First 20% of bonds in long-term Treasuries

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columbia
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Re: First 20% of bonds in long-term Treasuries

Post by columbia »

oldzey wrote: Sun Sep 01, 2019 1:12 pm
willthrill81 wrote: Sat Aug 10, 2019 4:23 pm
oldzey wrote: Sat Aug 10, 2019 4:19 pm Fortunately, I have access to TIAA Traditional, which I use for my entire fixed income allocation (20% of my portfolio).
The liquid version of TIAA Trad. is still very appealing, but the 'illiquid' version I have access to pays the same 3%, so there's very little reason to own it instead other than the possibility of higher rates in the future due to the 'vintage' issue.
Yes, TIAA Trad is currently at the minimum (3%) accumulation interest rate for both the liquid and illiquid versions. However, since it represents the portion of my portfolio that I cannot afford to lose, I'll gladly take my 3%, with the option to eventually annuitize some or all of it. It also helps me contain my risk-taking to the equity side of my portfolio.
TIAA is far from transparent, but yes there is a “time in the fund” factor* upon opting for the annuity.

*That’s a proper use of the word factor. ;)
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Re: First 20% of bonds in long-term Treasuries

Post by Beensabu »

zonto wrote: Thu Aug 08, 2019 5:38 pm
HawkeyePierce wrote: Thu Aug 08, 2019 5:28 pm . . . Is anyone aware of any good papers or books on this topic?
Vanguard published in June 2019 a white paper titled Commodities and short-term TIPS: how each combats unexpected inflation.
Also, this Vanguard paper is from 2011 and discusses the historical correlation of both expected inflation and unexpected inflation with the returns of various asset classes: Hedging Inflation: The Role of Expectations.
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Re: First 20% of bonds in long-term Treasuries

Post by pascalwager »

stlutz wrote: Sun Sep 01, 2019 12:46 pm A few years back there was a poster here, jerry_lee who pretty much took the exact opposite side of the coin from vineviz, pointing out that the post-1999 timeframe has been very unique and should be considered an anomaly.

e.g.

viewtopic.php?t=99591#p1440660
viewtopic.php?f=10&t=103247#p1498364

Same data; different adjectives.

As for "modern financial knowledge", a bias toward long-term bonds has decidedly not been conventional wisdom. I I generally think of Antti Ilmanen's book, "Expected Returns" as being a representation of "modern" conventional knowledge. That book has a strong bias in favor of short-term bonds because the additional term risk in long-term bonds is not adequately compensated.

The bias toward short/intermediate bonds might be wrong, but it was not something manufactured on Bogleheads.
Jerry_lee's basic recommendation for Vanguard investor's was the Short-Term Bond Index Fund. For DFA investor's, the Five-Year Global Fund (variable maturity, presently 2.91 years duration).
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Re: First 20% of bonds in long-term Treasuries

Post by stlutz »

vineviz wrote: Sun Sep 01, 2019 12:52 pm
I think it should be very apparent that the performance of LTTs relative to t-bills has varied considerably depending on the policy regime. The 1951-1979 era not only was period in which the returns of LTTs was lower: volatility, skewness, and excess kurtosis were also much lower. We rarely observe such large swings in the basic characteristics of other securities over time, which I why I think treasury data pre-1979 should only run under a caution flag.
I think what you've laid out can be approached in a couple of ways by an investor who is operating in the forward direction.

In our lifetimes, the people who have profited the most were those who locked in high rates in the early 80s and held on and profited through this regime change. Obviously not everybody did that (else rates wouldn't have been so high). But you can only get that benefit once. We aren't going to change from a pre-Volcker to a post-Volcker world again.

Now everybody is investing based on the understanding that inflation is under control in developed economies. The bigger concern right now is mild deflation and whether policy makers can prevent that.

But what if the regime changes again? It has multiple times in the past and likely will in the future. I don't think we've reached the end of history w.r.t. monetary policy. The question is, when that happens how long will it take me to figure out that it has happened? Based on the charts vineviz and nisiprius have discussed, it seems it took the market about 20 years to figure out how fundamentally that Volcker had changed things. Assuming I'm no smarter or dumber than the market, I'll assume it would take me about the same amount of time to figure out that the next fundamental change has occurred. For a human investor, that's a long time.

The second question is, if a regime change happens, could that flip the switch in favor of short-term bonds again? Possibly. Looking at current interest rates, the deeper risk seems to be that the market is not considering the possibility of higher and unpredictable inflation in the future. For people who spend money in real dollars, that is a concern.

I agree with vineviz on the fundamental point that if one doesn't know something the market doesn't know, that balancing out reinvestment risk and interest-rate risk is prudent. That generally means using longer-term bonds than most bogleheads use.

From a risk management perspective, however, the bigger risk for an investor today is that of higher inflation in the future. Doesn't mean that is likely to happen--that's just a risk that needs to be taken into consideration more than it is currently. And that leads to moving the midpoint more in the direction of shorter-term bonds.

In any given period, either the shortest term bonds or the longest term bonds are going to "work" the best from a Sharpe Ratio perspective. Intermediate bonds (which covers a pretty broad range) will never be the best. For those who are not trying match liabilities but are simply trying to construct an efficient portfolio, using intermediate bonds will never be the best nor the worst option. For most investors, this is a good place to end up.
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Re: First 20% of bonds in long-term Treasuries

Post by SimpleGift »

stlutz wrote: Sun Sep 01, 2019 1:53 pm From a risk management perspective, however, the bigger risk for an investor today is that of higher inflation in the future. Doesn't mean that is likely to happen--that's just a risk that needs to be taken into consideration more than it is currently. And that leads to moving the midpoint more in the direction of shorter-term bonds.

In any given period, either the shortest term bonds or the longest term bonds are going to "work" the best from a Sharpe Ratio perspective. Intermediate bonds (which covers a pretty broad range) will never be the best. For those who are not trying match liabilities but are simply trying to construct an efficient portfolio, using intermediate bonds will never be the best nor the worst option. For most investors, this is a good place to end up.
Excellent analysis and post. Nearly everything one reads these days about demographics and future economic growth, especially in the developed world, points to a future of low inflation, low GDP growth and low interest rates. However, from a historical perspective, an investor needs to acknowledge that we've been living in a rather unusual time since about 1997, with mostly negative stock-bond correlations (in blue, chart below).
Should inflation expectations ever rise or become more volatile, correlations would change quickly. Personally in retirement now, we're squarely in the intermediate-term bond camp, with a third of our bond allocation in TIPS.
Last edited by SimpleGift on Sun Sep 01, 2019 2:44 pm, edited 1 time in total.
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Re: First 20% of bonds in long-term Treasuries

Post by Doc »

stlutz wrote: Sun Sep 01, 2019 12:00 pm Morningstar is using the stated maturity on the face of the bond, which is problematic in three respects:
Morningstar wrote:
  • Fixed Income Measures Fund Category
    Effective Duration 6.02 5.24
    Modified Duration — 5.43
    Effective Maturity 8.20 7.33
    Credit Rating AA A
    Weighted Coupon 3.25 3.52
    Weighted Price 105.04 105.28
    Yield 2.67 2.73
https://www.morningstar.com/funds/xnas/vbtlx/portfolio


Vanguard has:

Average effective maturity: 8.2 years
Average Duration: 6.0 years

Vanguard does not show Effective duration as far as I can tell.

https://investor.vanguard.com/mutual-fu ... olio/vbtlx

I belive Morningstar gets its data from the fund companies in a format prescribed by M* so everyone is on the same basis.
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Re: First 20% of bonds in long-term Treasuries

Post by BigJohn »

stlutz wrote: Sun Sep 01, 2019 1:53 pm In any given period, either the shortest term bonds or the longest term bonds are going to "work" the best from a Sharpe Ratio perspective. Intermediate bonds (which covers a pretty broad range) will never be the best. For those who are not trying match liabilities but are simply trying to construct an efficient portfolio, using intermediate bonds will never be the best nor the worst option. For most investors, this is a good place to end up.
I never thought about it in this way but it’s an excellent perspective. Thanks!
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Re: First 20% of bonds in long-term Treasuries

Post by willthrill81 »

stlutz wrote: Sun Sep 01, 2019 1:53 pm In any given period, either the shortest term bonds or the longest term bonds are going to "work" the best from a Sharpe Ratio perspective. Intermediate bonds (which covers a pretty broad range) will never be the best. For those who are not trying match liabilities but are simply trying to construct an efficient portfolio, using intermediate bonds will never be the best nor the worst option. For most investors, this is a good place to end up.
So you're arguing that ITT (basically TBM) may be optimal from a regret minimization perspective?
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Re: First 20% of bonds in long-term Treasuries

Post by columbia »

BigJohn wrote: Sun Sep 01, 2019 2:48 pm
stlutz wrote: Sun Sep 01, 2019 1:53 pm In any given period, either the shortest term bonds or the longest term bonds are going to "work" the best from a Sharpe Ratio perspective. Intermediate bonds (which covers a pretty broad range) will never be the best. For those who are not trying match liabilities but are simply trying to construct an efficient portfolio, using intermediate bonds will never be the best nor the worst option. For most investors, this is a good place to end up.
I never thought about it in this way but it’s an excellent perspective. Thanks!
Being average - minus cost - is, of course, the point of this message board.
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Re: First 20% of bonds in long-term Treasuries

Post by stlutz »

willthrill81 wrote: Sun Sep 01, 2019 2:51 pm
So you're arguing that ITT (basically TBM) may be optimal from a regret minimization perspective?
Yep--your ongoing thread came to mind as I was writing this. :sharebeer
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Re: First 20% of bonds in long-term Treasuries

Post by willthrill81 »

stlutz wrote: Sun Sep 01, 2019 2:55 pm
willthrill81 wrote: Sun Sep 01, 2019 2:51 pm
So you're arguing that ITT (basically TBM) may be optimal from a regret minimization perspective?
Yep--your ongoing thread came to mind as I was writing this. :sharebeer
The idea seems to me to have merit and widespread applicability.
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Re: First 20% of bonds in long-term Treasuries

Post by ARoseByAnyOtherName »

stlutz wrote: Sun Sep 01, 2019 1:53 pm But what if the regime changes again? It has multiple times in the past and likely will in the future. I don't think we've reached the end of history w.r.t. monetary policy. The question is, when that happens how long will it take me to figure out that it has happened? Based on the charts vineviz and nisiprius have discussed, it seems it took the market about 20 years to figure out how fundamentally that Volcker had changed things. Assuming I'm no smarter or dumber than the market, I'll assume it would take me about the same amount of time to figure out that the next fundamental change has occurred. For a human investor, that's a long time.
Thank you for your post (that I've quoted part of above). I found it very clear and it hit on a subject I've been thinking about lately.

I'm starting to think we are at the beginning, or the end of the beginning, of the next fundamental change:

https://www.foreignaffairs.com/reviews/ ... ation-bust
https://www.nytimes.com/2019/08/17/opin ... ssion.html

stlutz wrote: Sun Sep 01, 2019 1:53 pm In any given period, either the shortest term bonds or the longest term bonds are going to "work" the best from a Sharpe Ratio perspective. Intermediate bonds (which covers a pretty broad range) will never be the best. For those who are not trying match liabilities but are simply trying to construct an efficient portfolio, using intermediate bonds will never be the best nor the worst option. For most investors, this is a good place to end up.
nisiprius had a post earlier in this thread that compared the long-term performance of portfolios with varying amounts of intermediate and long-term government bonds. I wonder what the difference would be if you got it exactly "wrong", that is held short term government bonds when the best case was to hold long-term, and vice versa? Quantifying the cost of being exactly wrong would be interesting.

My main takeaway from this thread is your last two sentences above: "For those who are not trying match liabilities but are simply trying to construct an efficient portfolio, using intermediate bonds will never be the best nor the worst option. For most investors, this is a good place to end up."
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Re: First 20% of bonds in long-term Treasuries

Post by spdoublebass »

Doc wrote: Sun Sep 01, 2019 10:28 am
nisiprius wrote: Sun Sep 01, 2019 9:43 am Do you mean, say, The Only Guide to a Winning Bond Strategy You'll Ever Need: The Way Smart Money Preserves Wealth Today by Larry Swedroe and Joseph H. Hempden, 2006? Which is on my to-read list, but as yet unread.
Since my copy is within hands reach of my computer and is well "dog eared" hear's my very brief synopsis.

Credit quality: AAA and AA only

Duration extension: Extend as long as you get additional 20 bps per year. (DFA recommendation) (Edit)

MBS: None (Negative convexity)

TIPS: Allocation in steps from 0% real yields <1.5% to 75-100% for real yields > 3%. (Table is for 10 yr TIPS vs Short term FI.) Sorry Grok.

Currently this gets me here:
Image

(The very high short T's is because any new cash is going into T-Bills given the current yield curve. But it would agree with Larry's Duration extension criteria.)
I’ve been following this thread and have enjoyed the discussion.

Can you please clarify how you’d limit yourself to AAA and AA bonds only? I looked inside The bond funds at Vanguard and with the addition of any corporate bonds you have entered into the A and Baa territory.

Is the argument to just hold government bonds? If so why bot just say that? I’m actually asking because how else would you be able to hold AAA and AA bonds exclusively?

I have another question about the .2% per year of duration. I understand the concept. How do you implement it?

Last I checked, for the government bond funds offered by Vanguard this would mean purchasing VGSH. You aren’t getting compensated enough to go to intermediate if you follow this rule.
My question is what happens if/when intermediate yields go up. And by following the rule it would now indicate to purchase VGIT instead of VGSH? Should you then sell your VGSH and move into VGIT?

I guess what I’m asking I get how to use the rule to tell me what to buy, but what do you do with the stuff you already own?

Just curious.
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Re: First 20% of bonds in long-term Treasuries

Post by willthrill81 »

spdoublebass wrote: Sun Sep 01, 2019 3:58 pm I have another question about the .2% per year of duration. I understand the concept. How do you implement it?
I've only seen that guideline applied to CDs. The idea is that you only extend the CD's maturity by an additional year if you're getting at least 20 basis points (.2%) more yield by doing so.

You could apply this to individual bonds as well, but it would seem to me to be difficult to implement with bond funds.
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Re: First 20% of bonds in long-term Treasuries

Post by vineviz »

willthrill81 wrote: Sun Sep 01, 2019 4:28 pm
spdoublebass wrote: Sun Sep 01, 2019 3:58 pm I have another question about the .2% per year of duration. I understand the concept. How do you implement it?
I've only seen that guideline applied to CDs. The idea is that you only extend the CD's maturity by an additional year if you're getting at least 20 basis points (.2%) more yield by doing so.

You could apply this to individual bonds as well, but it would seem to me to be difficult to implement with bond funds.
And nonsensical.
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Re: First 20% of bonds in long-term Treasuries

Post by Doc »

spdoublebass wrote: Sun Sep 01, 2019 3:58 pm Can you please clarify how you’d limit yourself to AAA and AA bonds only? I looked inside The bond funds at Vanguard and with the addition of any corporate bonds you have entered into the A and Baa territory.

Is the argument to just hold government bonds? If so why bot just say that? I’m actually asking because how else would you be able to hold AAA and AA bonds exclusively?

I have another question about the .2% per year of duration. I understand the concept. How do you implement it?
First these are ideas presented in Swedroe's bond book. Implementing for a retail investor takes a bit of work and flexibility.

If you are going to use a bond fund you are not going to be able to avoid all bonds with ratings less than AA. But there are short term investment grade funds out there that have only a limited amount because they offset the A and Baa with Treasuries.

The only practical way to implement a 0.2% per year duration portfolio for a retail investor is probably with a Treasury ladder. It's not practical to do it with corporates for us peons. And with today's yield curve a 20 bps per year criteria would be all T-bills anyway.

In general I use actual Treasury notes and Bills along with investment grade corporate funds. But for tax reasons I am usually going to separate Treasuries from corporates so I am halfway there in any case.

The whole point of this thread for long Treasuries is based on the interaction of long Treasuries with the equity portion of one's portfolio. Swedroe's bond book is about bonds.

(Caveat: Larry Swedroe is the best bund guru in my neighborhood. :D )
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Re: First 20% of bonds in long-term Treasuries

Post by vineviz »

SimpleGift wrote: Sun Sep 01, 2019 2:40 pm However, from a historical perspective, an investor needs to acknowledge that we've been living in a rather unusual time since about 1997, with mostly negative stock-bond correlations (in blue, chart below).
No offense to you, but whoever put that data visualization together should find a new job. Because they clearly don't know the first thing about statistical analysis.

Do they not still teach people in first week of Stats 101 to isolate the dependent and independent variables?
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Re: First 20% of bonds in long-term Treasuries

Post by lazyday »

ARoseByAnyOtherName wrote: Sun Sep 01, 2019 3:54 pmI wonder what the difference would be if you got it exactly "wrong", that is held short term government bonds when the best case was to hold long-term, and vice versa?
You could take a look at siamond's earlier post in this thread:
viewtopic.php?f=10&t=287627&start=100#p4728029

For a retiree, I like the SWR comparison in the top left of the image.

Note that instead of comparing short to long term bonds, it's comparing 60/20/20 to 60/40, where 60 is equity, one 20 is long term treasuries, and the other 20 & the 40 are total bond market. So, as siamond says in the linked post "there is only so much impact a change of 20% of the portfolio from TBM to LTT can have".

Still, I find the 1950s and 60s retiree Withdrawal Rate reduction from moving 20% TBM to LTT to be surprisingly small, considering what happened to yield (and real equity return) after retirement: https://fred.stlouisfed.org/series/GS20 Image
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Re: First 20% of bonds in long-term Treasuries

Post by stlutz »

ARoseByAnyOtherName wrote: Sun Sep 01, 2019 3:54 pm I wonder what the difference would be if you got it exactly "wrong", that is held short term government bonds when the best case was to hold long-term, and vice versa? Quantifying the cost of being exactly wrong would be interesting.
I would recommend downloading the Simba/Siamond backtesting spreadsheet (https://www.bogleheads.org/wiki/Simba%2 ... preadsheet) and running the simulations you are interested in.

For a 60/40 portfolio over 30 years, about 1.4% is the biggest difference I've been able generate between the two (ST vs LT). But I haven't comprehensively checked every combinations of years either. :happy
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Re: First 20% of bonds in long-term Treasuries

Post by vineviz »

stlutz wrote: Sun Sep 01, 2019 1:53 pm The second question is, if a regime change happens, could that flip the switch in favor of short-term bonds again? Possibly. Looking at current interest rates, the deeper risk seems to be that the market is not considering the possibility of higher and unpredictable inflation in the future. For people who spend money in real dollars, that is a concern.
Once again, it seems to be difficult to avoid the trap of conflating term risk with inflation risk.

Inflation risk has no bearing on the question of duration: if you want to avoid taking on the risk of "higher and unpredictable inflation" then use TIPS, otherwise use nominal bonds. Duration has nothing to do with that. And term risk has no bearing on the question of inflation protection: if you have a long-term investment horizon, use long-term bonds, otherwise use short-term or intermediate-term bonds. You can buy either nominal Treasury bonds or TIPS in any maturity from 1-month to 30-years, and in any combination of mutual funds/ETFs (see below for an example decision tree).

As for whether there is a regime change that will impact any of this, it won't be difficult to tell that it has happened. If the Fed stops targeting inflation, you'll know it. And if the Treasury starts issuing callable bonds again, you'll know it.

I agree with vineviz on the fundamental point that if one doesn't know something the market doesn't know, that balancing out reinvestment risk and interest-rate risk is prudent. That generally means using longer-term bonds than most bogleheads use.

From a risk management perspective, however, the bigger risk for an investor today is that of higher inflation in the future. Doesn't mean that is likely to happen--that's just a risk that needs to be taken into consideration more than it is currently. And that leads to moving the midpoint more in the direction of shorter-term bonds.
stlutz wrote: Sun Sep 01, 2019 1:53 pmFor those who are not trying match liabilities but are simply trying to construct an efficient portfolio, using intermediate bonds will never be the best nor the worst option. For most investors, this is a good place to end up.
Thankfully, investors don't need to guess about this. Trying to time bond markets should obviously be as difficult as trying to time stock markets, but choosing a bond fund isn't (or shouldn't, IMHO) be about trying to time the markets. Matching the duration and inflation-sensitivity of your bonds to the duration and inflation-sensitive of the associated expenses will virtually ALWAYS yield the most efficient portfolio. And this kind of matching will certainly be more efficient than any alternative approach.

Image
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Re: First 20% of bonds in long-term Treasuries

Post by ThereAreNoGurus »

vineviz wrote: Sun Sep 01, 2019 12:52 pm [T]he Fed was actively trying so suppress the volatility of long-term rates during this period (versus the current strategy of suppressing inflation volatility). As a result, the term structure for Treasuries was seriously distorted.
How was the Fed doing this? Open market purchases of long-term treasuries?

Can you provide a reference? I'd like to read it.
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Re: First 20% of bonds in long-term Treasuries

Post by decapod10 »

vineviz wrote: Sun Sep 01, 2019 6:02 pm
stlutz wrote: Sun Sep 01, 2019 1:53 pm The second question is, if a regime change happens, could that flip the switch in favor of short-term bonds again? Possibly. Looking at current interest rates, the deeper risk seems to be that the market is not considering the possibility of higher and unpredictable inflation in the future. For people who spend money in real dollars, that is a concern.
Once again, it seems to be difficult to avoid the trap of conflating term risk with inflation risk.

Inflation risk has no bearing on the question of duration: if you want to avoid taking on the risk of "higher and unpredictable inflation" then use TIPS, otherwise use nominal bonds. Duration has nothing to do with that. And term risk has no bearing on the question of inflation protection: if you have a long-term investment horizon, use long-term bonds, otherwise use short-term or intermediate-term bonds. You can buy either nominal Treasury bonds or TIPS in any maturity from 1-month to 30-years, and in any combination of mutual funds/ETFs (see below for an example decision tree).

As for whether there is a regime change that will impact any of this, it won't be difficult to tell that it has happened. If the Fed stops targeting inflation, you'll know it. And if the Treasury starts issuing callable bonds again, you'll know it.

I agree with vineviz on the fundamental point that if one doesn't know something the market doesn't know, that balancing out reinvestment risk and interest-rate risk is prudent. That generally means using longer-term bonds than most bogleheads use.

From a risk management perspective, however, the bigger risk for an investor today is that of higher inflation in the future. Doesn't mean that is likely to happen--that's just a risk that needs to be taken into consideration more than it is currently. And that leads to moving the midpoint more in the direction of shorter-term bonds.
stlutz wrote: Sun Sep 01, 2019 1:53 pmFor those who are not trying match liabilities but are simply trying to construct an efficient portfolio, using intermediate bonds will never be the best nor the worst option. For most investors, this is a good place to end up.
Thankfully, investors don't need to guess about this. Trying to time bond markets should obviously be as difficult as trying to time stock markets, but choosing a bond fund isn't (or shouldn't, IMHO) be about trying to time the markets. Matching the duration and inflation-sensitivity of your bonds to the duration and inflation-sensitive of the associated expenses will virtually ALWAYS yield the most efficient portfolio. And this kind of matching will certainly be more efficient than any alternative approach.

Image
So putting together the flowsheet and your OP, you don't think unexpected inflation is a significant risk and therefore you end up at the bottom of the flowsheet? How does one determine this? Depends on the individual, or something about the market?

Serious questions, not trying to be difficult.
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Re: First 20% of bonds in long-term Treasuries

Post by vineviz »

decapod10 wrote: Sun Sep 01, 2019 7:54 pm So putting together the flowsheet and your OP, you don't think unexpected inflation is a significant risk and therefore you end up at the bottom of the flowsheet? How does one determine this? Depends on the individual, or something about the market?
I was probably not very clear in the OP, but I view "Treasuries" as including both nominal and inflation-linked instruments (i.e. TIPS). So my view is that "first 20%" could be in either nominal treasuries or TIPS.

But yes, the question about whether unexpected inflation is a risk is almost entirely personal. We tend to talk about risks as if they are inherent qualities of the asset, but really the risk is in how closely the characteristics of the asset match the characteristics of the investor's liabilities.

Every investor will have a different sensitivity to inflation volatility (i.e. unexpected inflation), so their choice of bonds should reflect that.

A 45-year old investor who is still saving for a planned retirement at age 70, with an asset allocation that is 80/20, will have very little inflation risk. Their two largest assets are their human capital and their equity investments, both of which are pretty well linked to the general level of inflation. For this accumulator, nominal bonds are probably the wise choice.

A 75-year old retiree with a portfolio that is 50/50 in stocks and bonds, for whom Social Security covers only 25% of their non-discretionary spending, is probably highly exposed to inflation risk unless most or all of those bonds are TIPS.

So yes, I'd say it's context dependent but that most investors can probably figure out roughly where on that spectrum they are.
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Re: First 20% of bonds in long-term Treasuries

Post by decapod10 »

vineviz wrote: Sun Sep 01, 2019 8:38 pm
decapod10 wrote: Sun Sep 01, 2019 7:54 pm So putting together the flowsheet and your OP, you don't think unexpected inflation is a significant risk and therefore you end up at the bottom of the flowsheet? How does one determine this? Depends on the individual, or something about the market?
I was probably not very clear in the OP, but I view "Treasuries" as including both nominal and inflation-linked instruments (i.e. TIPS). So my view is that "first 20%" could be in either nominal treasuries or TIPS.

But yes, the question about whether unexpected inflation is a risk is almost entirely personal. We tend to talk about risks as if they are inherent qualities of the asset, but really the risk is in how closely the characteristics of the asset match the characteristics of the investor's liabilities.

Every investor will have a different sensitivity to inflation volatility (i.e. unexpected inflation), so their choice of bonds should reflect that.

A 45-year old investor who is still saving for a planned retirement at age 70, with an asset allocation that is 80/20, will have very little inflation risk. Their two largest assets are their human capital and their equity investments, both of which are pretty well linked to the general level of inflation. For this accumulator, nominal bonds are probably the wise choice.

A 75-year old retiree with a portfolio that is 50/50 in stocks and bonds, for whom Social Security covers only 25% of their non-discretionary spending, is probably highly exposed to inflation risk unless most or all of those bonds are TIPS.

So yes, I'd say it's context dependent but that most investors can probably figure out roughly where on that spectrum they are.
Interesting, appreciate the response.
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Re: First 20% of bonds in long-term Treasuries

Post by columbia »

One bond fund which doesn’t get much attention here is the 7-10 year treasury offering from iShares:

https://www.ishares.com/us/products/239 ... y-bond-etf

It’s a pretty cheap way to go a bit more out on the yield curve, if that’s your thing.
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Re: First 20% of bonds in long-term Treasuries

Post by Alex GR »

vineviz wrote: Sun Sep 01, 2019 8:38 pm
decapod10 wrote: Sun Sep 01, 2019 7:54 pm So putting together the flowsheet and your OP, you don't think unexpected inflation is a significant risk and therefore you end up at the bottom of the flowsheet? How does one determine this? Depends on the individual, or something about the market?
I was probably not very clear in the OP, but I view "Treasuries" as including both nominal and inflation-linked instruments (i.e. TIPS). So my view is that "first 20%" could be in either nominal treasuries or TIPS.

But yes, the question about whether unexpected inflation is a risk is almost entirely personal. We tend to talk about risks as if they are inherent qualities of the asset, but really the risk is in how closely the characteristics of the asset match the characteristics of the investor's liabilities.

Every investor will have a different sensitivity to inflation volatility (i.e. unexpected inflation), so their choice of bonds should reflect that.

A 45-year old investor who is still saving for a planned retirement at age 70, with an asset allocation that is 80/20, will have very little inflation risk. Their two largest assets are their human capital and their equity investments, both of which are pretty well linked to the general level of inflation. For this accumulator, nominal bonds are probably the wise choice.

A 75-year old retiree with a portfolio that is 50/50 in stocks and bonds, for whom Social Security covers only 25% of their non-discretionary spending, is probably highly exposed to inflation risk unless most or all of those bonds are TIPS.

So yes, I'd say it's context dependent but that most investors can probably figure out roughly where on that spectrum they are.
When you determine inflation risk and trying to decide whether you should buy inflation-protected products are expected monthly expenses a factor?
For example, if I think that Social Security and one annuity(SPIA) will completely cover monthly expenses, is inflation risk very low? (this is with a paid off house of course). Thanks!
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Re: First 20% of bonds in long-term Treasuries

Post by coingaroo »

stlutz wrote: Sun Sep 01, 2019 1:53 pm In any given period, either the shortest term bonds or the longest term bonds are going to "work" the best from a Sharpe Ratio perspective. Intermediate bonds (which covers a pretty broad range) will never be the best. For those who are not trying match liabilities but are simply trying to construct an efficient portfolio, using intermediate bonds will never be the best nor the worst option. For most investors, this is a good place to end up.
Well said. For investors who prefer a little more duration exposure, you can have a balance of intermediate treasuries and long term treasuries.

Alternatively, you can leverage up short term treasuries to a desired duration level. Short term treasuries have had significantly higher sharpe ratios than long term treasuries (yeah! weird, huh?)

https://www.advisorperspectives.com/art ... sury-bonds
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Re: First 20% of bonds in long-term Treasuries

Post by CULater »

There seems to be a great deal of concern with the duration of bonds being held; with the suggestion that bond duration should be scaled to one's investment horizon; e.g. EDV has a duration near 25, TLT duration is about 18. Why do we not consider the duration of stocks as well, which is estimated by the Price/Dividend ratio? Currently the modified duration of the S&P 500 would be about 52. If you're willing to own stocks with a duration of 50 years, why the angst about holding long term bonds with a duration less than half of that?

https://en.wikipedia.org/wiki/Stock_duration
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Re: First 20% of bonds in long-term Treasuries

Post by vineviz »

Alex GR wrote: Mon Sep 02, 2019 7:08 am When you determine inflation risk and trying to decide whether you should buy inflation-protected products are expected monthly expenses a factor?
For example, if I think that Social Security and one annuity(SPIA) will completely cover monthly expenses, is inflation risk very low? (this is with a paid off house of course). Thanks!
If the SPIA is inflation-indexed (best would be CPI-linked, but some have fixed 2% or 3% escalators), then I'd say yes: a retiree whose Social Security + pension/annuity streams faces very little risk from unexpected inflation.

Adapting some guidance from AllianceBernstein's inflation white paper (which I think is pretty well-written, though obviously designed to recruit clients), I'd say that investors face more inflation risk:

• The older they are;
• The higher their portfolio withdrawal rate is;
• The fewer fixed expenses they have (e.g. mortages, loans, etc.);
• The more their non-discretionary expenses exceed their Social Security income;
• The less diversified their equity portfolio is;
• The higher the percentage of nominal bonds in their fixed income portfolio;
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Re: First 20% of bonds in long-term Treasuries

Post by Doc »

CULater wrote: Mon Sep 02, 2019 7:58 am Why do we not consider the duration of stocks as well ...
Barring default, bonds return a known amount at a given time in the future. Equities do not.
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Re: First 20% of bonds in long-term Treasuries

Post by vineviz »

CULater wrote: Mon Sep 02, 2019 7:58 am There seems to be a great deal of concern with the duration of bonds being held; with the suggestion that bond duration should be scaled to one's investment horizon; e.g. EDV has a duration near 25, TLT duration is about 18. Why do we not consider the duration of stocks as well, which is estimated by the Price/Dividend ratio? Currently the modified duration of the S&P 500 would be about 52. If you're willing to own stocks with a duration of 50 years, why the angst about holding long term bonds with a duration less than half of that?

https://en.wikipedia.org/wiki/Stock_duration
This is a good point, and was part of the reason I formulated the rule in terms of the first 20%.

An investor who is 80% stock and 20% bonds has, by definition adopted a stance that is congruent with a long investment horizon. When I see a portfolio that is 80% stocks and 20% stable value funds, my head explodes a little bit from the schizophrenia of a portfolio like that.

It should be noted that stock buybacks have dramatically increased in importance since the earlier work on implied equity duration was done, so the dividend yield alone is probably not the right metric to calculation implied duration. Total shareholder yield (dividends + buybacks) is probably more appropriate. With the current shareholder yield at something like 5.4% the implied equity duration of the S&P 500 is probably closer to 18 years than to 52 years.
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Re: First 20% of bonds in long-term Treasuries

Post by vineviz »

Doc wrote: Mon Sep 02, 2019 8:32 am
CULater wrote: Mon Sep 02, 2019 7:58 am Why do we not consider the duration of stocks as well ...
Barring default, bonds return a known amount at a given time in the future. Equities do not.
The seminal paper on this topic, Implied Equity Duration: A New Measure of Equity Risk, explains the extensibility of the concept of duration to stocks.

https://deepblue.lib.umich.edu/bitstrea ... sAllowed=y
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Re: First 20% of bonds in long-term Treasuries

Post by Doc »

vineviz wrote: Mon Sep 02, 2019 8:49 am
Doc wrote: Mon Sep 02, 2019 8:32 am
CULater wrote: Mon Sep 02, 2019 7:58 am Why do we not consider the duration of stocks as well ...
Barring default, bonds return a known amount at a given time in the future. Equities do not.
The seminal paper on this topic, Implied Equity Duration: A New Measure of Equity Risk, explains the extensibility of the concept of duration to stocks.

https://deepblue.lib.umich.edu/bitstrea ... sAllowed=y
Interesting.
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Re: First 20% of bonds in long-term Treasuries

Post by Horton »

Does anyone know the typical bid/ask spread to buy or sell TIPS on the secondary market?

The 20 bp expense ratio of LTPZ is basically 100% of the real return and 10% of the nominal return, every year. Perhaps it’s more efficient to purchase TIPS at auction, filling in the gaps and adjusting your holdings to meet your desired timeframe in the secondary market when necessary? In essence, is it more efficient to be your own portfolio manager for LT TIPS rather than outsource to PIMCO?
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Re: First 20% of bonds in long-term Treasuries

Post by vineviz »

Horton wrote: Mon Sep 02, 2019 10:35 am Does anyone know the typical bid/ask spread to buy or sell TIPS on the secondary market?
It’s in the neighborhood of 0.05%.

Even with onerous commissions, an investor should be able to build a ladder of individual TIPS at far lower cost than any of the funds I mentioned.
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Re: First 20% of bonds in long-term Treasuries

Post by Mountain Doc »

vineviz wrote: Wed Aug 07, 2019 7:24 pm The first 20% of a portfolio allocated to bonds should be allocated to long-term US Treasury bonds.
Out of curiosity, do you view EE bonds (held for the 20 year doubling period) as preferable to long-term treasuries given the significantly higher yield, or less favorably because they don't benefit from a flight to safety when stocks decline?
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Re: First 20% of bonds in long-term Treasuries

Post by cali »

lots of good info here

I need to increase my position in bonds. currently only have tax free muni bond fund and small amt in target fund. I was told today by a few personal investor friends/family that I missed the boat on treasuries and should have done that 6 mos or more ago.


Right now I have a huge stake in equities. Planned to meet with an advisor last year but got off track to family health.

About 5 years from retirement. Would do you recommend? what to look for? Not really familiar with treasuries and bonds so am researching but still not clear.

thanks
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Re: First 20% of bonds in long-term Treasuries

Post by ivk5 »

cali wrote: Tue Sep 03, 2019 3:36 am lots of good info here

I need to increase my position in bonds. currently only have tax free muni bond fund and small amt in target fund. I was told today by a few personal investor friends/family that I missed the boat on treasuries and should have done that 6 mos or more ago.


Right now I have a huge stake in equities. Planned to meet with an advisor last year but got off track to family health.

About 5 years from retirement. Would do you recommend? what to look for? Not really familiar with treasuries and bonds so am researching but still not clear.

thanks
I’d suggest starting a new thread and getting a full portfolio review. There’s a sticky in the forum with a recommended format for Asking Portfolio Questions.

Please don’t take this personally- intended to be helpful: The language in your recent posts suggests you are inclined to make financial/investment decisions based on tips you hear from people you trust. Understand that this puts you at significant risk, and this may be one of the biggest risks that you need to manage. I suggest having an explicit strategy for that, either based on education/DIY or find a respectable fee-only fiduciary advisor (no AUM fees). Neither will be trivial.
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Re: First 20% of bonds in long-term Treasuries

Post by james22 »

vineviz wrote: Mon Sep 02, 2019 8:47 amWhen I see a portfolio that is 80% stocks and 20% stable value funds, my head explodes a little bit from the schizophrenia of a portfolio like that.
Don't underestimate limited 401k option constraints (I'd swap my Stable Value for LTT if I could).
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Re: First 20% of bonds in long-term Treasuries

Post by MotoTrojan »

cali wrote: Tue Sep 03, 2019 3:36 am lots of good info here

I need to increase my position in bonds. currently only have tax free muni bond fund and small amt in target fund. I was told today by a few personal investor friends/family that I missed the boat on treasuries and should have done that 6 mos or more ago.


Right now I have a huge stake in equities. Planned to meet with an advisor last year but got off track to family health.

About 5 years from retirement. Would do you recommend? what to look for? Not really familiar with treasuries and bonds so am researching but still not clear.

thanks
My only advice for now is to not see an advisor, unless it’s fee only.
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Re: First 20% of bonds in long-term Treasuries

Post by ivk5 »

MotoTrojan wrote: Tue Sep 03, 2019 10:00 am
cali wrote: Tue Sep 03, 2019 3:36 am lots of good info here

I need to increase my position in bonds. currently only have tax free muni bond fund and small amt in target fund. I was told today by a few personal investor friends/family that I missed the boat on treasuries and should have done that 6 mos or more ago.


Right now I have a huge stake in equities. Planned to meet with an advisor last year but got off track to family health.

About 5 years from retirement. Would do you recommend? what to look for? Not really familiar with treasuries and bonds so am researching but still not clear.

thanks
My only advice for now is to not see an advisor, unless it’s fee only.
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Re: First 20% of bonds in long-term Treasuries

Post by Horton »

vineviz wrote: Mon Sep 02, 2019 11:34 am
Horton wrote: Mon Sep 02, 2019 10:35 am Does anyone know the typical bid/ask spread to buy or sell TIPS on the secondary market?
It’s in the neighborhood of 0.05%.

Even with onerous commissions, an investor should be able to build a ladder of individual TIPS at far lower cost than any of the funds I mentioned.
Indeed, the spread appears to be about 5 bp's per WSJ. That said, I anticipate that the price is marked up when purchasing via a broker (separate and apart from the commission you pay). Looking at quotes on Vanguard this afternoon, the spread on LT TIPS seems to be more like 15-20 bp's.

I don't think this changes the conclusion though.
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Re: First 20% of bonds in long-term Treasuries

Post by vineviz »

Horton wrote: Tue Sep 03, 2019 3:26 pm Indeed, the spread appears to be about 5 bp's per WSJ. That said, I anticipate that the price is marked up when purchasing via a broker (separate and apart from the commission you pay). Looking at quotes on Vanguard this afternoon, the spread on LT TIPS seems to be more like 15-20 bp's.

I don't think this changes the conclusion though.
I agree. Setting up a TIPS ladder using bonds from the secondary market probably has an annualized transaction cost of less than 0.02%. Buying bonds at auction is basically free.
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Re: First 20% of bonds in long-term Treasuries

Post by Nittany_Lion »

A quick question for vineviz, or anyone else who might know the answer. What is the cheapest mutual fund for investing in LT TIPS? I would like a mutual fund, rather than an ETF, because I will be investing monthly.

I am currently using both the Vanguard TIPS fund and a Schwab TIPS fund that have low ER (0.07 and 0.05, respectively), but both have durations of roughly 7.5 years. I am looking for something more apropos to a 20-year investment horizon and was struck by how expensive the Pimco TIPS mutual funds are.

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Re: First 20% of bonds in long-term Treasuries

Post by vineviz »

Nittany_Lion wrote: Tue Sep 03, 2019 5:19 pm A quick question for vineviz, or anyone else who might know the answer. What is the cheapest mutual fund for investing in LT TIPS? I would like a mutual fund, rather than an ETF, because I will be investing monthly.

I am currently using both the Vanguard TIPS fund and a Schwab TIPS fund that have low ER (0.07 and 0.05, respectively), but both have durations of roughly 7.5 years. I am looking for something more apropos to a 20-year investment horizon and was struck by how expensive the Pimco TIPS mutual funds are.

Unfortunately, the pickings are pretty slim. Besides the PIMCO ETF (LTPZ), the only other long-term TIPS fund is DFA LTIP Portfolio from Dimensional Fund Advisors at 0.15%. But it's typically only available through advisors and a tiny few 401k plans. Plus, I kid you not, the DFA fund only owns four different bonds.

You might consider directing the monthly investments to a long-term nominal treasury fund like Vanguard Long-Term Treasury Index Fund Admiral Shares (VLGSX) or similar. Then, once a year or so when you've amassed enough money, pull money from that fund and buy individual TIPS. It might seem intimidating the first time, but there's not much to it once you learn how.
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Re: First 20% of bonds in long-term Treasuries

Post by CULater »

schismal wrote: Sat Aug 31, 2019 7:59 am
coingaroo wrote: Sat Aug 31, 2019 7:42 am
schismal wrote: Sat Aug 31, 2019 6:45 am

The prevailing recommendation is against holding LTTs in taxable accounts -- let's use EDV as an extreme example. But if one were limited on tax advantaged space, would you alter this recommendation?

You can improve your tax efficiency in taxable accounts, through futures which are 60% LT capital gains, and 40% ST capital gains.
This is one reason why I'm about to pull the trigger on making NTSX a core taxable holding. Its treasury exposure is all in futures.
I've been playing around with this using Portfolio Visualizer. One problem I'm having is estimating the duration of the treasury exposure in NTSX.

According to these weights, the average duration would be the weighted duration of the 2, 5, 10, and 30- year futures that it holds. Is this a correct assumption and can anybody figure this out? For sure it's longer than the duration of the 5-year and closer to 10-15 years it looks, so using VFITX for the bond portion of NTSX with PV doesn't seem correct. Perhaps TLT?

US 5YR NOTE (CBT) DEC19 XCBT 20191231 = 13.02%
US 10YR ULTRA FUT DEC19 XCBT 20191219 = 12.54%
US 2YR NOTE (CBT) DEC19 XCBT 20191231 = 12.51%
US 10YR NOTE (CBT)DEC19 XCBT 20191219 = 12.39%
US LONG BOND(CBT) DEC19 XCBT 20191219 =11.96%

https://www.wisdomtree.com/etfs/asset-allocation/ntsx
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Re: First 20% of bonds in long-term Treasuries

Post by schismal »

CULater wrote: Tue Sep 03, 2019 7:16 pm I've been playing around with this using Portfolio Visualizer. One problem I'm having is estimating the duration of the treasury exposure in NTSX.

According to these weights, the average duration would be the weighted duration of the 2, 5, 10, and 30- year futures that it holds. Is this a correct assumption and can anybody figure this out? For sure it's longer than the duration of the 5-year and closer to 10-15 years it looks, so using VFITX for the bond portion of NTSX with PV doesn't seem correct. Perhaps TLT?

US 5YR NOTE (CBT) DEC19 XCBT 20191231 = 13.02%
US 10YR ULTRA FUT DEC19 XCBT 20191219 = 12.54%
US 2YR NOTE (CBT) DEC19 XCBT 20191231 = 12.51%
US 10YR NOTE (CBT)DEC19 XCBT 20191219 = 12.39%
US LONG BOND(CBT) DEC19 XCBT 20191219 =11.96%

https://www.wisdomtree.com/etfs/asset-allocation/ntsx
Napkin math, but it looks more like an average of 8-9 years to me. If you include both long (VUSTX, duration ~17 years) and intermediate treasuries (VFITX, duration ~5 years) in PV, you can adjust the ratio to simulate the duration you're looking for.

PV LINK

P1: Simulated NTSX (75/25 intermediate/long split, average duration of 8-9 years)
P2: 80/20 S&P 500 and long treasuries
P3: 100% S&P 500

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Edit: I'm going to copy this conversation into the NTSX thread since I don't want to derail this one too far.
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Re: First 20% of bonds in long-term Treasuries

Post by Nittany_Lion »

Thanks for your reply, vineviz, and for your many interesting posts on the forum. That's what I suspected and, regrettably, neither the Pimco ETF nor the DFA fund are available through my brokerage window at work. Since I don't have enough accumulated for a meaningful TIPS ladder in my Roth, I will have to give this more thought.
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Re: First 20% of bonds in long-term Treasuries

Post by patrick013 »

Doc wrote: Sun Sep 01, 2019 4:59 pm

The whole point of this thread for long Treasuries is based on the interaction of long Treasuries with the equity portion of one's portfolio. Swedroe's bond book is about bonds.

(Caveat: Larry Swedroe is the best bund guru in my neighborhood. :D )
And YTD we see this in plus 25% gains for gold mines and LT trsy's. Only about 8% for IT trsy funds.
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Re: First 20% of bonds in long-term Treasuries

Post by Doc »

patrick013 wrote: Wed Sep 04, 2019 8:25 am And YTD we see this in plus 25% gains for gold mines and LT trsy's. Only about 8% for IT trsy funds.
So we are talking about 20 and 30 year Treasuries and we are going to base our decision on the last 8 months data.
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