
Mon Aug 20, 2018 4:46 pm
Kevin M wrote:
Mon Aug 20, 2018 4:12 pm
Mursili wrote:
Sun Aug 19, 2018 10:08 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.
This statement seems to be a major sub-current within this thread.
Really? Without re-reading the entire thread, I think this is a minority opinion--at least with respect to nominal bonds. Most Bogleheads use short-term or intermediate-term bonds or bond funds for their fixed income, regardless of their investment horizon. Some use long-term TIPS as part of a liability matching strategy, but we don't see many posts advocating using long-term nominal bonds, regardless of investment horizon--too much inflation risk for long investment horizons.

Larry Swedroe did co-author a paper suggesting that long-term Treasuries (nominal) could be suitable for portfolios with very high equity allocations, but I haven't seen many posts by Bogleheads who are actually doing this. And Larry seems to prefer using shorter-term fixed income in the "Larry Portfolio", which uses mostly small-cap value stocks for the equity portion of the portfolio.

Another subset who might by holding long-term nominal Treasuries are those who use something like a permanent portfolio, but then they also hold an equal amount of cash or short-term Treasuries, so it has nothing to do with investment horizon.
If it is true that "the duration of your bonds should match your investment horizon" then are there target date bond funds? Do other target date funds do this?
Vanguard target retirement funds don't do it, because it's not true. Vanguard uses total bond funds (US and international) in its target retirement funds, as well as in its LifeStrategy balanced funds. These bond funds are intermediate-term funds, and are used even in the TR funds with the longest target retirement date. In the shorter-dated funds, they also use a short-term TIPS fund.

There are target date bond funds though, in which the bonds mature by a certain date, although I've never looked at them.

Kevin
There are firms with asset allocation expertise besides Vanguard, many of whom realize the wisdom of matching duration.

The concept of matching bond duration to investment horizon is literally in the fixed income text books. Why Vanguard fails to do this is anyone’s guess.
When bonds are expected to have higher interest rates lower bond
maturities, and when bonds are expected to have lower interest
rates lengthen bond maturities. The trend will be your friend.

There's a handful of things in Finance I could live without and duration
is one of them. Just another dumb old concept. I know of no textbook
that says I should buy a 30 year bond today at 3% for any reason. Duration
is just window dressing IMO. You can achieve the same results target
dating maturities or weighting maturities and YTM's on a bond portfolio
for specific targets.

Wisdom? hardly if long term is static and advised.

For what we're trying to do in a rising rate trend, apparently a secular trend,
a good old fashioned CD ladder is working, then a sizable investment in ticker
BLV when rates peak and start to go down.

Or just stay in an IT bond fund with average returns.
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 » Mon Aug 20, 2018 7:30 pm

Kevin M wrote:
Mon Aug 20, 2018 7:07 pm
Why Vanguard fails to do this is anyone’s guess.
No, it's obvious. The target retirement and LifeStrategy funds are for people, who typically have long-term real liabilities; they are not for institutions, with long-term nominal liabilities. The funds rely on the equity portion of the portfolio for the long-term real growth, while using the fixed-income portion to reduce portfolio risk.
This is equal part conjecture and opinion. I’m not aware of any attempt by Vanguard to explain WHY they’ve constructed their target date portfolios using a total bond approach instead of a more sensible immunization approach.

I, too, could guess at their reasons but I don’t know what benefit that would present.

As for using the ”using the fixed-income portion to reduce portfolio risk“, that approach when taken to its logical conclusion would lead to owning no bonds at all. I know it’s a common belief among investors about the construction of their portfolios, but that doesn’t make it smart or even internally logical.
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Re: Treasury Bonds are the Only Bonds You Need

Post by Noobvestor » Mon Aug 20, 2018 8:08 pm

Whenever Treasury duration comes up, I like to link Robert T's classic thread on the 'Diversifying Power of Longer Term US Treasuries'

viewtopic.php?t=2409

Notably, long-term Treasuries do well in most crises. However, intermediate is arguably the best balance for when they don't. /2 cents
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Re: Treasury Bonds are the Only Bonds You Need

Post by Darwin » Mon Aug 20, 2018 8:11 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 ?
The TSP G fund, in my case. One of the perks of Federal service.
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Re: Treasury Bonds are the Only Bonds You Need

Post by Kevin M » Mon Aug 20, 2018 8:12 pm

vineviz wrote:
Mon Aug 20, 2018 7:30 pm
This is equal part conjecture and opinion. I’m not aware of any attempt by Vanguard to explain WHY they’ve constructed their target date portfolios using a total bond approach instead of a more sensible immunization approach.

I, too, could guess at their reasons but I don’t know what benefit that would present.
First, the only one I hear arguing that using an immunization approach with nominal bonds for people with real liabilities is you. That's not much evidence for calling it "more sensible". Not only is it not more sensible, it's completely irrational, and not supported by any investment theory I've ever studied. It's not even immunization at all if you are talking about nominal bonds and real liabilities. You're simply using the term incorrectly.

By contrast, there is wide and theoretically justified support for people with real liabilities using TIPS (real bonds) with maturities or durations matching those liabilities. Matching maturity or duration to investment horizon using TIPS for people with real liabilities makes perfect sense; not so for nominal bonds.

Second, although it doesn't go into a lot of depth, Vanguard does discuss it's approach to constructing target date funds in this paper: Vanguard's approach to target-date funds. From that paper:
Similar to our market-cap-weighted methodology for
both U.S. and non-U.S. equities, Vanguard follows a
market-proportional approach in the U.S. nominal
investment-grade bond market to match the market’s
risk-and-return characteristics as an investor approaches
retirement. We focus on nominal U.S. investment-grade
bonds to provide diversification to the primary risk of
a sizable equity exposure.
By contrast, we can see that Vanguard understands the concept of liability matching quite well by looking at their paper on institutional portfolio construction. In discussing different institutional portfolio objectives, one category is:
Liability-driven. These investors are focused on
maintaining the portfolio’s ability to meet specific
future obligations. Their defining characteristics include:
• A focus on the portfolio’s “claims-paying” ability.
A time horizon consistent with the nature of the
investment obligation.

• A desire to manage portfolio performance relative
to a liability benchmark.
A degree of certainty about their portfolio liability’s
amount and timing
.
(Underlines mine, for emphasis)

Even though I'm retired, my investment horizon could still be 20-30 years, and it would be ridiculous, even dangerous, for me to attempt to match my real liabilities 20-30 years from now with 20-30 year nominal Treasuries. The inflation risk would be huge. It's not only important to match the durations of the assets and liabilities, but also the units of exchange. The relevant unit of exchange for me is purchasing power, not nominal dollars.

Ignoring the units of exchange is a key flaw in your argument, and a very dangerous one.

Kevin
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vineviz
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Re: Treasury Bonds are the Only Bonds You Need

Post by vineviz » Mon Aug 20, 2018 8:34 pm

Kevin M wrote:
Mon Aug 20, 2018 8:12 pm
vineviz wrote:
Mon Aug 20, 2018 7:30 pm
This is equal part conjecture and opinion. I’m not aware of any attempt by Vanguard to explain WHY they’ve constructed their target date portfolios using a total bond approach instead of a more sensible immunization approach.

I, too, could guess at their reasons but I don’t know what benefit that would present.
First, the only one I hear arguing that using an immunization approach with nominal bonds for people with real liabilities is you. That's not much evidence for calling it "more sensible". Not only is it not more sensible, it's completely irrational, and not supported by any investment theory I've ever studied. It's not even immunization at all if you are talking about nominal bonds and real liabilities. You're simply using the term incorrectly.
Quite the opposite, in fact. I’m not the one who is confusing immunization with liability matching, nor do I use those phrases interchangeably since they are different approaches to bond portfolio management.

I don’t happen to think that liability matching is a reasonable approach for most individual investors, so I’m not in the habit of recommending either nominal treasuries or TIPS to such people.

Even if I WERE talking about liability matching, the principle of matching duration to the investment horizon would apply no matter what type of bonds you were using .
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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patrick013
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Re: Treasury Bonds are the Only Bonds You Need

Post by patrick013 » Mon Aug 20, 2018 8:44 pm

More window dressing. Returns don't increase after a certain point
but inflation certainly keeps going slowly upward.

So.......
age in bonds, buy-and-hold, 10 year business cycle

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Kevin M
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Re: Treasury Bonds are the Only Bonds You Need

Post by Kevin M » Mon Aug 20, 2018 9:12 pm

vineviz wrote:
Mon Aug 20, 2018 8:34 pm
Quite the opposite, in fact. I’m not the one who is confusing immunization with liability matching, nor do I use those phrases interchangeably since they are different approaches to bond portfolio management.
From Investments, by Bodie, Kane and Marcus:
The idea behind immunization is that the duration-matched assets and liabilities let the asset portfolio meet the firm's obligations despite interest rate movements.
(underline mine)

The firm's obligations are its liabilities. Therefore, the purpose of immunization is exactly for liability matching. It's not the only way, but it's one way. Immunization uses duration matching to balance price risk and reinvestment risk.

Another way to match the liability is to use zero-coupon bonds, in which case there is no reinvestment risk, so one can simply match the maturity of the bond to the timing of the liability (and of course duration = maturity for a zero, so it's still duration matched).

You continue to make statements without citing any authoritative references to back them up, and without providing any rational explanations to support them.
Even if I WERE talking about liability matching, the principle of matching to the investment horizon would apply no matter what type of bonds you were using .
You keep saying things like this, but presenting no rational explanations to defend them. How in the world does matching the investment horizon of a nominal bond to that of a real liability "apply"? Again, you are completely ignoring the unit of exchange, and have not addressed that issue.

So please explain to us why matching the maturity or duration of a bond to the investment horizon makes sense if you're not talking about liability matching, and are ignoring the units of exchange?

Kevin
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fortfun
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Re: Treasury Bonds are the Only Bonds You Need

Post by fortfun » Mon Aug 20, 2018 9:38 pm

willthrill81 wrote:
Mon Aug 20, 2018 4:42 pm
fortfun wrote:
Mon Aug 20, 2018 4:14 pm
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.
Does Fidelity have such a fund?
I have no idea. To my knowledge, the SVF I have with TIAA has been one of the best out there.
My wife has access to TIAA. What are the fees on that SVF?

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