Are Treasury Bonds no longer a safe haven w/ 0% interest rates

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JimmyJammy
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Are Treasury Bonds no longer a safe haven w/ 0% interest rates

Post by JimmyJammy » Tue Mar 10, 2020 7:35 am

I caught a snippet of someone on Bloomberg radio saying that Treasury Bonds will no longer be a safe haven in a Japan-style 0% interest rate environment.

Can someone explain?

And what will be the “safe haven” asset class? Other types of bonds?

earningaverage
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Re: Are Treasury Bonds no longer a safe haven w/ 0% interest rates

Post by earningaverage » Tue Mar 10, 2020 7:42 am

Maybe another way to look at it is that treasuries are close to 0% interest BECAUSE they are a safe haven asset.

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Re: Are Treasury Bonds no longer a safe haven w/ 0% interest rates

Post by Grt2bOutdoors » Tue Mar 10, 2020 7:43 am

Always important to hear it in it’s full context rather than a blurb as you did. The U.S. is the worlds reserve country, people don’t buy Japanese government obligations when markets fall, they buy US Treasuries and even if interest rates did go to zero, the fact remains there are countries with negative rates so which would you rather own?
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Re: Are Treasury Bonds no longer a safe haven w/ 0% interest rates

Post by Seasonal » Tue Mar 10, 2020 7:45 am

Treasuries are regarded as a safe haven because they are government bonds with the largest amount outstanding and the highest degree of liquidity. That's not changing.

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Re: Are Treasury Bonds no longer a safe haven w/ 0% interest rates

Post by Call_Me_Op » Tue Mar 10, 2020 7:46 am

That;s the problem with these snippets. They do not explain what they are saying. Basically, they are saying that at very low interest rates, you should not expect a large increase in the value of long-dated treasuries to offset stock declines in a "flight to safety" scenario. Also, you become susceptible to losses when the flight reverse direction.

Stick to Tbills and you do not have to worry about losses when the process reverses.
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Re: Are Treasury Bonds no longer a safe haven w/ 0% interest rates

Post by sabtastic » Tue Mar 10, 2020 8:02 am

earningaverage wrote:
Tue Mar 10, 2020 7:42 am
Maybe another way to look at it is that treasuries are close to 0% interest BECAUSE they are a safe haven asset.
This is a good way to look at it. The interest rates are low because demand is high. German sovereign debt has negative yields because they are one of the few countries in the EU that will return your investment. Yes, there is inflation risk - but there always was inflation risk.

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Re: Are Treasury Bonds no longer a safe haven w/ 0% interest rates

Post by Ramjet » Tue Mar 10, 2020 8:08 am

What country is comparable to the U.S. with significantly higher rates?

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Re: Are Treasury Bonds no longer a safe haven w/ 0% interest rates

Post by lazyday » Tue Mar 10, 2020 10:09 am

For institutional investors with nominal future obligations, Treasuries might be safe.

For individuals with real future spending needs:

Long term Treasuries are not safe. Their value will fall if interest rates rise quickly. Even if held to maturity, inflation could destroy value.

I bonds are safe. TIPS held to maturity are safe. Short term Treasuries have some inflation risk, but many people see them as safe.

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Re: Are Treasury Bonds no longer a safe haven w/ 0% interest rates

Post by aristotelian » Tue Mar 10, 2020 10:21 am

The are safe haven if you mean that they have close to zero credit risk. They are not a safe haven (and never have been) if you mean guaranteed real return.

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Re: Are Treasury Bonds no longer a safe haven w/ 0% interest rates

Post by dbr » Tue Mar 10, 2020 10:31 am

I don't think "safe haven" is useful terminology. Of course being on a website where sailing the seven seas is the overriding metaphor I guess seeking a harbor when storms abound makes sense. https://www.merriam-webster.com/dictionary/haven

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Re: Are Treasury Bonds no longer a safe haven w/ 0% interest rates

Post by Phineas J. Whoopee » Tue Mar 10, 2020 6:02 pm

dbr wrote:
Tue Mar 10, 2020 10:31 am
I don't think "safe haven" is useful terminology. Of course being on a website where sailing the seven seas is the overriding metaphor I guess seeking a harbor when storms abound makes sense. https://www.merriam-webster.com/dictionary/haven
I agree with dbr.

OP: what is it you want to remain safe from? Treasuries might or might not help keep you safe from it.

If safe is just sort of a catch-all term, with respect to investing it's poorly defined. Really it's an emotive word, loaded language, a term used to manipulate potential customers.

It's perfectly reasonable to seek safety from a threat. There are many. What threat is it?

PJW

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Re: Are Treasury Bonds no longer a safe haven w/ 0% interest rates

Post by Xrayman69 » Tue Mar 10, 2020 10:38 pm

If a bond has a “zero” interest rate, isn’t this more inconvenient to buy this bond than to just hold the cash. In this circumstance would banks start to consider charging “negative” interest in savings or checking accounts.

The low interest for fixed income and the “safe haven” is making investors seeking return to lean towards equities. It’s interesting that the bond market is significantly larger than the equity market and thus in a zero interest environment it would appear most money remains in a “safe haven” but this has always been the case where most money sits in bonds.

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Re: Are Treasury Bonds no longer a safe haven w/ 0% interest rates

Post by JimmyJammy » Tue Mar 10, 2020 11:16 pm

Well, it looks like they had someone come on to say that 30 Year Treasuries are the *only* safe haven asset right now. Ha.

https://www.bloomberg.com/news/videos/2 ... sury-video

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Re: Are Treasury Bonds no longer a safe haven w/ 0% interest rates

Post by Theoretical » Tue Mar 10, 2020 11:19 pm

In the bond world, a safe haven is often seen as a fount of liquidity in illiquid, frozen times. This is why countries with huge amounts of sovereign debt and stable governments (Japan and USA) are the big safe havens. Less liquid but still ultrasafe are places like Switzerland and Germany that may not have as much debt but are highly fiscally disciplined. A 30 year treasury bond will pay 1%, likely lose money in real terms to inflation over that time, but those are all known factors, and regardless, whoever owns the 30 year bond in 30 years is going to receive the full entitled payout and will be receiving all of those coupon payments. That's a safe haven in a deflationary/panic situation. The downside is that the only risks being taken are those of duration explicitly and inflation implicitly or explicitly, depending on whether the bonds are inflation-linked.

Let's say you're an insurance company that just underwrote a $1,000,000 30 year annuity for an injury settlement. You buy a stripped 30 year bond for X dollars, say $950,000. You don't care if there's a whole period of the 1970s that destroys wealth via inflation. All you have to do is pay out $1 million in 30 years. That bond will be right there for you then, regardless of whether it was a good deal or not.

These traits aren't a big help if there's a massive, sudden inflationary shock - say the Saudis, OPEC, and Russia decided to near-completely shut off the oil spigot to cause $200/barrel oil prices and news comes out that some terrorist group has successfully mined the straits of Hormuz) or less dramatic but still severe inflation. The downside in that situation would be that treasuries are easier to pay off, but the market's already priced that in with AA+ or AAA credit ratings. The reason is that nobody expects a major developed economy to default on their debt, so the miniscule black swan risk is at most priced in at like .000001% of the bond's price. On the other hand, junk bonds or emerging market bonds love inflation because now it's easier for the lender to pay the debt off, leading to ratings upgrades, which push the prices higher.

A 6% B bond might all of a sudden turn into a BBB or even A corporate bond if the inflation was sufficient to make the borrower's ability to repay that much greater. While the effective purchase yield goes down, the price of the bond is greatly increased due to its having a high interest rate at a (more) respectable credit rating.

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Re: Are Treasury Bonds no longer a safe haven w/ 0% interest rates

Post by watchnerd » Wed Mar 11, 2020 12:21 am

JimmyJammy wrote:
Tue Mar 10, 2020 11:16 pm
Well, it looks like they had someone come on to say that 30 Year Treasuries are the *only* safe haven asset right now. Ha.

https://www.bloomberg.com/news/videos/2 ... sury-video
So all my 20 year Treasuries are screwed?

Oh man.....
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Re: Are Treasury Bonds no longer a safe haven w/ 0% interest rates

Post by FIREchief » Wed Mar 11, 2020 1:46 am

Please define "safe haven." What does this require?
Last edited by FIREchief on Wed Mar 11, 2020 2:35 am, edited 1 time in total.
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Re: Are Treasury Bonds no longer a safe haven w/ 0% interest rates

Post by watchnerd » Wed Mar 11, 2020 1:56 am

FIREchief wrote:
Wed Mar 11, 2020 1:46 am
Please define "safe haven." That does this require?
Start with a safe?
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Re: Are Treasury Bonds no longer a safe haven w/ 0% interest rates

Post by FIREchief » Wed Mar 11, 2020 2:36 am

watchnerd wrote:
Wed Mar 11, 2020 1:56 am
FIREchief wrote:
Wed Mar 11, 2020 1:46 am
Please define "safe haven." What does this require?
Start with a safe?
Lol. Probably the right approach (dude). :D
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Re: Are Treasury Bonds no longer a safe haven w/ 0% interest rates

Post by watchnerd » Wed Mar 11, 2020 9:29 am

FIREchief wrote:
Wed Mar 11, 2020 2:36 am

Lol. Probably the right approach (dude). :D
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Re: Are Treasury Bonds no longer a safe haven w/ 0% interest rates

Post by vineviz » Wed Mar 11, 2020 9:41 am

lazyday wrote:
Tue Mar 10, 2020 10:09 am
For institutional investors with nominal future obligations, Treasuries might be safe.

For individuals with real future spending needs:

Long term Treasuries are not safe. Their value will fall if interest rates rise quickly. Even if held to maturity, inflation could destroy value.

I bonds are safe. TIPS held to maturity are safe. Short term Treasuries have some inflation risk, but many people see them as safe.
This is a great summary.

I'd just add that for an investor with future nominal spending, the closest thing there is to a risk-free asset is a zero-coupon US Treasury bond with a maturity date matching the date of the future expense.

For an investor with future real spending, the closest thing there would be to a risk-free asset is a zero-coupon US TIPS bond with a maturity date matching the date of the future expense. The closest thing to this that actually exists are Series I Savings Bonds. Because TIPS have coupon payments (which must be reinvested), they still possess some amount of real interest rate risk.
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Re: Are Treasury Bonds no longer a safe haven w/ 0% interest rates

Post by Seasonal » Wed Mar 11, 2020 9:50 am

vineviz wrote:
Wed Mar 11, 2020 9:41 am
lazyday wrote:
Tue Mar 10, 2020 10:09 am
For institutional investors with nominal future obligations, Treasuries might be safe.

For individuals with real future spending needs:

Long term Treasuries are not safe. Their value will fall if interest rates rise quickly. Even if held to maturity, inflation could destroy value.

I bonds are safe. TIPS held to maturity are safe. Short term Treasuries have some inflation risk, but many people see them as safe.
This is a great summary.

I'd just add that for an investor with future nominal spending, the closest thing there is to a risk-free asset is a zero-coupon US Treasury bond with a maturity date matching the date of the future expense.

For an investor with future real spending, the closest thing there would be to a risk-free asset is a zero-coupon US TIPS bond with a maturity date matching the date of the future expense. The closest thing to this that actually exists are Series I Savings Bonds. Because TIPS have coupon payments (which must be reinvested), they still possess some amount of real interest rate risk.
If economic growth is slow for a substantial period, interest rates and inflation are likely to be low for a substantial period. A market average duration bond portfolio could be fine. For a long-term investor, the temporary loss of principal value due to higher rates will eventually be more than made up through the increased interest.

If economic growth picks up, stocks will likely to do rather well, more than making up for any temporary issues with bonds.

A portfolio consisting solely of bonds, especially very short or very long bonds, seems foolish.

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Re: Are Treasury Bonds no longer a safe haven w/ 0% interest rates

Post by dbr » Wed Mar 11, 2020 9:56 am

Theoretical wrote:
Tue Mar 10, 2020 11:19 pm
In the bond world, a safe haven is often seen as a fount of liquidity in illiquid, frozen times.

--snip--
Thanks for a great description of what this is actually all about.

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Re: Are Treasury Bonds no longer a safe haven w/ 0% interest rates

Post by vineviz » Wed Mar 11, 2020 10:20 am

Seasonal wrote:
Wed Mar 11, 2020 9:50 am
If economic growth is slow for a substantial period, interest rates and inflation are likely to be low for a substantial period.
That is probably true, but "likely to be low" is another way of saying "possibly not low". It's not like we don't have plenty of examples of economies that have faced low growth coupled with inflation.

Changes in real yields and inflation represent very definite risks for most investors, and I think people should - at the very least - have a realistic view of the risks they are taking on in their portfolio. Investing in intermediate-term bonds, instead of long-term bonds, when your savings goal is a long-term goal is increasing interest rate risk. I think a minority of Bogleheads (or investors in general) realize this.

Moreover, failing to match the average duration of your assets to your investment time horizon is an active decision to bet on the future path of bond yields: it's a form of market timing, and I don't think most Bogleheads realize this either.
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Re: Are Treasury Bonds no longer a safe haven w/ 0% interest rates

Post by Seasonal » Wed Mar 11, 2020 10:26 am

vineviz wrote:
Wed Mar 11, 2020 10:20 am
Seasonal wrote:
Wed Mar 11, 2020 9:50 am
If economic growth is slow for a substantial period, interest rates and inflation are likely to be low for a substantial period.
That is probably true, but "likely to be low" is another way of saying "possibly not low". It's not like we don't have plenty of examples of economies that have faced low growth coupled with inflation.

Changes in real yields and inflation represent very definite risks for most investors, and I think people should - at the very least - have a realistic view of the risks they are taking on in their portfolio. Investing in intermediate-term bonds, instead of long-term bonds, when your savings goal is a long-term goal is increasing interest rate risk. I think a minority of Bogleheads (or investors in general) realize this.

Moreover, failing to match the average duration of your assets to your investment time horizon is an active decision to bet on the future path of bond yields: it's a form of market timing, and I don't think most Bogleheads realize this either.
That's why you should diversify, owning a reasonable mix of stocks and bonds, as I endeavored to suggest in the other part of my post. I believe the better course is to look at your entire portfolio rather than one portion in isolation.

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Re: Are Treasury Bonds no longer a safe haven w/ 0% interest rates

Post by watchnerd » Wed Mar 11, 2020 10:28 am

vineviz wrote:
Wed Mar 11, 2020 10:20 am
Investing in intermediate-term bonds, instead of long-term bonds, when your savings goal is a long-term goal is increasing interest rate risk. I think a minority of Bogleheads (or investors in general) realize this.
I'm going to go a step further:

I think most Bogleheads have an overly simplistic view of fixed income, a "set it and forget it" allocation to TBM as a low-volatility asset that kicks off yield, and that's it.

Interest rate and inflation risk are under-appreciated.

Yield-chasing behavior seems to be common, and likely to increase. This will increase credit risk exposure.
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Re: Are Treasury Bonds no longer a safe haven w/ 0% interest rates

Post by garlandwhizzer » Wed Mar 11, 2020 12:13 pm

vineviz wrote: ↑Wed Mar 11, 2020 10:20 am

Investing in intermediate-term bonds, instead of long-term bonds, when your savings goal is a long-term goal is increasing interest rate risk. I think a minority of Bogleheads (or investors in general) realize this.
I believe that aligning your bond duration to your long term goals as suggested above implies that all young or middle aged investors should hold only LT bonds, presumably LTT, because they have long time horizons. There are many problems with that approach but the biggest problem IMO is that no one knows exactly when they will need money in the future and how much money they will need at that point. There are nasty things like divorces, lawsuits, emergencies, loss of home to fire or flood, sons and daughters who need sudden cash inflows, loss of job or income stream, disability so you can no longer work, early onset of dementia or incapacitating health issues requiring long term care, the list goes on and on. At those times which are unpredictable as to when they will happens or how much money they will require, one needs to have access to stable, safe, and low volatility source of fixed income. LTTs are much more volatile than STT in principal value as interest rates move. If you're forced to sell them at the wrong time (during a period of rising rates and inflation) principals losses can be extreme. Investors have fallen in love with LTT because they backtest beautifully over the last 38 years of declining rates and declining inflation. The problem is that 30 Treasuries currently yield about 1% nominal. Over the last 45 years the average yield of 30 Treasuries has been greater than 6%. If and when we ever return to those rates, currently yielding 1% 30 yr. Treasuries will be essentially worthless.

We have ridden the train of decreasing inflation and yields for 38 years but we're now very near the end of the line. Negative interest rates loom ahead and possible large principal losses for LTT if inflation ever re-ignites. I don't believe the train can keep going like it has been much longer with great returns, great equity diversification, and zero risk. It looks great on backtesting and if we were going backward in time I'd be fully on board. As usual in investing those who hang out solely in LTT are fully prepared for the last war, but will they be prepared for the next on? I don't know, and I don't believe they know either. Personally I want duration diversification, LT, IT, and ST in my portfolio (TBM is fine for me) and it's not because I"m stupid or misinformed, rather because I want to be prepared for a possible unexpected change in the fixed income market future. Also in case I unexpectedly need a big wad of cash at at time of rising rates and inflation which would devastate principal values of LTT I like the idea of greater stability of principal in ST bonds and MMF. It is certainly possible that my approach will underperform a LTT dominated fixed income portfolio, but mine is lower risk in case that what no one expects--inflation, rising rates--happens. If you believe there's no long term risk in loading up on LTT at current 1% yield, I strongly disagree.

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Re: Are Treasury Bonds no longer a safe haven w/ 0% interest rates

Post by Almond » Wed Mar 11, 2020 12:49 pm

Tyler9000 posted this in my thread where I was confused how bonds and interest rates work. Hope it helps

Tyler9000 wrote: ↑Tue Mar 10, 2020 11:42 am
Bonds make money in two ways -- interest payments and capital appreciation due to changing market rates. Long term treasuries are particularly sensitive to rate changes, so their capital appreciation (or loss) can easily dwarf the interest payment. And they get more and more volatile the lower rates go, with higher highs and lower lows similar to stock market volatility but often in the opposite direction. That can make them very useful diversifiers, but their value depends somewhat on what else is in your portfolio and how you approach investing.

People who value bonds for stable income relative to stocks may not care for long term treasuries at low rates, as the high volatility is not what they're looking for. For those investors, short term bonds or CDs may make more sense. But people who value how LTTs are capable of completely offsetting stock losses in tough times (like the last few weeks) appreciate their responsive characteristics even more at low rates. I suspect a lot of the mixed signals you read about bonds are simply a result of those two different types of investors talking about the same asset from very different investing perspectives.

For a lot more info on how bonds work, I recommend this: High Profits at Low Rates: The Benefits of Bond Convexity

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Re: Are Treasury Bonds no longer a safe haven w/ 0% interest rates

Post by Almond » Wed Mar 11, 2020 12:50 pm

Here is the article he referred to at the end. https://portfoliocharts.com/2019/05/27/ ... convexity/

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Re: Are Treasury Bonds no longer a safe haven w/ 0% interest rates

Post by squirm » Wed Mar 11, 2020 12:55 pm

Their just saying bonds can go to negative. All that means is investors are trying to front run the fed so they can sell those bonds at a higher price to the fed or someone else. Forget the interest rate that doesn't matter. Everyone is trying to catch the ride up in price to zero rates or negative.

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Re: Are Treasury Bonds no longer a safe haven w/ 0% interest rates

Post by vineviz » Wed Mar 11, 2020 1:05 pm

Seasonal wrote:
Wed Mar 11, 2020 10:26 am
That's why you should diversify, owning a reasonable mix of stocks and bonds, as I endeavored to suggest in the other part of my post. I believe the better course is to look at your entire portfolio rather than one portion in isolation.
Diversification works when the risks are, well, diversifiable. Interest rate risk isn't a diversifiable risk, so it can not be diversified away by owning a "reasonable mix" of bonds.

Interest rate risk can only be managed with a duration management strategy.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Are Treasury Bonds no longer a safe haven w/ 0% interest rates

Post by Seasonal » Wed Mar 11, 2020 1:11 pm

vineviz wrote:
Wed Mar 11, 2020 1:05 pm
Seasonal wrote:
Wed Mar 11, 2020 10:26 am
That's why you should diversify, owning a reasonable mix of stocks and bonds, as I endeavored to suggest in the other part of my post. I believe the better course is to look at your entire portfolio rather than one portion in isolation.
Diversification works when the risks are, well, diversifiable. Interest rate risk isn't a diversifiable risk, so it can not be diversified away by owning a "reasonable mix" of bonds.

Interest rate risk can only be managed with a duration management strategy.
Note the emphasized words and the general idea that stock and bonds react differently to different economic conditions, although obviously not always. Also that interest rate increases help in the long term if you are not selling much.

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Re: Are Treasury Bonds no longer a safe haven w/ 0% interest rates

Post by vineviz » Wed Mar 11, 2020 1:13 pm

garlandwhizzer wrote:
Wed Mar 11, 2020 12:13 pm
I believe that aligning your bond duration to your long term goals as suggested above implies that all young or middle aged investors should hold only LT bonds, presumably LTT, because they have long time horizons.
Indeed, that's exactly what they should do.
garlandwhizzer wrote:
Wed Mar 11, 2020 12:13 pm
There are many problems with that approach but the biggest problem IMO is that no one knows exactly when they will need money in the future and how much money they will need at that point.
That's not a problem with duration matching, it's simply one of the uncertainties that all investors face. An investor doesn't need to "know exactly" how much money they will spend at every particular point in time in order to come up with a reasonable estimate of their investment horizon. There are entire areas within the field of decision sciences that can help an investor come up with such estimates, even in the face of tremendous uncertainty.
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Re: Are Treasury Bonds no longer a safe haven w/ 0% interest rates

Post by vineviz » Wed Mar 11, 2020 1:17 pm

Seasonal wrote:
Wed Mar 11, 2020 1:11 pm
vineviz wrote:
Wed Mar 11, 2020 1:05 pm
Seasonal wrote:
Wed Mar 11, 2020 10:26 am
That's why you should diversify, owning a reasonable mix of stocks and bonds, as I endeavored to suggest in the other part of my post. I believe the better course is to look at your entire portfolio rather than one portion in isolation.
Diversification works when the risks are, well, diversifiable. Interest rate risk isn't a diversifiable risk, so it can not be diversified away by owning a "reasonable mix" of bonds.

Interest rate risk can only be managed with a duration management strategy.
Note the emphasized words and the general idea that stock and bonds react differently to different economic conditions, although obviously not always. Also that interest rate increases help in the long term if you are not selling much.
I wasn't suggesting that anyone should avoid diversifying their portfolio across both stocks and bonds. The question I was addressing is, within that portfolio, "which bonds should the investor own?". And the answer isn't "a random assortment of durations".
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Are Treasury Bonds no longer a safe haven w/ 0% interest rates

Post by InvestingGeek » Wed Mar 11, 2020 1:20 pm

garlandwhizzer wrote:
Wed Mar 11, 2020 12:13 pm
vineviz wrote: ↑Wed Mar 11, 2020 10:20 am

Investing in intermediate-term bonds, instead of long-term bonds, when your savings goal is a long-term goal is increasing interest rate risk. I think a minority of Bogleheads (or investors in general) realize this.
I believe that aligning your bond duration to your long term goals as suggested above implies that all young or middle aged investors should hold only LT bonds, presumably LTT, because they have long time horizons. There are many problems with that approach but the biggest problem IMO is that no one knows exactly when they will need money in the future and how much money they will need at that point. There are nasty things like divorces, lawsuits, emergencies, loss of home to fire or flood, sons and daughters who need sudden cash inflows, loss of job or income stream, disability so you can no longer work, early onset of dementia or incapacitating health issues requiring long term care, the list goes on and on. At those times which are unpredictable as to when they will happens or how much money they will require, one needs to have access to stable, safe, and low volatility source of fixed income. LTTs are much more volatile than STT in principal value as interest rates move. If you're forced to sell them at the wrong time (during a period of rising rates and inflation) principals losses can be extreme. Investors have fallen in love with LTT because they backtest beautifully over the last 38 years of declining rates and declining inflation. The problem is that 30 Treasuries currently yield about 1% nominal. Over the last 45 years the average yield of 30 Treasuries has been greater than 6%. If and when we ever return to those rates, currently yielding 1% 30 yr. Treasuries will be essentially worthless.

We have ridden the train of decreasing inflation and yields for 38 years but we're now very near the end of the line. Negative interest rates loom ahead and possible large principal losses for LTT if inflation ever re-ignites. I don't believe the train can keep going like it has been much longer with great returns, great equity diversification, and zero risk. It looks great on backtesting and if we were going backward in time I'd be fully on board. As usual in investing those who hang out solely in LTT are fully prepared for the last war, but will they be prepared for the next on? I don't know, and I don't believe they know either. Personally I want duration diversification, LT, IT, and ST in my portfolio (TBM is fine for me) and it's not because I"m stupid or misinformed, rather because I want to be prepared for a possible unexpected change in the fixed income market future. Also in case I unexpectedly need a big wad of cash at at time of rising rates and inflation which would devastate principal values of LTT I like the idea of greater stability of principal in ST bonds and MMF. It is certainly possible that my approach will underperform a LTT dominated fixed income portfolio, but mine is lower risk in case that what no one expects--inflation, rising rates--happens. If you believe there's no long term risk in loading up on LTT at current 1% yield, I strongly disagree.

Garland Whizzer
Your posts are always instructive. Do you recommend paying down 3.5% mortgage instead of loading up on treasuries during accumulation given where we've arrived with treasuries now? My concern is liquidity.

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Re: Are Treasury Bonds no longer a safe haven w/ 0% interest rates

Post by marky2kk » Wed Mar 11, 2020 1:23 pm

Maybe this is the wrong thread, but with the recent surge of gold as the "safe haven", I am wondering... I never invested in gold because it doesn't pay interest, it doesn't pay dividends, and basically it has no intrinsic value. I was told it is just speculation instead of investing, although I never bought that point. If I think of the simple CAPM world, the expected return of an asset can be negative --- as long as correlation with the market is negative. And even if it has no intrinsic value it can have value if others think it has value. Just like our fiat money. I did not buy it because I want all my investments to earn a long-term return and I figured gold does not.

So now I am looking at my treasuries, yielding negative real returns and paying virtually no interest---just like gold. And I look at high debt to gdp ratios in virtually all developed countries. And I am wondering, how much of the dollar safe haven property was driven by a little bit of positive yield, in contrast to Japanese and Euro bonds, and how much of that property will be lost once yields are the same as in Europe or Japan?

And will gold eventually replace the dollar as the safe haven, given that both presumably earn negative real returns BUT gold will be a hedge once there is a severe debt crisis?

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Re: Are Treasury Bonds no longer a safe haven w/ 0% interest rates

Post by watchnerd » Wed Mar 11, 2020 1:59 pm

marky2kk wrote:
Wed Mar 11, 2020 1:23 pm
So now I am looking at my treasuries, yielding negative real returns and paying virtually no interest---just like gold.
Ahhh...well that all depends on what inflation is.

If you have deflation, a negative yielding bond can still have positive real returns.

If there is such a thing as the "gold constant", i wouldn't expect gold to go up in real return terms during deflation.
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Re: Are Treasury Bonds no longer a safe haven w/ 0% interest rates

Post by seychellois_lib » Wed Mar 11, 2020 2:09 pm

InvestingGeek wrote:
Wed Mar 11, 2020 1:20 pm
garlandwhizzer wrote:
Wed Mar 11, 2020 12:13 pm
vineviz wrote: ↑Wed Mar 11, 2020 10:20 am

Investing in intermediate-term bonds, instead of long-term bonds, when your savings goal is a long-term goal is increasing interest rate risk. I think a minority of Bogleheads (or investors in general) realize this.
I believe that aligning your bond duration to your long term goals as suggested above implies that all young or middle aged investors should hold only LT bonds, presumably LTT, because they have long time horizons. There are many problems with that approach but the biggest problem IMO is that no one knows exactly when they will need money in the future and how much money they will need at that point. There are nasty things like divorces, lawsuits, emergencies, loss of home to fire or flood, sons and daughters who need sudden cash inflows, loss of job or income stream, disability so you can no longer work, early onset of dementia or incapacitating health issues requiring long term care, the list goes on and on. At those times which are unpredictable as to when they will happens or how much money they will require, one needs to have access to stable, safe, and low volatility source of fixed income. LTTs are much more volatile than STT in principal value as interest rates move. If you're forced to sell them at the wrong time (during a period of rising rates and inflation) principals losses can be extreme. Investors have fallen in love with LTT because they backtest beautifully over the last 38 years of declining rates and declining inflation. The problem is that 30 Treasuries currently yield about 1% nominal. Over the last 45 years the average yield of 30 Treasuries has been greater than 6%. If and when we ever return to those rates, currently yielding 1% 30 yr. Treasuries will be essentially worthless.

We have ridden the train of decreasing inflation and yields for 38 years but we're now very near the end of the line. Negative interest rates loom ahead and possible large principal losses for LTT if inflation ever re-ignites. I don't believe the train can keep going like it has been much longer with great returns, great equity diversification, and zero risk. It looks great on backtesting and if we were going backward in time I'd be fully on board. As usual in investing those who hang out solely in LTT are fully prepared for the last war, but will they be prepared for the next on? I don't know, and I don't believe they know either. Personally I want duration diversification, LT, IT, and ST in my portfolio (TBM is fine for me) and it's not because I"m stupid or misinformed, rather because I want to be prepared for a possible unexpected change in the fixed income market future. Also in case I unexpectedly need a big wad of cash at at time of rising rates and inflation which would devastate principal values of LTT I like the idea of greater stability of principal in ST bonds and MMF. It is certainly possible that my approach will underperform a LTT dominated fixed income portfolio, but mine is lower risk in case that what no one expects--inflation, rising rates--happens. If you believe there's no long term risk in loading up on LTT at current 1% yield, I strongly disagree.

Garland Whizzer
Your posts are always instructive. Do you recommend paying down 3.5% mortgage instead of loading up on treasuries during accumulation given where we've arrived with treasuries now? My concern is liquidity.
That's a good question. I had a 470K loan at 4.25% (about 5 years old) I made an effort to make additional payments to chip away at the debit because I believed the AT return was more or less competitive with a LT bond investment (plus I have always disliked debit but not as much as I like my home).

Several months ago I refinanced (no cash out!!!) to 3.5%. My effort to pay down the mortgage was helpful in that I refinanced $415K vs the $427K I would otherwise have had to borrow. Not a huge impact, but it is $12 grand which is effectively returning 2.5 to 3% AT if my thinking is correct. It also seems to be an inflation protected investment albeit a very small one. Meanwhile, my payment dropped $400/mo. or approx 17%.

One could argue us homeowners with fixed rate mortgages effectively have an inflation hedge IMO. I am on the other side of a bond. .. If the inflation gets out of hand, the financial dynamics of a mortgage and home value seem to be balanced somewhat...so long as I can service the debit...which is why I have a significant ST treasury position in my portfolio. My plan is to keep chipping. Not big numbers but a couple hundred a month. Who knows? We may be able to fefi a 2.5% (or less) before long. If home values crater I would assume rates will tank as well. This would set up for a refi at low rate or, perhaps, someone would pay me to take their money 8-) eg negative rates. Now THAT would be interesting!

Which brings up the next topic. What happens ...goodness forbid... if folks (in mass) are unable to pay their mortgages due to the personal financial dislocations caused by Covid 19? See news from Italy.

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Re: Are Treasury Bonds no longer a safe haven w/ 0% interest rates

Post by watchnerd » Wed Mar 11, 2020 2:12 pm

seychellois_lib wrote:
Wed Mar 11, 2020 2:09 pm

Which brings up the next topic. What happens ...goodness forbid... if folks (in mass) are unable to pay their mortgages due to the personal financial dislocations caused by Covid 19? See news from Italy.
Foreclosures, I would assume.
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Re: Are Treasury Bonds no longer a safe haven w/ 0% interest rates

Post by ballons » Wed Mar 11, 2020 3:03 pm

seychellois_lib wrote:
Wed Mar 11, 2020 2:09 pm
Which brings up the next topic. What happens ...goodness forbid... if folks (in mass) are unable to pay their mortgages due to the personal financial dislocations caused by Covid 19? See news from Italy.
40% of Americans don't have $400. So you are looking at 90 day delinquencies or more.

You should be more worried about what happens if people start panic selling homes that are sitting on the market currently. "Better take a 5% haircut before the recession, than 10% during a recession."

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Re: Are Treasury Bonds no longer a safe haven w/ 0% interest rates

Post by seychellois_lib » Wed Mar 11, 2020 3:29 pm

watchnerd wrote:
Wed Mar 11, 2020 2:12 pm
seychellois_lib wrote:
Wed Mar 11, 2020 2:09 pm

Which brings up the next topic. What happens ...goodness forbid... if folks (in mass) are unable to pay their mortgages due to the personal financial dislocations caused by Covid 19? See news from Italy.
Foreclosures, I would assume.
That is the legal answer of course. How that would play out if, say, 50% (just making something up) of homeowners can not go to work for whatever reason and are unable to pay their mortgages. That might become very interesting.

In the aftermath of 9/11 the famous "failure of imagination" quote widely circulated. May be apt today as well.

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Re: Are Treasury Bonds no longer a safe haven w/ 0% interest rates

Post by TBillT » Wed Mar 11, 2020 3:40 pm

Extraordinary day

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Re: Are Treasury Bonds no longer a safe haven w/ 0% interest rates

Post by watchnerd » Wed Mar 11, 2020 3:42 pm

seychellois_lib wrote:
Wed Mar 11, 2020 3:29 pm
watchnerd wrote:
Wed Mar 11, 2020 2:12 pm
seychellois_lib wrote:
Wed Mar 11, 2020 2:09 pm

Which brings up the next topic. What happens ...goodness forbid... if folks (in mass) are unable to pay their mortgages due to the personal financial dislocations caused by Covid 19? See news from Italy.
Foreclosures, I would assume.
That is the legal answer of course. How that would play out if, say, 50% (just making something up) of homeowners can not go to work for whatever reason and are unable to pay their mortgages. That might become very interesting.

In the aftermath of 9/11 the famous "failure of imagination" quote widely circulated. May be apt today as well.
All sorts of things could happen.

But I don't consider that part of my investing decision tree.
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seychellois_lib
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Re: Are Treasury Bonds no longer a safe haven w/ 0% interest rates

Post by seychellois_lib » Wed Mar 11, 2020 3:47 pm

ballons wrote:
Wed Mar 11, 2020 3:03 pm
seychellois_lib wrote:
Wed Mar 11, 2020 2:09 pm
Which brings up the next topic. What happens ...goodness forbid... if folks (in mass) are unable to pay their mortgages due to the personal financial dislocations caused by Covid 19? See news from Italy.
40% of Americans don't have $400. So you are looking at 90 day delinquencies or more.

You should be more worried about what happens if people start panic selling homes that are sitting on the market currently. "Better take a 5% haircut before the recession, than 10% during a recession."
Had a place in an area that absolutely tanked in 2010/11. Home had sold for $465K in 2006. I bought for $300 in 2008 (oops) by 2010/11 it was valued at $179K, so, been there done that. Imagine... 465K to 179K wow! Thank goodness I was not the poor souls who bought for $465K or lent them the money to do so.

Refied $240K under HARP and just kept paying. Eventually things recovered and got out at $370K. This is my experience, I was lucky. I do not...repeat do not consider my current home an investment. but it is a nice place to live.

My current setup is about 38% equity. So value would need to fall substantially to drop below mortgage, but, no question, it could happen. I think one has to imagine the worst and work through how to survive in that environment. We could further explore what happens in this scenario, but I have a feeling putting millions of people on the street might be rather inconvenient.

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Re: Are Treasury Bonds no longer a safe haven w/ 0% interest rates

Post by Elysium » Wed Mar 11, 2020 4:04 pm

garlandwhizzer wrote:
Wed Mar 11, 2020 12:13 pm
We have ridden the train of decreasing inflation and yields for 38 years but we're now very near the end of the line. Negative interest rates loom ahead and possible large principal losses for LTT if inflation ever re-ignites. I don't believe the train can keep going like it has been much longer with great returns, great equity diversification, and zero risk. It looks great on backtesting and if we were going backward in time I'd be fully on board. As usual in investing those who hang out solely in LTT are fully prepared for the last war, but will they be prepared for the next on?
In fairness, I would point out that Bogleheads never adopted LTT in their long history ever. I do remember late 90's and early 2000's when LTT were yielding above 6% and the standard advice was always TBM or ITB. In fact, Short Term bonds and ST Corp Bonds were more popular than Long Term Bonds. LTT were a thing you wouldn't touch with a 10 foot pole. IIRC, the argument used to be that LTT were for duration matching by institutions such as insurance companies and endowments, never suited for individuals. The main reason for this is the bonds are for safety idea and LTT presents high amount of volatility.

Apart from Jack Bogle who preferred TBM and ITB, most of the FA's involved in the early part including William Bernstein, Larry Swedroe, Rick Ferri, and countless others also preferred Short to Intermediate maturity. I would say that Boglehead threshold for maturity never went beyond that 5 to 7 year sweet spot ever in the last 20 years regardless of the rates. Current situation may be different with rates so closer to zero, but that wasn't the real reason for aversion to LTT. If I have to point out one thing it is the desire to avoid volatility in your bond portion that led to this standard board position.

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Re: Are Treasury Bonds no longer a safe haven w/ 0% interest rates

Post by seychellois_lib » Wed Mar 11, 2020 4:26 pm

watchnerd wrote:
Wed Mar 11, 2020 3:42 pm
seychellois_lib wrote:
Wed Mar 11, 2020 3:29 pm
watchnerd wrote:
Wed Mar 11, 2020 2:12 pm
seychellois_lib wrote:
Wed Mar 11, 2020 2:09 pm

Which brings up the next topic. What happens ...goodness forbid... if folks (in mass) are unable to pay their mortgages due to the personal financial dislocations caused by Covid 19? See news from Italy.
Foreclosures, I would assume.
That is the legal answer of course. How that would play out if, say, 50% (just making something up) of homeowners can not go to work for whatever reason and are unable to pay their mortgages. That might become very interesting.

In the aftermath of 9/11 the famous "failure of imagination" quote widely circulated. May be apt today as well.
All sorts of things could happen.

But I don't consider that part of my investing decision tree.
OK, fair enough. I like to test my portfolio against various scenarios. I acknowledge all sorts of things might happen but Covid 19 IS happening and the implications could be very different than we have experienced in the past. What differences? Heck, I don't know, maybe none. But it seems to me it is reasonable to explore the possibilities among ourselves and bounce them against our financial structures. For example, let's assume COVId 19 did not exist but that MBS and Putin go to war anyway. I think many folks would review their portfolios for weakness (and strengths) related to surprisingly, almost fantastically, low oil prices.

Some unusual characteristics of the current situation

1. Very low rates possibly dipping into negative rates at some point
2. Extraordinarily low energy prices
3. Potential destruction of the domestic oil /gas patch and strategic implications thereof
4. Bizarre situation where people have jobs and business has business (well, had business) ...but they can not execute
5. The normal stress related to significant paper losses combined with the fear of actual death (at least for older folks)

I don't assert it's the end of the world, but this really is different than what we normally experience, during a downturn, severe or not. Winners and losers will be different and it is interesting to hear conjecture form people who, like me, don't think this is armageddon but could be the end of some profitable things which we have become used to and the beginning of other profitable things which we are currently ignorant of... Sure, we could spin all day and get nowhere but occasionally some unique and useful insight emerges from such a conversation.

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Re: Are Treasury Bonds no longer a safe haven w/ 0% interest rates

Post by OSUperu » Wed Mar 11, 2020 4:29 pm

seychellois_lib wrote:
Wed Mar 11, 2020 4:26 pm
watchnerd wrote:
Wed Mar 11, 2020 3:42 pm
seychellois_lib wrote:
Wed Mar 11, 2020 3:29 pm
watchnerd wrote:
Wed Mar 11, 2020 2:12 pm
seychellois_lib wrote:
Wed Mar 11, 2020 2:09 pm

Which brings up the next topic. What happens ...goodness forbid... if folks (in mass) are unable to pay their mortgages due to the personal financial dislocations caused by Covid 19? See news from Italy.
Foreclosures, I would assume.
That is the legal answer of course. How that would play out if, say, 50% (just making something up) of homeowners can not go to work for whatever reason and are unable to pay their mortgages. That might become very interesting.

In the aftermath of 9/11 the famous "failure of imagination" quote widely circulated. May be apt today as well.
All sorts of things could happen.

But I don't consider that part of my investing decision tree.
OK, fair enough. I like to test my portfolio against various scenarios. I acknowledge all sorts of things might happen but Covid 19 IS happening and the implications could be very different than we have experienced in the past. What differences? Heck, I don't know, maybe none. But it seems to me it is reasonable to explore the possibilities among ourselves and bounce them against our financial structures. For example, let's assume COVId 19 did not exist but that MBS and Putin go to war anyway. I think many folks would review their portfolios for weakness (and strengths) related to surprisingly, almost fantastically, low oil prices.

Some unusual characteristics of the current situation

1. Very low rates possibly dipping into negative rates at some point
2. Extraordinarily low energy prices
3. Potential destruction of the domestic oil /gas patch and strategic implications thereof
4. Bizarre situation where people have jobs and business has business (well, had business) ...but they can not execute
5. The normal stress related to significant paper losses combined with the fear of actual death (at least for older folks)

I don't assert it's the end of the world, but this really is different than what we normally experience, during a downturn, severe or not. Winners and losers will be different and it is interesting to hear conjecture form people who, like me, don't think this is armageddon but could be the end of some profitable things which we have become used to and the beginning of other profitable things which we are currently ignorant of... Sure, we could spin all day and get nowhere but occasionally some unique and useful insight emerges from such a conversation.

A period of deflation/stagflation?..

seychellois_lib
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Re: Are Treasury Bonds no longer a safe haven w/ 0% interest rates

Post by seychellois_lib » Wed Mar 11, 2020 5:04 pm

OSUperu wrote:
Wed Mar 11, 2020 4:29 pm
seychellois_lib wrote:
Wed Mar 11, 2020 4:26 pm
watchnerd wrote:
Wed Mar 11, 2020 3:42 pm
seychellois_lib wrote:
Wed Mar 11, 2020 3:29 pm
watchnerd wrote:
Wed Mar 11, 2020 2:12 pm


Foreclosures, I would assume.
That is the legal answer of course. How that would play out if, say, 50% (just making something up) of homeowners can not go to work for whatever reason and are unable to pay their mortgages. That might become very interesting.

In the aftermath of 9/11 the famous "failure of imagination" quote widely circulated. May be apt today as well.
All sorts of things could happen.

But I don't consider that part of my investing decision tree.
OK, fair enough. I like to test my portfolio against various scenarios. I acknowledge all sorts of things might happen but Covid 19 IS happening and the implications could be very different than we have experienced in the past. What differences? Heck, I don't know, maybe none. But it seems to me it is reasonable to explore the possibilities among ourselves and bounce them against our financial structures. For example, let's assume COVId 19 did not exist but that MBS and Putin go to war anyway. I think many folks would review their portfolios for weakness (and strengths) related to surprisingly, almost fantastically, low oil prices.

Some unusual characteristics of the current situation

1. Very low rates possibly dipping into negative rates at some point
2. Extraordinarily low energy prices
3. Potential destruction of the domestic oil /gas patch and strategic implications thereof
4. Bizarre situation where people have jobs and business has business (well, had business) ...but they can not execute
5. The normal stress related to significant paper losses combined with the fear of actual death (at least for older folks)

I don't assert it's the end of the world, but this really is different than what we normally experience, during a downturn, severe or not. Winners and losers will be different and it is interesting to hear conjecture form people who, like me, don't think this is armageddon but could be the end of some profitable things which we have become used to and the beginning of other profitable things which we are currently ignorant of... Sure, we could spin all day and get nowhere but occasionally some unique and useful insight emerges from such a conversation.

A period of deflation/stagflation?..
Maybe. The markets seem to be voting for deflation.

However, I wonder what happens after people habituate themselves to social isolation for the next few months. When the all clear comes - which it will eventually - do we have an explosion of joy (physical joy too, next gen will be called the Covid 19ers) as we did at the end of WWII when we get the all clear, a vaccine, successful antivirals or whatever?

This will be over at some point and the end could be accompanied by a massive bang. Which leads us back to stay the course.

Dang, I keep exploring different courses of action and wind up right where I started :oops:

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Re: Are Treasury Bonds no longer a safe haven w/ 0% interest rates

Post by watchnerd » Wed Mar 11, 2020 5:58 pm

seychellois_lib wrote:
Wed Mar 11, 2020 4:26 pm


OK, fair enough. I like to test my portfolio against various scenarios. I acknowledge all sorts of things might happen but Covid 19 IS happening and the implications could be very different than we have experienced in the past. What differences? Heck, I don't know, maybe none. But it seems to me it is reasonable to explore the possibilities among ourselves and bounce them against our financial structures. For example, let's assume COVId 19 did not exist but that MBS and Putin go to war anyway. I think many folks would review their portfolios for weakness (and strengths) related to surprisingly, almost fantastically, low oil prices.

Some unusual characteristics of the current situation

1. Very low rates possibly dipping into negative rates at some point
2. Extraordinarily low energy prices
3. Potential destruction of the domestic oil /gas patch and strategic implications thereof
4. Bizarre situation where people have jobs and business has business (well, had business) ...but they can not execute
5. The normal stress related to significant paper losses combined with the fear of actual death (at least for older folks)

I don't assert it's the end of the world, but this really is different than what we normally experience, during a downturn, severe or not. Winners and losers will be different and it is interesting to hear conjecture form people who, like me, don't think this is armageddon but could be the end of some profitable things which we have become used to and the beginning of other profitable things which we are currently ignorant of... Sure, we could spin all day and get nowhere but occasionally some unique and useful insight emerges from such a conversation.
Sure, people can play "how will this pan out?" bar bet games all day long.

But that's basically a form of entertainment.

I try not to conflate entertainment with my investment decisions.
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

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BlueEars
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Re: Are Treasury Bonds no longer a safe haven w/ 0% interest rates

Post by BlueEars » Wed Mar 11, 2020 6:07 pm

I am looking at a few funds and trying to choose for new cash:

VFIUX intermediate Treasury, yield = 1.13%
VFIRX short term Treasury, yield = 1.00%
VUSXX short term money market, yield = 1.47%

VFIDX intermediate IG, yield = 2.01%
VFSUX short term IG, yield = 1.95%
VMMXX Prime money market, yield = 1.52%

To me VUSXX looks really good right now. The others seem to be awfully low for the marginal benefit should rates go lower then now.

Other opinions welcomed.

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Re: Are Treasury Bonds no longer a safe haven w/ 0% interest rates

Post by Phineas J. Whoopee » Wed Mar 11, 2020 6:56 pm

squirm wrote:
Wed Mar 11, 2020 12:55 pm
Their just saying bonds can go to negative. All that means is investors are trying to front run the fed so they can sell those bonds at a higher price to the fed or someone else. Forget the interest rate that doesn't matter. Everyone is trying to catch the ride up in price to zero rates or negative.
I'm afraid the Fed does not set bond yields. They're determined by an ongoing, continuous auction. It can get confusing because the Fed conducts primary market bond auctions on behalf of the Treasury, but it doesn't bid in them. By law, as written by Congress, which created the Fed and to which it reports, it can't.

PJW

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