Switch AA 10-year to 2-year Treasuries?

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willthrill81
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Re: Switch AA 10-year to 2-year Treasuries?

Post by willthrill81 » Thu Aug 15, 2019 9:40 pm

Hector wrote:
Wed Aug 14, 2019 4:54 pm
jdilla1107 wrote:
Wed Aug 14, 2019 3:04 pm
Going shorter duration because of the yield curve is completely silly. You could make an equally viable argument that you should go longer duration. (The yield curve is "telling you" that short term rates are going to drop.)

The correct answer is to not pay any attention to it and make no moves based on it.
It depends on investor’s goal. If the goal is capital preservation in nominal terms, it makes sense to buy treasury bills.
If that was the goal, cash stuffed into a mattress would do the trick.

In all seriousness, I really don't know how preservation of nominal dollars could be a rational goal for an investor. Perhaps someone can help me understand that one. Creativity is not of one of my strong suits.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

jello_nailer
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Re: Switch AA 10-year to 2-year Treasuries?

Post by jello_nailer » Thu Aug 15, 2019 9:44 pm

Call_Me_Op wrote:
Tue Aug 13, 2019 7:07 am
You could certainly invoke Pascal's Wager to justify 2 year notes instead of the 10 year bonds. In other words the risk going with 2 year is re-investment risk if rates fall further - while the risk with the 10 year is inflation risk if there is a sharp rise in inflation - arguably more threatening.
Looks like we're at a pick your poison moment. :( I don't like that.

But I guess it isn't much different than market timing, we don't know that either. Stay the course and stick with your AA?

pascalwager
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Re: Switch AA 10-year to 2-year Treasuries?

Post by pascalwager » Thu Aug 15, 2019 11:18 pm

Lee_WSP wrote:
Wed Aug 14, 2019 3:06 pm
pascalwager wrote:
Wed Aug 14, 2019 2:24 pm
me81 wrote:
Wed Aug 14, 2019 3:34 am
Are these 2 risks affected by using a bond fund (which continually rolls onto new bonds of the fund's duration), vs individual bonds that you hold until maturity?
You're perfectly right andrew99999.

Individual bonds held to maturity do not suffer from interest rate risk, since price will go back to par at expiration. So a drop in price due to rising rates will be irrelevant if you hold to maturity..
Sure if you need to buy new bonds at expiration, you will still be hit by re-investment risk, hence the idea of having bonds matching your investment horizon..

They do suffer inflation risk however, since your coupon will not change (unless it's inflation-linked) and should inflation boom, your real return will feel the pinch.

Bond funds are indeed not the same as individual bonds for this very reason.. This is often overlooked in many forums in my opinion..
Bond funds and individual bonds are both subject to interest rate risk whether or not the individual bond is held to maturity.
Only hypothetically. In practicality, the holder gets exactly what he/she paid for at the beginning.
Yes, you've described a risk outcome or opportunity cost when rates rise. The sum of his initial payment plus the interest may be less than for a new bond with a higher coupon that was issued, say, the day following his purchase. This monetary loss is not hypothetical and is quite practical.

This is a common myth, or false understanding, discussed in bond books/articles.

Day9
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Re: Switch AA 10-year to 2-year Treasuries?

Post by Day9 » Fri Aug 16, 2019 12:06 pm

willthrill81 wrote:
Thu Aug 15, 2019 9:40 pm
Hector wrote:
Wed Aug 14, 2019 4:54 pm
jdilla1107 wrote:
Wed Aug 14, 2019 3:04 pm
Going shorter duration because of the yield curve is completely silly. You could make an equally viable argument that you should go longer duration. (The yield curve is "telling you" that short term rates are going to drop.)

The correct answer is to not pay any attention to it and make no moves based on it.
It depends on investor’s goal. If the goal is capital preservation in nominal terms, it makes sense to buy treasury bills.
If that was the goal, cash stuffed into a mattress would do the trick.

In all seriousness, I really don't know how preservation of nominal dollars could be a rational goal for an investor. Perhaps someone can help me understand that one. Creativity is not of one of my strong suits.
Good question. I suppose it would be someone whose circumstances are less sensitive to inflation as calculated the same way as TIPS. I looked at the basket of goods used in that CPI calculation and it is all reasonable stuff: housing costs, healthcare costs, food, clothing, heating oil, etc. But I just have to imagine of the 300 million people in the USA, some must be more sensitive, and some must be less sensitive than the average person to changes to the CPI index. So someone who is far on the "less sensitive" tail might prefer nominal bonds. I am curious what that person's budget would look like. Perhaps a high net worth individual whose basic necessity spending needs are a very low percentage of his yearly spending, and he gives a large amount of money to charity each year?
I'm just a fan of the person I got my user name from

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willthrill81
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Re: Switch AA 10-year to 2-year Treasuries?

Post by willthrill81 » Fri Aug 16, 2019 2:26 pm

Day9 wrote:
Fri Aug 16, 2019 12:06 pm
willthrill81 wrote:
Thu Aug 15, 2019 9:40 pm
Hector wrote:
Wed Aug 14, 2019 4:54 pm
jdilla1107 wrote:
Wed Aug 14, 2019 3:04 pm
Going shorter duration because of the yield curve is completely silly. You could make an equally viable argument that you should go longer duration. (The yield curve is "telling you" that short term rates are going to drop.)

The correct answer is to not pay any attention to it and make no moves based on it.
It depends on investor’s goal. If the goal is capital preservation in nominal terms, it makes sense to buy treasury bills.
If that was the goal, cash stuffed into a mattress would do the trick.

In all seriousness, I really don't know how preservation of nominal dollars could be a rational goal for an investor. Perhaps someone can help me understand that one. Creativity is not of one of my strong suits.
Good question. I suppose it would be someone whose circumstances are less sensitive to inflation as calculated the same way as TIPS. I looked at the basket of goods used in that CPI calculation and it is all reasonable stuff: housing costs, healthcare costs, food, clothing, heating oil, etc. But I just have to imagine of the 300 million people in the USA, some must be more sensitive, and some must be less sensitive than the average person to changes to the CPI index. So someone who is far on the "less sensitive" tail might prefer nominal bonds. I am curious what that person's budget would look like. Perhaps a high net worth individual whose basic necessity spending needs are a very low percentage of his yearly spending, and he gives a large amount of money to charity each year?
Still, the preservation of buying power over nominal dollars would seem to be a more worthwhile goal for every situation that I can think of.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Hector
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Re: Switch AA 10-year to 2-year Treasuries?

Post by Hector » Fri Aug 16, 2019 2:36 pm

willthrill81 wrote:
Thu Aug 15, 2019 9:40 pm
Hector wrote:
Wed Aug 14, 2019 4:54 pm
jdilla1107 wrote:
Wed Aug 14, 2019 3:04 pm
Going shorter duration because of the yield curve is completely silly. You could make an equally viable argument that you should go longer duration. (The yield curve is "telling you" that short term rates are going to drop.)

The correct answer is to not pay any attention to it and make no moves based on it.
It depends on investor’s goal. If the goal is capital preservation in nominal terms, it makes sense to buy treasury bills.
If that was the goal, cash stuffed into a mattress would do the trick.

In all seriousness, I really don't know how preservation of nominal dollars could be a rational goal for an investor. Perhaps someone can help me understand that one. Creativity is not of one of my strong suits.
I am one of them. I have always been mostly in I Bonds and short term treasury bonds for bond portion of portfolio. Right now I also hold individual treasury bills till maturity and money market fund. By doing so I am loosing capital appreciation that short term treasury bond funds have experienced lately.

I did the silly thing by going shorter; from ~2 years maturity to few months maturity.

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vineviz
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Re: Switch AA 10-year to 2-year Treasuries?

Post by vineviz » Sun Aug 18, 2019 11:15 am

Day9 wrote:
Fri Aug 16, 2019 12:06 pm
willthrill81 wrote:
Thu Aug 15, 2019 9:40 pm
Hector wrote:
Wed Aug 14, 2019 4:54 pm
jdilla1107 wrote:
Wed Aug 14, 2019 3:04 pm
Going shorter duration because of the yield curve is completely silly. You could make an equally viable argument that you should go longer duration. (The yield curve is "telling you" that short term rates are going to drop.)

The correct answer is to not pay any attention to it and make no moves based on it.
It depends on investor’s goal. If the goal is capital preservation in nominal terms, it makes sense to buy treasury bills.
If that was the goal, cash stuffed into a mattress would do the trick.

In all seriousness, I really don't know how preservation of nominal dollars could be a rational goal for an investor. Perhaps someone can help me understand that one. Creativity is not of one of my strong suits.
Good question. I suppose it would be someone whose circumstances are less sensitive to inflation as calculated the same way as TIPS. I looked at the basket of goods used in that CPI calculation and it is all reasonable stuff: housing costs, healthcare costs, food, clothing, heating oil, etc. But I just have to imagine of the 300 million people in the USA, some must be more sensitive, and some must be less sensitive than the average person to changes to the CPI index. So someone who is far on the "less sensitive" tail might prefer nominal bonds. I am curious what that person's budget would look like. Perhaps a high net worth individual whose basic necessity spending needs are a very low percentage of his yearly spending, and he gives a large amount of money to charity each year?
We have pretty solid evidence, imho, that the typical growth rate of retiree spending is lower than CPI.

One rule of thumb is that retirement spending tends to grow about 1% less than the annual rate of inflation. In other words, it declines in real terms. Probably not linearly so, but still...

Planning on such a path is difficult without knowing future CPI, obviously, but many investors may reasonably conclude that nominal bonds (or a nominal annuity) might play a reasonable part in an investment plan designed to meet such a spending trajectory.

A low withdrawal rate would be one indicator, as would a high equity allocation. An investor who expects Social Security and/or an inflation-linked pension to cover most of their retirement spending might rationally use nominal bonds in n their investment portfolio.

The existence of zero-coupon nominal bonds, but not zero-coupon TIPS, can tip the advantage toward nominal bonds for investors with little sensitivity to unexpected inflation volatility.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

Call_Me_Op
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Re: Switch AA 10-year to 2-year Treasuries?

Post by Call_Me_Op » Sun Aug 18, 2019 11:38 am

TNOA wrote:
Tue Aug 13, 2019 11:57 am
Call_Me_Op wrote:
Tue Aug 13, 2019 7:07 am
You could certainly invoke Pascal's Wager to justify 2 year notes instead of the 10 year bonds. In other words the risk going with 2 year is re-investment risk if rates fall further - while the risk with the 10 year is inflation risk if there is a sharp rise in inflation - arguably more threatening.
Sorry but who or what exactly is Pascal's Wager? Apologize for my ignorance.
A Google search brings this up:

https://en.wikipedia.org/wiki/Pascal%27s_wager

While Pascal's Wager related to the existence of God, it can be applied to investing by analogy.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

Call_Me_Op
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Re: Switch AA 10-year to 2-year Treasuries?

Post by Call_Me_Op » Sun Aug 18, 2019 11:41 am

TNOA wrote:
Tue Aug 13, 2019 11:57 am
Call_Me_Op wrote:
Tue Aug 13, 2019 7:07 am
You could certainly invoke Pascal's Wager to justify 2 year notes instead of the 10 year bonds. In other words the risk going with 2 year is re-investment risk if rates fall further - while the risk with the 10 year is inflation risk if there is a sharp rise in inflation - arguably more threatening.
Sorry but who or what exactly is Pascal's Wager? Apologize for my ignorance.
A Google search brings this up:

https://en.wikipedia.org/wiki/Pascal%27s_wager

While Pascal's Wager related to the existence of God, it can be applied to investing by analogy. In the investing analogy you are giving-up something modest (higher expected returns) in order to avoid something catastrophic (a large depletion of investment value).
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

michaeljc70
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Re: Switch AA 10-year to 2-year Treasuries?

Post by michaeljc70 » Sun Aug 18, 2019 11:49 am

TNOA wrote:
Tue Aug 13, 2019 6:18 am
I am not one who makes changes to AA. But one thing, I've been struggling with. Considering how low the yields have sunk, and how little the spread has become between the 10-year Treasuries and 2-year Treasuries... And simply thinking, the path for treasuries from these lows or even perhaps negative yields one day soon, is most likely up... after all, it is less likely to assume treasuries in the future will yield negative 5% than positive 5% especially when they are near zero today... so my question is, does this warrant to switch the 10-year Treasury exposure within the AA (asset allocation) to 2-year Treasuries? I know this may tick you guys off as it is not "stay the course" but i honestly couldn't do without asking.
Then don't. Short term swings in treasury rates shouldn't make you rethink your AA. Why don't you just use Total Bond which has both? If you switch to 2 years what is the magic number/spread that will make you switch back?

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TNOA
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Re: Switch AA 10-year to 2-year Treasuries?

Post by TNOA » Sun Aug 18, 2019 8:47 pm

michaeljc70 wrote:
Sun Aug 18, 2019 11:49 am
TNOA wrote:
Tue Aug 13, 2019 6:18 am
I am not one who makes changes to AA. But one thing, I've been struggling with. Considering how low the yields have sunk, and how little the spread has become between the 10-year Treasuries and 2-year Treasuries... And simply thinking, the path for treasuries from these lows or even perhaps negative yields one day soon, is most likely up... after all, it is less likely to assume treasuries in the future will yield negative 5% than positive 5% especially when they are near zero today... so my question is, does this warrant to switch the 10-year Treasury exposure within the AA (asset allocation) to 2-year Treasuries? I know this may tick you guys off as it is not "stay the course" but i honestly couldn't do without asking.
Then don't. Short term swings in treasury rates shouldn't make you rethink your AA. Why don't you just use Total Bond which has both? If you switch to 2 years what is the magic number/spread that will make you switch back?
Thank you for your comments and questions. I don't know off-hand my answer to what spread would make me switch back. So, duly noted and your question already makes me feel more at ease. Thank you. On the AA side I so struggled between BND, BNDW, 10-Year Treasury and VTEB. My AA is a totally tax-disadvantaged account, and as such, I wanted to have some VTEB. So, for my fixed income, I went with 50/50 VTEB, VGIT. (Considered long and hard 50/50 VTEB/BND or VTEB/BNDW but decided to shy away due to the corporate bonds included and my desire to limit equity-like risk taking on the fixed income). I am still not sure to date if this was the right call, because I do believe truly holding it all for diversification. But this is what I have ended up doing.

pascalwager
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Re: Switch AA 10-year to 2-year Treasuries?

Post by pascalwager » Tue Aug 20, 2019 10:25 am

me81 wrote:
Wed Aug 14, 2019 11:24 pm
Bond funds and individual bonds are both subject to interest rate risk whether or not the individual bond is held to maturity.
pascalwager, interest rate risk is the drop in price of a bond if interest rates rise.. If you need to sell the bond, you might receive less than you paid for. However, if you buy the bond at par and hold it to maturity (which is what the question was), you will receive par back, therefore any drop in price during the holding period will only be a loss "on paper".

In fact, I could even argue that if you buy in the secondary market at a discount and hold to maturity, you will receive the YTM at the time of purchase, which will be more than if you bought at the time of issue (due to par being higher than what you paid for), regardless of the price fluctuations in between.

You might incur in opportunity risk, by not being able to take advantage of new, higher yielding bonds, but that is not interest rate risk, as I interpret it.

The FINRA website explains bond risks, note the "if you sell" part.. https://www.finra.org/investors/understanding-bond-risk

If you have any evidence or reasoning to support your statement, I'm all ears..
Yes, opportunity cost is an example of interest rate risk and it applies to individual bonds held to maturity. It's right out of bond books/articles. It's been discussed here previously. You buy a bond and the next day interest rates rise and stay higher and you're getting less than market interest for, say, the next five years.

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