Why ever buy & hold a LT treasury?

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UberGrub
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Why ever buy & hold a LT treasury?

Post by UberGrub » Wed Nov 06, 2019 11:27 am

Hello,
I recently read "The Bond Book" by Annette Thau and she seems to recommend buying and holding bonds to maturity for retail investors. I see that BH philosophy when buying bonds is similar; buying and holding until maturity.

However, it seems that over a period of 30 years, stocks essentially always outperform bonds. So for an investor who will willingly wait for 30 years and not sell, stocks seem like a no-brainer.

In other words, if you don't need the money for more than 3 decades, why would you ever buy bonds at all? Is it purely from the psychology stability of bonds?

At the very least I understand ST bonds to deal with ST liabilities (like a mortgage). But a LT bonds is only risk less if held to maturity (or around that much), at which point stocks always seem to outperform. So why ever buy a LT bonds given that you will hold to maturity?

Seems like the only reason to buy one is if you knew you'd rebalance and sell them earlier potentially. What am I missing?

Thanks!

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Re: Why ever buy & hold a LT treasury?

Post by HEDGEFUNDIE » Wed Nov 06, 2019 11:30 am

LTTs have beaten stocks for the past 13 years and counting:

https://www.portfoliovisualizer.com/fun ... mark=VFINX

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Re: Why ever buy & hold a LT treasury?

Post by aristotelian » Wed Nov 06, 2019 11:31 am

A lot of people buy EE Bonds which amounts to a similar proposition. I would be tempted to lock in a high yield for 30 years if interest rates were historically high, but it would be hard to do in the moment when it seems like interest rates are skyrocketing along with inflation.

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Re: Why ever buy & hold a LT treasury?

Post by aristotelian » Wed Nov 06, 2019 11:37 am

HEDGEFUNDIE wrote:
Wed Nov 06, 2019 11:30 am
LTTs have beaten stocks for the past 13 years and counting:

https://www.portfoliovisualizer.com/fun ... mark=VFINX
He's asking about buy-and-holding an individual bond. If he had bought a 30 Year in 2007, he would have gotten about 5% yield, which would have been a sweet call given what happened to interest rates since then, but less than the return of the S&P. (However, he could sell it right now for a bundle in addition to the yield he would have received).

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KlingKlang
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Re: Why ever buy & hold a LT treasury?

Post by KlingKlang » Wed Nov 06, 2019 11:37 am

UberGrub wrote:
Wed Nov 06, 2019 11:27 am
In other words, if you don't need the money for more than 3 decades, why would you ever buy bonds at all?
Treasury bonds pay interest semiannually, so you purchase them because you desire a guaranteed income stream for three decades plus a return of your capital.
Last edited by KlingKlang on Wed Nov 06, 2019 11:39 am, edited 1 time in total.

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305pelusa
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Re: Why ever buy & hold a LT treasury?

Post by 305pelusa » Wed Nov 06, 2019 11:38 am

HEDGEFUNDIE wrote:
Wed Nov 06, 2019 11:30 am
LTTs have beaten stocks for the past 13 years and counting:

https://www.portfoliovisualizer.com/fun ... mark=VFINX
Ah yes, ONE instance of bonds outperforming for 13 years proves wrong OP's point about how buying and holding for 30 years LT bonds on average underperforms stocks.

Come on man.

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UberGrub
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Re: Why ever buy & hold a LT treasury?

Post by UberGrub » Wed Nov 06, 2019 11:42 am

KlingKlang wrote:
Wed Nov 06, 2019 11:37 am
UberGrub wrote:
Wed Nov 06, 2019 11:27 am
In other words, if you don't need the money for more than 3 decades, why would you ever buy bonds at all?
Treasury bonds pay interest semiannually, so you purchase them because you desire a guaranteed income stream for three decades plus a return of your capital.
Oh I see. So let me see if I get it:

If you need to spend money from the investment throughout (like in retirement), then LT bonds become a lot safer than stocks. Almost like a reverse DCA.

That makes sense actually.

The implication is that if you don't spend and only reinvest, then stocks would be a safer choice?

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Re: Why ever buy & hold a LT treasury?

Post by HEDGEFUNDIE » Wed Nov 06, 2019 11:44 am

305pelusa wrote:
Wed Nov 06, 2019 11:38 am
HEDGEFUNDIE wrote:
Wed Nov 06, 2019 11:30 am
LTTs have beaten stocks for the past 13 years and counting:

https://www.portfoliovisualizer.com/fun ... mark=VFINX
Ah yes, ONE instance of bonds outperforming for 13 years proves wrong OP's point about how buying and holding for 30 years LT bonds on average underperforms stocks.

Come on man.
The OP’s point was that it never makes sense to hold LTTs over stocks, there was nothing about average performance in the OP.

Come on indeed.

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Re: Why ever buy & hold a LT treasury?

Post by UberGrub » Wed Nov 06, 2019 11:50 am

HEDGEFUNDIE wrote:
Wed Nov 06, 2019 11:44 am
305pelusa wrote:
Wed Nov 06, 2019 11:38 am
HEDGEFUNDIE wrote:
Wed Nov 06, 2019 11:30 am
LTTs have beaten stocks for the past 13 years and counting:

https://www.portfoliovisualizer.com/fun ... mark=VFINX
Ah yes, ONE instance of bonds outperforming for 13 years proves wrong OP's point about how buying and holding for 30 years LT bonds on average underperforms stocks.

Come on man.
The OP’s point was that it never makes sense to hold LTTs over stocks, there was nothing about average performance in the OP.

Come on indeed.
No that's not quite my point. My point is that given that you're going to hold the bond to maturity, why would you ever buy LT bonds (and hold them to maturity) instead of stocks when stocks essentially always outperform LT bonds over time periods of 30 years?

I'm not saying stocks will ALWAYS outperform LT bonds over the life of the bond itself. But so far they always have. So the odds are stacked against buying and holding LT bonds.

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305pelusa
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Re: Why ever buy & hold a LT treasury?

Post by 305pelusa » Wed Nov 06, 2019 11:52 am

HEDGEFUNDIE wrote:
Wed Nov 06, 2019 11:44 am
305pelusa wrote:
Wed Nov 06, 2019 11:38 am
HEDGEFUNDIE wrote:
Wed Nov 06, 2019 11:30 am
LTTs have beaten stocks for the past 13 years and counting:

https://www.portfoliovisualizer.com/fun ... mark=VFINX
Ah yes, ONE instance of bonds outperforming for 13 years proves wrong OP's point about how buying and holding for 30 years LT bonds on average underperforms stocks.

Come on man.
The OP’s point was that it never makes sense to hold LTTs over stocks, there was nothing about average performance in the OP.

Come on indeed.
That's not what he's talking about. He's saying:
1) Some who recommend buying bonds tell you to hold to maturity (many BHs and Annette herself)
2) Over time periods of 30 years, stocks almost always outperform bonds.
Hence
3) Why would any of those people who hold to maturity ever buy a LT bond instead of stocks, when stocks are more likely to be a better choice (I.e. on average, they come out ahead over that time frame).

In that context, one example of LT bonds being ahead so far after 13 years is just irrelevant. And even if they kept up their outperformance for the next 17, that still doesn't answer his question because it doesn't mean they're more likely to do it any ways.

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UberGrub
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Re: Why ever buy & hold a LT treasury?

Post by UberGrub » Wed Nov 06, 2019 11:55 am

305pelusa wrote:
Wed Nov 06, 2019 11:52 am
HEDGEFUNDIE wrote:
Wed Nov 06, 2019 11:44 am
305pelusa wrote:
Wed Nov 06, 2019 11:38 am
HEDGEFUNDIE wrote:
Wed Nov 06, 2019 11:30 am
LTTs have beaten stocks for the past 13 years and counting:

https://www.portfoliovisualizer.com/fun ... mark=VFINX
Ah yes, ONE instance of bonds outperforming for 13 years proves wrong OP's point about how buying and holding for 30 years LT bonds on average underperforms stocks.

Come on man.
The OP’s point was that it never makes sense to hold LTTs over stocks, there was nothing about average performance in the OP.

Come on indeed.
That's not what he's talking about. He's saying:
1) Some who recommend buying bonds tell you to hold to maturity (many BHs and Annette herself)
2) Over time periods of 30 years, stocks almost always outperform bonds.
Hence
3) Why would any of those people who hold to maturity ever buy a LT bond instead of stocks, when stocks are more likely to be a better choice (I.e. on average, they come out ahead over that time frame).

In that context, one example of LT bonds being ahead so far after 13 years is just irrelevant. And even if they kept up their outperformance for the next 17, that still doesn't answer his question because it doesn't mean they're more likely to do it any ways.
Yes this is exactly what I mean, thank you.

I think Kliang gave me a good answer though.

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Re: Why ever buy & hold a LT treasury?

Post by Grt2bOutdoors » Wed Nov 06, 2019 12:07 pm

305pelusa wrote:
Wed Nov 06, 2019 11:38 am
HEDGEFUNDIE wrote:
Wed Nov 06, 2019 11:30 am
LTTs have beaten stocks for the past 13 years and counting:

https://www.portfoliovisualizer.com/fun ... mark=VFINX
Ah yes, ONE instance of bonds outperforming for 13 years proves wrong OP's point about how buying and holding for 30 years LT bonds on average underperforms stocks.

Come on man.
The year you go to cash out could be the year that 1929-1931 type performance shows up. You purchase a US Treasury bond with the intention to hold til maturity with the knowledge that a nominal sum of monies will be guaranteed, no equity can offer such a guarantee.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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305pelusa
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Re: Why ever buy & hold a LT treasury?

Post by 305pelusa » Wed Nov 06, 2019 12:25 pm

Grt2bOutdoors wrote:
Wed Nov 06, 2019 12:07 pm
305pelusa wrote:
Wed Nov 06, 2019 11:38 am
HEDGEFUNDIE wrote:
Wed Nov 06, 2019 11:30 am
LTTs have beaten stocks for the past 13 years and counting:

https://www.portfoliovisualizer.com/fun ... mark=VFINX
Ah yes, ONE instance of bonds outperforming for 13 years proves wrong OP's point about how buying and holding for 30 years LT bonds on average underperforms stocks.

Come on man.
The year you go to cash out could be the year that 1929-1931 type performance shows up. You purchase a US Treasury bond with the intention to hold til maturity with the knowledge that a nominal sum of monies will be guaranteed, no equity can offer such a guarantee.
If you bought stocks in 1902 and sold on 1932, you would've realized a 5.92% nominal CAGR on stocks. I don't have data for 30 year bond rates on 1902 but do have 10 year rates. They had a 3% rate on 1902. So I'm assuming 30 year bond rates were around that area. 10 year bond rates never even went past 5% during those 30 years so stocks would've come out ahead.

Similarly, if you bought a LT bonds in 1978 (with a coupon of 9% being the highest you could've gotten that year), that's the return you would've gotten if held until 2008. OTOH, if you bought stocks, you would've realized a 10.55%.

In fact, AFAIK, LT bonds have thus far never beaten stocks over any 30 year period when held to maturity. Even when that period ends in the most atrocious stock bear markets because earlier stock gains more than make up for it.

I believe that's OP's point. With the above in mind, why would you ever buy and hold a LT bonds to maturity? At least based on history, the odds are stacked against you.

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Re: Why ever buy & hold a LT treasury?

Post by Phineas J. Whoopee » Wed Nov 06, 2019 1:25 pm

OP's question seems to rest on an objective of maximizing return over decades. That's one objective, but not the only possible. I observe it's a common unstated assumption around here. There are other legitimate objectives.

My personal investing mission statement, which took ever so long to formulate, and then still longer to express compactly, is:

To meet my future financial needs, and within reason wants, without taking undue risk.

With respect to my own plans, portfolio, and life situation, concentrated long-term bonds from any issuer would constitute undue risk. It is not true that one must buy a ladder of individual bonds, Treasuries or otherwise, and hold each to maturity. Their present market values change, just as the net asset values, NAVs, of bond funds do.

NAVs are based on the mark-to-market values of the fund's underlying holdings. Implement your own equivalent ladder and the mark-to-market effects will be the same.

PJW
Last edited by Phineas J. Whoopee on Wed Nov 06, 2019 1:42 pm, edited 1 time in total.

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Re: Why ever buy & hold a LT treasury?

Post by gr7070 » Wed Nov 06, 2019 1:40 pm

I'm not saying stocks will ALWAYS outperform LT bonds over the life of the bond itself. But so far they always have. So the odds are stacked against buying and holding LT bonds.
That's one reason.

True, it doesn't appear too likely, but we really have no assurance.

Statistically speaking we're guaranteed it will happen given a similar system stays in place long enough.

The other may be at some point we want to lock in those gains realized in stocks "shortly" prior to needing them, but also still be invested in something that likely has safer growth/income that may exceed inflation.

We don't know how long prolonged equity losses may last so we start that transition out a ways, and then hopefully live plenty long.

Unsure if my second point truly provides reason for holding to maturity, but it is reason for owning bonds.

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Re: Why ever buy & hold a LT treasury?

Post by bgf » Wed Nov 06, 2019 2:22 pm

this is a good thread, and im glad OP asked this question. it teases out what it means to actually own a bond, which is something that too often gets obscured by intricate and formidable discussions here about yield curves, correlation, convexity, etc etc.

when you buy a bond, you loan someone (a government, a company) money in exchange for the contractual promise of regular payments of some fixed amount over some fixed period of time. that's it. its really that simple.

if you buy and hold to maturity (rather than SPECULATE, yes i said it, in interest rate movements during the duration of your holding), then you know exactly what the return on your bond will be and how and when it will be paid. this makes fixed income instruments excellent securities for someone who has pretty well known future liabilities, a need to meet those liabilities with investment income, and very little desire to take any risk with their investment.

as someone already said, while these securities are incredibly unlikely to outperform equities over their duration, they come with little risk of you failing to meet your liabilities. if your focus is meeting your liabilities (rather than growing your principal), then you will be quite happy with your investment.

when people start getting into all the other gobbledy gook about what this and that type of bond may do for your portfolio, in this or that particular economic environment, with this particular interest rate, against that particular equity investment, i think it should be called precisely what it is, speculation.
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Re: Why ever buy & hold a LT treasury?

Post by MotoTrojan » Wed Nov 06, 2019 2:37 pm

Portfolio efficiency by holding uncorrelated yet volatile assets.

Geologist
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Re: Why ever buy & hold a LT treasury?

Post by Geologist » Wed Nov 06, 2019 2:57 pm

It is true that Annette Thau generally advises holding bonds to maturity once purchased. However, I do not recall that she suggests buying long-term bonds, whether Treasuries or not. That doesn’t mean she advocates against buying bonds. She suggests buying intermediate bonds as a good combination of maturity and return. That just means you will have to turn over your bond portfolio (or buy a bond mutual fund that will do it for you).

Reasons to buy bonds are not dependent on the maturity question and generally the reasons are not because you expect them to outperform equities.

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Re: Why ever buy & hold a LT treasury?

Post by UberGrub » Wed Nov 06, 2019 3:10 pm

Geologist wrote:
Wed Nov 06, 2019 2:57 pm
It is true that Annette Thau generally advises holding bonds to maturity once purchased. However, I do not recall that she suggests buying long-term bonds, whether Treasuries or not. That doesn’t mean she advocates against buying bonds. She suggests buying intermediate bonds as a good combination of maturity and return. That just means you will have to turn over your bond portfolio (or buy a bond mutual fund that will do it for you).

Reasons to buy bonds are not dependent on the maturity question and generally the reasons are not because you expect them to outperform equities.
She doesn't in general. But she had a chapter about bond barbells. In that context, she seemed to say you just buy and hold the LT bond.

I just don't get it. You should just grab that money that was gonna get used for buying and holding until maturity that LT bond and put it into stocks instead and you're far far far more likely to end up with more money at the end.
MotoTrojan wrote:
Wed Nov 06, 2019 2:37 pm
Portfolio efficiency by holding uncorrelated yet volatile assets.
Portfolio efficiency is only realized if you rebalance. Diversification actually has no impact at all unless you rebalance.

And by definition, if you hold a LT bond to maturity, you're not rebalancing anything.

Which is why in my OP, I say the only reason why you'd do it is if you were willing to sell and rebalance beforehand.

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Re: Why ever buy & hold a LT treasury?

Post by MotoTrojan » Wed Nov 06, 2019 3:20 pm

UberGrub wrote:
Wed Nov 06, 2019 3:10 pm

Portfolio efficiency is only realized if you rebalance. Diversification actually has no impact at all unless you rebalance.

And by definition, if you hold a LT bond to maturity, you're not rebalancing anything.

Which is why in my OP, I say the only reason why you'd do it is if you were willing to sell and rebalance beforehand.
While I agree it is best practice to rebalance, I do not agree with your statement about portfolio efficiency.

Here is an example from 1987 to present of 50/50 S&P500/LTT and then 100% of each without any rebalancing:

https://www.portfoliovisualizer.com/bac ... ion2_3=100

While a drifting AA is not common, it is clearly improving Sharpe ratio quite a bit. More practically you could envision someone actually holding long-term treasuries to maturity could be re-investing their income in new bonds, to effectively maintain balance without using proceeds from the equity side to rebalance.

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Re: Why ever buy & hold a LT treasury?

Post by fwellimort » Wed Nov 06, 2019 3:37 pm

Outside rebalancing, I too fail to see the purpose of long term treasuries.

You have to be a real bear market believer to believe long term treasuries are worth it (30 years mind you). Treasuries today aren't yield 6, 9, 12 ,15%. It barely beats inflation (might even underperform long term).

Prominent investors like Buffett are against long term treasuries believing them to be riskier than stocks.
I like to believe long term treasuries are meant more for rebalancing in tax advantaged accounts to smooth volatility but nothing much more. Current rates are so low it is more likely inflation to be higher long term.

Figureheads like Bogle preferred intermediate bonds. Investing in long term treasuries with no expectation of selling is essentially believing the US stock market will perform poorly over the next 30 years. If true, then we have to revisit the entire portfolio I feel. I am starting to believe long term treasuries are now speculations for potential negative interest rates going forward.
Last edited by fwellimort on Wed Nov 06, 2019 3:40 pm, edited 1 time in total.

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Re: Why ever buy & hold a LT treasury?

Post by MotoTrojan » Wed Nov 06, 2019 3:37 pm

fwellimort wrote:
Wed Nov 06, 2019 3:37 pm
Outside rebalancing, I too fail to see the purpose of long term treasuries.

You have to be a real bear market believer to believe long term treasuries are worth it (30 years mind you). Treasuries today aren't yield 6, 9, 12 ,15%. It barely beats inflation (might even underperform long term).

Prominent investors like Buffett are against long term treasuries believing them to be riskier than stocks.
I like to believe long term treasuries are meant more for rebalancing in tax advantaged accounts to smooth volatility but nothing much more. Current rates are so low it is more likely inflation to be higher long term.
Do you believe you can time the equity market? If not, why do you think you can time the bond market?

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Re: Why ever buy & hold a LT treasury?

Post by neurosphere » Wed Nov 06, 2019 3:42 pm

UberGrub wrote:
Wed Nov 06, 2019 3:10 pm
I just don't get it. You should just grab that money that was gonna get used for buying and holding until maturity that LT bond and put it into stocks instead and you're far far far more likely to end up with more money at the end.
Ask the question a different way. Why would anyone own any kind of bond at all if retirement is 30+ years away? Suppose I'm 35 and hoping for retirement at 65. Should I be in 100% stocks? Then a year goes by, and I expect retirement in 29 years. Do I buy a bond now? What maturity?
If you have to ask "Is a Target Date fund right for me?", the answer is "Yes".

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305pelusa
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Re: Why ever buy & hold a LT treasury?

Post by 305pelusa » Wed Nov 06, 2019 3:43 pm

MotoTrojan wrote:
Wed Nov 06, 2019 3:20 pm
UberGrub wrote:
Wed Nov 06, 2019 3:10 pm

Portfolio efficiency is only realized if you rebalance. Diversification actually has no impact at all unless you rebalance.

And by definition, if you hold a LT bond to maturity, you're not rebalancing anything.

Which is why in my OP, I say the only reason why you'd do it is if you were willing to sell and rebalance beforehand.
While I agree it is best practice to rebalance, I do not agree with your statement about portfolio efficiency.

Here is an example from 1987 to present of 50/50 S&P500/LTT and then 100% of each without any rebalancing:

https://www.portfoliovisualizer.com/bac ... ion2_3=100

While a drifting AA is not common, it is clearly improving Sharpe ratio quite a bit. More practically you could envision someone actually holding long-term treasuries to maturity could be re-investing their income in new bonds, to effectively maintain balance without using proceeds from the equity side to rebalance.
OP is right. If you don't rebalance, the returns and volatility of the portfolio are just the weighted sum of the constituent returns and volatility. There's no diversification effect then, it's as good as though each asset had a corration of 1.

To get the higher returns and lower risk of a diversified portfolio, you have to rebalance.

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Re: Why ever buy & hold a LT treasury?

Post by fwellimort » Wed Nov 06, 2019 3:44 pm

No. I don't believe I can time the market. However, I do know believing in long term treasuries with low interest rates mean one of two things :

1. Negative interest rates. Very much a speculation/gamble in itself. Also, if this becomes the case, I have no thoughts investing in bonds and would rather put my money in a bank or ibonds.

2. Stock market does poorly for 30 years. If such is true, many people's retirement are in trouble including mine and needs a huge revisit.

And I am more of an optimist than 30 year bear market.

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Re: Why ever buy & hold a LT treasury?

Post by MotoTrojan » Wed Nov 06, 2019 3:48 pm

305pelusa wrote:
Wed Nov 06, 2019 3:43 pm
MotoTrojan wrote:
Wed Nov 06, 2019 3:20 pm
UberGrub wrote:
Wed Nov 06, 2019 3:10 pm

Portfolio efficiency is only realized if you rebalance. Diversification actually has no impact at all unless you rebalance.

And by definition, if you hold a LT bond to maturity, you're not rebalancing anything.

Which is why in my OP, I say the only reason why you'd do it is if you were willing to sell and rebalance beforehand.
While I agree it is best practice to rebalance, I do not agree with your statement about portfolio efficiency.

Here is an example from 1987 to present of 50/50 S&P500/LTT and then 100% of each without any rebalancing:

https://www.portfoliovisualizer.com/bac ... ion2_3=100

While a drifting AA is not common, it is clearly improving Sharpe ratio quite a bit. More practically you could envision someone actually holding long-term treasuries to maturity could be re-investing their income in new bonds, to effectively maintain balance without using proceeds from the equity side to rebalance.
OP is right. If you don't rebalance, the returns and volatility of the portfolio are just the weighted sum of the constituent returns and volatility. There's no diversification effect then, it's as good as though each asset had a corration of 1.

To get the higher returns and lower risk of a diversified portfolio, you have to rebalance.
How was the risk-adjusted return of the unbalanced holding in the above Portfolio Visualizer link not better than holding either asset alone? There was no rebalancing there...

Volatility is the weighted sum?!?! How is the correlation not relevant?

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Re: Why ever buy & hold a LT treasury?

Post by fwellimort » Wed Nov 06, 2019 4:52 pm

OP mentioned a single LT Treasury (and holding to maturity). Not a LT Treasury fund. Those two are very different.

If you are planning to buy and hold treasuries to maturity, you might as well purchase EE Bonds.
Why buy and hold LT Treasuries to maturity (especially not LT Treasury funds) at today's rate? All I can think of at end of day is : 30 year bear market belief.

Also, don't forget to take inflation into account. More than likely, your purchasing power in today's rate of LT Treasury is going to be much lower especially after tax.
I like to believe LT Treasuries were meant for institutional needs (since some are required to purchase such) and/or for rebalancing purposes (buy low sell high).


All these portfolio visualizers are for LT Treasury funds. A single LT Treasury if held to maturity has no interest rate risks. You only face post-tax inflation rate risk. In that matter, TIPS/I Bonds might just be better bets.
Although at the rates LT Treasuries are today, EE Bonds simply make more sense if you plan to hold to maturity. Higher rate and hyper inflation risk on both sides.
Last edited by fwellimort on Wed Nov 06, 2019 5:06 pm, edited 2 times in total.

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Re: Why ever buy & hold a LT treasury?

Post by MotoTrojan » Wed Nov 06, 2019 5:00 pm

fwellimort wrote:
Wed Nov 06, 2019 4:52 pm
OP mentioned a single LT Treasury (and holding to maturity). Not a LT Treasury fund. Those two are very different.

If you are planning to buy and hold treasuries to maturity, you might as well purchase EE Bonds.
Why hold LT Treasuries at today's rate? All I can think of at end of day is : 30 year bear market belief.

Also, don't forget to take inflation into account. More than likely, your purchasing power in today's rate of LT Treasury is going to be much lower especially after tax.
I like to believe LT Treasuries were meant for institutional needs (since some are required to purchase such) and/or for rebalancing purposes (buy low sell high).


All these portfolio visualizers are for LT Treasury funds. A single LT Treasury if held to maturity has no interest rate risks. You only face post-tax inflation rate risk. In that matter, TIPS/I Bonds might just be better bets.
Although at the rates LT Treasuries are today, EE Bonds simply make more sense if you plan to hold to maturity. Higher rate and hyper inflation risk on both sides.
Just like the fund in the PV plot, your bonds market price is also fluctuating and improving efficiency. If you never buy another bond the yes, your duration will reduce over time.

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Re: Why ever buy & hold a LT treasury?

Post by willthrill81 » Wed Nov 06, 2019 5:06 pm

If you absolutely knew that you wouldn't need access to your capital (or principal in the case of bonds) before 30 years, then the evidence is very strong for owning only stocks in such an instance. But none of us knows that we won't need our capital before then, hence, there is a case to be made for owning bonds of some duration, and historically LTT have offered a strong diversification benefit.
“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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Re: Why ever buy & hold a LT treasury?

Post by illumination » Wed Nov 06, 2019 5:22 pm

It's not something I would want to hold, but you would surprised how many people would gladly prefer a "risk free" investment with a consistent cash flow and no/low volatility over even the remote possibility of losing money (even though the data shows that to be extremely unlikely over a 30 year period with stocks).

And since these same people plan to have a portion in fixed income "forever" they might as well get the risk free instrument that has the highest interest rate, which is usually long term treasury bills.

To be fair though, the "30 years of stocks always outperforming bonds" has some bias in that it's true in the United States, but not necessarily everywhere else. Which means it is a possibility here. Had you say been in bonds in the late 1980s in Japan, you would have easily outperformed their stock market over the next 30 years.

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Re: Why ever buy & hold a LT treasury?

Post by willthrill81 » Wed Nov 06, 2019 5:45 pm

illumination wrote:
Wed Nov 06, 2019 5:22 pm
It's not something I would want to hold, but you would surprised how many people would gladly prefer a "risk free" investment with a consistent cash flow and no/low volatility over even the remote possibility of losing money (even though the data shows that to be extremely unlikely over a 30 year period with stocks).

And since these same people plan to have a portion in fixed income "forever" they might as well get the risk free instrument that has the highest interest rate, which is usually long term treasury bills.
My understanding is that the 'risk free instrument' is Treasury bills, not 30 year Treasury bonds.
“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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Re: Why ever buy & hold a LT treasury?

Post by rich126 » Wed Nov 06, 2019 5:50 pm

While not exactly the same, this question is similar to the long thread that has been going on recently.
viewtopic.php?f=1&t=293692&newpost=4826279

Some people are worried about risk and drawdowns of holding 100% stocks, others don't worry about it.

Some people here are obsessed with the worst case, others are willing to take a bit more risk for likely, higher gains.

Rich

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Re: Why ever buy & hold a LT treasury?

Post by illumination » Wed Nov 06, 2019 5:55 pm

willthrill81 wrote:
Wed Nov 06, 2019 5:45 pm
illumination wrote:
Wed Nov 06, 2019 5:22 pm
It's not something I would want to hold, but you would surprised how many people would gladly prefer a "risk free" investment with a consistent cash flow and no/low volatility over even the remote possibility of losing money (even though the data shows that to be extremely unlikely over a 30 year period with stocks).

And since these same people plan to have a portion in fixed income "forever" they might as well get the risk free instrument that has the highest interest rate, which is usually long term treasury bills.
My understanding is that the 'risk free instrument' is Treasury bills, not 30 year Treasury bonds.
Bonds are the longer period, I should have said bonds, not bills.

But considering both are backed by the full faith and credit of the federal government, isn't the default risk is the same?

Obviously longer periods have greater risk from things like inflation, but I always shorthanded "risk free" to mean default risk, not risk from other factors that could erode the value.

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Re: Why ever buy & hold a LT treasury?

Post by 305pelusa » Wed Nov 06, 2019 6:40 pm

MotoTrojan wrote:
Wed Nov 06, 2019 3:48 pm
305pelusa wrote:
Wed Nov 06, 2019 3:43 pm
MotoTrojan wrote:
Wed Nov 06, 2019 3:20 pm
UberGrub wrote:
Wed Nov 06, 2019 3:10 pm

Portfolio efficiency is only realized if you rebalance. Diversification actually has no impact at all unless you rebalance.

And by definition, if you hold a LT bond to maturity, you're not rebalancing anything.

Which is why in my OP, I say the only reason why you'd do it is if you were willing to sell and rebalance beforehand.
While I agree it is best practice to rebalance, I do not agree with your statement about portfolio efficiency.

Here is an example from 1987 to present of 50/50 S&P500/LTT and then 100% of each without any rebalancing:

https://www.portfoliovisualizer.com/bac ... ion2_3=100

While a drifting AA is not common, it is clearly improving Sharpe ratio quite a bit. More practically you could envision someone actually holding long-term treasuries to maturity could be re-investing their income in new bonds, to effectively maintain balance without using proceeds from the equity side to rebalance.
OP is right. If you don't rebalance, the returns and volatility of the portfolio are just the weighted sum of the constituent returns and volatility. There's no diversification effect then, it's as good as though each asset had a corration of 1.

To get the higher returns and lower risk of a diversified portfolio, you have to rebalance.
How was the risk-adjusted return of the unbalanced holding in the above Portfolio Visualizer link not better than holding either asset alone? There was no rebalancing there...

Volatility is the weighted sum?!?! How is the correlation not relevant?
Huh you're right. Eerie. The terminal wealth is just the average of the other two as I expected. That's what I meant by "the returns are a weighted average.

I did expect the volatility to be an average as well. Looks like I was incorrect.

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Re: Why ever buy & hold a LT treasury?

Post by MotoTrojan » Wed Nov 06, 2019 7:01 pm

305pelusa wrote:
Wed Nov 06, 2019 6:40 pm
MotoTrojan wrote:
Wed Nov 06, 2019 3:48 pm
305pelusa wrote:
Wed Nov 06, 2019 3:43 pm
MotoTrojan wrote:
Wed Nov 06, 2019 3:20 pm
UberGrub wrote:
Wed Nov 06, 2019 3:10 pm

Portfolio efficiency is only realized if you rebalance. Diversification actually has no impact at all unless you rebalance.

And by definition, if you hold a LT bond to maturity, you're not rebalancing anything.

Which is why in my OP, I say the only reason why you'd do it is if you were willing to sell and rebalance beforehand.
While I agree it is best practice to rebalance, I do not agree with your statement about portfolio efficiency.

Here is an example from 1987 to present of 50/50 S&P500/LTT and then 100% of each without any rebalancing:

https://www.portfoliovisualizer.com/bac ... ion2_3=100

While a drifting AA is not common, it is clearly improving Sharpe ratio quite a bit. More practically you could envision someone actually holding long-term treasuries to maturity could be re-investing their income in new bonds, to effectively maintain balance without using proceeds from the equity side to rebalance.
OP is right. If you don't rebalance, the returns and volatility of the portfolio are just the weighted sum of the constituent returns and volatility. There's no diversification effect then, it's as good as though each asset had a corration of 1.

To get the higher returns and lower risk of a diversified portfolio, you have to rebalance.
How was the risk-adjusted return of the unbalanced holding in the above Portfolio Visualizer link not better than holding either asset alone? There was no rebalancing there...

Volatility is the weighted sum?!?! How is the correlation not relevant?
Huh you're right. Eerie. The terminal wealth is just the average of the other two as I expected. That's what I meant by "the returns are a weighted average.

I did expect the volatility to be an average as well. Looks like I was incorrect.
Right on. Yeah the return part makes sense, but the volatility should certainly be improved. In the "perfect" scenario where you don't touch it for 30 years anyways that doesn't help you much, where rebalancing may have actually improved your return, but at-least there would be less volatility to impact an unplanned withdrawal/liquidation prior to the 30 years.

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Re: Why ever buy & hold a LT treasury?

Post by willthrill81 » Wed Nov 06, 2019 8:09 pm

illumination wrote:
Wed Nov 06, 2019 5:55 pm
willthrill81 wrote:
Wed Nov 06, 2019 5:45 pm
illumination wrote:
Wed Nov 06, 2019 5:22 pm
It's not something I would want to hold, but you would surprised how many people would gladly prefer a "risk free" investment with a consistent cash flow and no/low volatility over even the remote possibility of losing money (even though the data shows that to be extremely unlikely over a 30 year period with stocks).

And since these same people plan to have a portion in fixed income "forever" they might as well get the risk free instrument that has the highest interest rate, which is usually long term treasury bills.
My understanding is that the 'risk free instrument' is Treasury bills, not 30 year Treasury bonds.
Bonds are the longer period, I should have said bonds, not bills.

But considering both are backed by the full faith and credit of the federal government, isn't the default risk is the same?

Obviously longer periods have greater risk from things like inflation, but I always shorthanded "risk free" to mean default risk, not risk from other factors that could erode the value.
By convention, I believe that the 'risk free instrument' is taken to be T-bills only. Bonds, while they don't have default risk, obviously experience many other risks as well (e.g. interest rate risk, inflation risk). Personally, I loathe the idea of a 'risk free instrument' because no such instrument exists in reality.
“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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Re: Why ever buy & hold a LT treasury?

Post by Phineas J. Whoopee » Wed Nov 06, 2019 9:28 pm

illumination wrote:
Wed Nov 06, 2019 5:55 pm
...
But considering both are backed by the full faith and credit of the federal government, isn't the default risk is the same?

Obviously longer periods have greater risk from things like inflation, but I always shorthanded "risk free" to mean default risk, not risk from other factors that could erode the value.
No, of course the default risk isn't the same. We already saw brinksmanship with a threat to hold ourselves and the whole world hostage with default. Thirty years is fifteen congresses. Now that the subject has been broached it may come up again.

Four weeks is a much shorter period in which to suppose Congress won't intentionally shoot us all in the head.

There was a scene in the old movie Blazing Saddles that expressed the concept.

PJW

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Re: Why ever buy & hold a LT treasury?

Post by Scooter57 » Wed Nov 06, 2019 10:40 pm

I fail to see how anyone could possibly know what their liabilities will be in 30 years. The costs of just about anything that far out is unknowable and there may be liabilities that you can't imagine now.

Who budgeted for their mobile phone bill 30 years ago? Who could have imagined they would need drugs that could cost hundreds of thoudsnds of dollars or more to survive?

Looking at bond performance through a period of steadily decreasing interest rates, starting in the 1980s, to draw any conclusions about the future is also misleading. It is hard to justify locking in 2.29% for 30 years. 9% wasn't great, but it doubled your principal every 8 years. At the current rate you don't complete a single double in 30 years. Even very moderate inflation wipes you out.

Five years seems like the mist reasonable horizon to plan for. Locking up money longer is very risky and that risk is not being compensated right now.

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Re: Why ever buy & hold a LT treasury?

Post by UberGrub » Wed Nov 06, 2019 11:26 pm

neurosphere wrote:
Wed Nov 06, 2019 3:42 pm

Ask the question a different way. Why would anyone own any kind of bond at all if retirement is 30+ years away?
I'm guessing people have liabilities other than retirement so bonds would make sense. That said, my original question could be asked as "why would you invest any retirement savings in bonds if retirement is over 30 years from now?". I've gotten some answers thus far.
neurosphere wrote:
Wed Nov 06, 2019 3:42 pm
Then a year goes by, and I expect retirement in 29 years. Do I buy a bond now? What maturity?
Idk probably not? It seems like as you decrease the horizon (say 15 years) then bonds do have a much higher possiblity of beating stocks. Stocks wouldn't be a no-brainer then (like they are with 30 year bonds were even if you sell at the low of the worst bear market, you still came out ahead in stocks).

So once retirement is 15 years away, then you'd buy a 15 year treasury and go from there?

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Re: Why ever buy & hold a LT treasury?

Post by ARoseByAnyOtherName » Wed Nov 06, 2019 11:42 pm

UberGrub wrote:
Wed Nov 06, 2019 3:10 pm
I just don't get it. You should just grab that money that was gonna get used for buying and holding until maturity that LT bond and put it into stocks instead and you're far far far more likely to end up with more money at the end.
Read what bgf said in this post and you will get it:
viewtopic.php?p=4826297#p4826631

Very clear and gets to the heart of your question.

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Re: Why ever buy & hold a LT treasury?

Post by Fryxell » Thu Nov 07, 2019 12:00 am

UberGrub wrote:
Wed Nov 06, 2019 11:50 am
I'm not saying stocks will ALWAYS outperform LT bonds over the life of the bond itself. But so far they always have. So the odds are stacked against buying and holding LT bonds.
Is your statement that so far equities have always outperformed over the life of the bond? If so, that wouldn’t quite be correct either. According to Larry Swedroe, long-term treasuries outperformed equities over the 40-year period from 1969 to 2008:

https://www.etf.com/sections/index-inve ... ssons-2018
Or consider the even longer 40-year period from 1969 through 2008, when the U.S. total stock market returned 8.8% and underperformed the 8.9% return of long-term U.S. Treasuries.
Granted, that’s a bit cherry-picked, but it shows that equities can underperform long-term treasuries for more than 30 years.

And it’s also with noting long term treasuries have outperformed equities over the last 20 years or so, and with less volatility.

I agree equities generally outperform in the long run, though. And long term treasuries are unlikely to outperform equities in the future, given current interest rates. But it’s worth pointing out they have in some cases outperformed equities over very long periods. And given their low correlation with equities, that makes them worth considering in a portfolio.

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Re: Why ever buy & hold a LT treasury?

Post by UberGrub » Thu Nov 07, 2019 12:16 am

ARoseByAnyOtherName wrote:
Wed Nov 06, 2019 11:42 pm
UberGrub wrote:
Wed Nov 06, 2019 3:10 pm
I just don't get it. You should just grab that money that was gonna get used for buying and holding until maturity that LT bond and put it into stocks instead and you're far far far more likely to end up with more money at the end.
Read what bgf said in this post and you will get it:
viewtopic.php?p=4826297#p4826631

Very clear and gets to the heart of your question.
I can't think of a single liability I would have for that long period of time in nominal terms. Buying a LT TIPs makes sense to me for what bgf says: Maybe you'd make more money using stocks but you know for sure it'll work out with the TIPs so it's good enough.

But LT treasuries are the ones I find perplexing.
Fryxell wrote:
Thu Nov 07, 2019 12:00 am
UberGrub wrote:
Wed Nov 06, 2019 11:50 am
I'm not saying stocks will ALWAYS outperform LT bonds over the life of the bond itself. But so far they always have. So the odds are stacked against buying and holding LT bonds.
Is your statement that so far equities have always outperformed over the life of the bond? If so, that wouldn’t quite be correct either. According to Larry Swedroe, long-term treasuries outperformed equities over the 40-year period from 1969 to 2008:

https://www.etf.com/sections/index-inve ... ssons-2018
Or consider the even longer 40-year period from 1969 through 2008, when the U.S. total stock market returned 8.8% and underperformed the 8.9% return of long-term U.S. Treasuries.
Granted, that’s a bit cherry-picked, but it shows that equities can underperform long-term treasuries for more than 30 years.

And it’s also with noting long term treasuries have outperformed equities over the last 20 years or so, and with less volatility.

I agree equities generally outperform in the long run, though. And long term treasuries are unlikely to outperform equities in the future, given current interest rates. But it’s worth pointing out they have in some cases outperformed equities over very long periods. And given their low correlation with equities, that makes them worth considering in a portfolio.
But is that representative of buying a LT bond in 1969 and holding to maturity until 1999?

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Re: Why ever buy & hold a LT treasury?

Post by illumination » Thu Nov 07, 2019 12:27 am

Phineas J. Whoopee wrote:
Wed Nov 06, 2019 9:28 pm
illumination wrote:
Wed Nov 06, 2019 5:55 pm
...
But considering both are backed by the full faith and credit of the federal government, isn't the default risk is the same?

Obviously longer periods have greater risk from things like inflation, but I always shorthanded "risk free" to mean default risk, not risk from other factors that could erode the value.
No, of course the default risk isn't the same. We already saw brinksmanship with a threat to hold ourselves and the whole world hostage with default. Thirty years is fifteen congresses. Now that the subject has been broached it may come up again.

Four weeks is a much shorter period in which to suppose Congress won't intentionally shoot us all in the head.

There was a scene in the old movie Blazing Saddles that expressed the concept.

PJW
But if the 4 week period was during a political "brinkmanship" couldn't the same thing be said about those short-term instruments? That they have the same risk?

If the US government defaults on long term treasury bonds, something tells me the short term ones are also in jeopardy.

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Re: Why ever buy & hold a LT treasury?

Post by Fryxell » Thu Nov 07, 2019 12:29 am

UberGrub wrote:
Thu Nov 07, 2019 12:16 am

But is that representative of buying a LT bond in 1969 and holding to maturity until 1999?
No, it wouldn’t be representative of holding that treasury until maturity.

I think what Larry did was to use a 30-year treasury, and then sell it and reinvest into a new 30-year treasury the next year, because I can’t quite match his figures with the long-term treasury fund data I have (but it comes close to his). But if you had a 1969-vintage 30-year treasury in the year 1998, it would behave more like a 1-year treasury anyway. We don’t expect long-term treasuries to behave the same way as they approach maturity.

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Re: Why ever buy & hold a LT treasury?

Post by UberGrub » Thu Nov 07, 2019 12:35 am

Fryxell wrote:
Thu Nov 07, 2019 12:29 am
UberGrub wrote:
Thu Nov 07, 2019 12:16 am

But is that representative of buying a LT bond in 1969 and holding to maturity until 1999?
No, it wouldn’t be representative of holding that treasury until maturity.

I think what Larry did was to use a 30-year treasury, and then sell it and reinvest into a new 30-year treasury the next year, because I can’t quite match his figures with the long-term treasury fund data I have (but it comes close to his). But if you had a 1969-vintage 30-year treasury in the year 1998, it would behave more like a 1-year treasury anyway. We don’t expect long-term treasuries to behave the same way as they approach maturity.
Right, holding a bond to maturity wouldn't benefit much from the excellent bond bull market from 1981-2008.

That's why I'm not asking about LT bond funds or something like that. Clearly that can outperform. But just simply buying and holding a bond. Your returns will be basically the coupon. Not exactly since you reinvest at other yields but close to that.

Current yields are 2.2%. What are the odds that stock give an annualized 2.2% nominal return over the next 30 years. I'm not saying it's zero but it seems really, really low.

So in terms of risk, as long as you just ignore the volatility (you invest and don't peak), stocks just seem far likelier to be superior.

EDIT: I looked it up on The Intelligent Asset Allocator. Historically, from 1926 to 1994, there has not been a single 30 year period were stocks did not have a CAGR of less than 8%. Of course, things can always change. But it just seems so unlikely that they would underperform a 2.2% 30 year bond over the life of said bond. It's not a bet I'd take 0_o
Last edited by UberGrub on Thu Nov 07, 2019 12:41 am, edited 1 time in total.

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Re: Why ever buy & hold a LT treasury?

Post by retired@50 » Thu Nov 07, 2019 12:36 am

UberGrub wrote:
Thu Nov 07, 2019 12:16 am

I can't think of a single liability I would have for that long period of time in nominal terms.

What about a fixed rate 30 year mortgage? From what I understand, they are pretty common.

Regards,

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Re: Why ever buy & hold a LT treasury?

Post by UberGrub » Thu Nov 07, 2019 12:39 am

retired@50 wrote:
Thu Nov 07, 2019 12:36 am
UberGrub wrote:
Thu Nov 07, 2019 12:16 am

I can't think of a single liability I would have for that long period of time in nominal terms.

What about a fixed rate 30 year mortgage? From what I understand, they are pretty common.

Regards,
My mortgage is amortized how about yours?

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Re: Why ever buy & hold a LT treasury?

Post by 305pelusa » Thu Nov 07, 2019 12:46 am

retired@50 wrote:
Thu Nov 07, 2019 12:36 am
UberGrub wrote:
Thu Nov 07, 2019 12:16 am

I can't think of a single liability I would have for that long period of time in nominal terms.

What about a fixed rate 30 year mortgage? From what I understand, they are pretty common.

Regards,
Haha could you imagine?
"All right, I have a 4.5% mortgage with 200k outstanding balance and I have 200k in cash. How to deal with this liability umh? Oh I know, I will purchase a 30 year ladder of treasuries, with yields of 1-2%, to hedge my risk."

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Re: Why ever buy & hold a LT treasury?

Post by illumination » Thu Nov 07, 2019 12:48 am

willthrill81 wrote:
Wed Nov 06, 2019 8:09 pm
illumination wrote:
Wed Nov 06, 2019 5:55 pm
willthrill81 wrote:
Wed Nov 06, 2019 5:45 pm
illumination wrote:
Wed Nov 06, 2019 5:22 pm
It's not something I would want to hold, but you would surprised how many people would gladly prefer a "risk free" investment with a consistent cash flow and no/low volatility over even the remote possibility of losing money (even though the data shows that to be extremely unlikely over a 30 year period with stocks).

And since these same people plan to have a portion in fixed income "forever" they might as well get the risk free instrument that has the highest interest rate, which is usually long term treasury bills.
My understanding is that the 'risk free instrument' is Treasury bills, not 30 year Treasury bonds.
Bonds are the longer period, I should have said bonds, not bills.

But considering both are backed by the full faith and credit of the federal government, isn't the default risk is the same?

Obviously longer periods have greater risk from things like inflation, but I always shorthanded "risk free" to mean default risk, not risk from other factors that could erode the value.
By convention, I believe that the 'risk free instrument' is taken to be T-bills only. Bonds, while they don't have default risk, obviously experience many other risks as well (e.g. interest rate risk, inflation risk). Personally, I loathe the idea of a 'risk free instrument' because no such instrument exists in reality.
I see treasury bonds being labeled "risk-free" all over the place, I remember being taught this in economics, is there a formal definition somewhere that has the exact time frame when you can no longer call it that?

I would also argue is a bad label anyway that is incorrect however its used.


I just did a little searching, I couldn't find any place that made the distinction.

"United States Treasury notes and United States Treasury bonds are often assumed to be risk-free bonds."
https://en.wikipedia.org/wiki/Risk-free_bond

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Re: Why ever buy & hold a LT treasury?

Post by politely » Thu Nov 07, 2019 1:52 am

UberGrub wrote:
Wed Nov 06, 2019 11:27 am
So for an investor who will willingly wait for 30 years and not sell, stocks seem like a no-brainer.

In other words, if you don't need the money for more than 3 decades, why would you ever buy bonds at all? Is it purely from the psychology stability of bonds?
Equities will likely perform better over that period based on historical performance, but 30 years is a long time. It would be a "no-brainer" if you knew that your financial condition wouldn't change in that time, and past performance guaranteed future performance - but, those are assumptions which may not turn out to be true. The "psychology stability of bonds" should be compared with the psychological assumptions of personal financial stability and past performance holding true over the next 30 years. In my view, the performance and return of LT treasuries held to maturity is more certain than either of those assumptions. Whether that additional certainty is worth exchanging for a possible higher return 30 years later, is a personal decision. And it doesn't have to be an all-or-nothing decision, you can buy both equities and bonds.

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