Rekenthaler: Long Bonds Are for Fools

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Rekenthaler: Long Bonds Are for Fools

Post by CULater » Fri May 15, 2020 9:16 am

Rekenthaler argues that long-term investors should avoid long bonds, because at current low rates the expected return is a non-starter. They are better viewed as short-term trading vehicles by retail investors and not buy-and-hold investments. And we know about active trading.
Today’s investors are buying long bonds with the thought of trading them later. They are not planning on a specific date; on the contrary, they probably intend to hold those bonds indefinitely, as a proportion of their strategic asset allocation. But the possibility of exit is in the back of their minds. Otherwise, they wouldn’t have agreed to the transaction.

At today’s prices, long bonds are a fool’s purchase, to be re-sold to greater fools.

By this point, Ben Graham would be holding his head because none of the reasons I have provided for owning long Treasury bonds involve their intrinsic value. They are instead arguments about market structure--claims for why those who don’t care about intrinsic value will buy Treasuries, or for how the Federal Reserve will manipulate sales, or for the rising tide of asset inflation lifting all boats. Graham never advocated securities for those reasons. Nor Jack Bogle, nor Warren Buffett, nor any other fundamental investor who ever lived.
https://www.morningstar.com/articles/97 ... for-fools
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Re: Rekenthaler: Long Bonds Are for Fools

Post by JoMoney » Fri May 15, 2020 9:27 am

I agree, but my expectations for interest rates have been wrong for almost 10 years now, and I can't say it won't stay low for another 10. Looking at history, interest rates from the 1930's to the 1960's stayed remarkably low... and for those who might be buying a long bond that they expect to hold to maturity it makes little difference.
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Re: Rekenthaler: Long Bonds Are for Fools

Post by vineviz » Fri May 15, 2020 9:51 am

CULater wrote:
Fri May 15, 2020 9:16 am
Rekenthaler argues that long-term investors should avoid long bonds, because at current low rates the expected return is a non-starter. They are better viewed as short-term trading vehicles by retail investors and not buy-and-hold investments. And we know about active trading.
Today’s investors are buying long bonds with the thought of trading them later. They are not planning on a specific date; on the contrary, they probably intend to hold those bonds indefinitely, as a proportion of their strategic asset allocation. But the possibility of exit is in the back of their minds. Otherwise, they wouldn’t have agreed to the transaction.

At today’s prices, long bonds are a fool’s purchase, to be re-sold to greater fools.

By this point, Ben Graham would be holding his head because none of the reasons I have provided for owning long Treasury bonds involve their intrinsic value. They are instead arguments about market structure--claims for why those who don’t care about intrinsic value will buy Treasuries, or for how the Federal Reserve will manipulate sales, or for the rising tide of asset inflation lifting all boats. Graham never advocated securities for those reasons. Nor Jack Bogle, nor Warren Buffett, nor any other fundamental investor who ever lived.
https://www.morningstar.com/articles/97 ... for-fools
Rekenthaler isn’t the only person with this belief, and he’s just as wrong as the others.
"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: Rekenthaler: Long Bonds Are for Fools

Post by CULater » Fri May 15, 2020 9:52 am

vineviz wrote:
Fri May 15, 2020 9:51 am
CULater wrote:
Fri May 15, 2020 9:16 am
Rekenthaler argues that long-term investors should avoid long bonds, because at current low rates the expected return is a non-starter. They are better viewed as short-term trading vehicles by retail investors and not buy-and-hold investments. And we know about active trading.
Today’s investors are buying long bonds with the thought of trading them later. They are not planning on a specific date; on the contrary, they probably intend to hold those bonds indefinitely, as a proportion of their strategic asset allocation. But the possibility of exit is in the back of their minds. Otherwise, they wouldn’t have agreed to the transaction.

At today’s prices, long bonds are a fool’s purchase, to be re-sold to greater fools.

By this point, Ben Graham would be holding his head because none of the reasons I have provided for owning long Treasury bonds involve their intrinsic value. They are instead arguments about market structure--claims for why those who don’t care about intrinsic value will buy Treasuries, or for how the Federal Reserve will manipulate sales, or for the rising tide of asset inflation lifting all boats. Graham never advocated securities for those reasons. Nor Jack Bogle, nor Warren Buffett, nor any other fundamental investor who ever lived.
https://www.morningstar.com/articles/97 ... for-fools
Rekenthaler isn’t the only person with this belief, and he’s just as wrong as the others.
Perhaps you aren't the only one with a differing view, who is just as wrong as the others. How do we know?
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Re: Rekenthaler: Long Bonds Are for Fools

Post by vineviz » Fri May 15, 2020 10:00 am

CULater wrote:
Fri May 15, 2020 9:52 am
Perhaps you aren't the only one with a differing view, who is just as wrong as the others. How do we know?
Because what he wrote in his column was based on a premise that is factually untrue?
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Re: Rekenthaler: Long Bonds Are for Fools

Post by CULater » Fri May 15, 2020 11:27 am

vineviz wrote:
Fri May 15, 2020 10:00 am
CULater wrote:
Fri May 15, 2020 9:52 am
Perhaps you aren't the only one with a differing view, who is just as wrong as the others. How do we know?
Because what he wrote in his column was based on a premise that is factually untrue?
can you explain?
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Re: Rekenthaler: Long Bonds Are for Fools

Post by fredflinstone » Fri May 15, 2020 12:47 pm

I've heard variations of this argment since joining this Forum 10 years ago. The argument was wrong then and is wrong now.

By the way, at 1.3% yield, US 30-year treasuries are a bargain compared to Swiss 10-year treasuries (current yield of -0.554%).
Stocks 28 / Gold 23 / Long-term US treasuries 19 / Cash 22 / TIPS 8

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Re: Rekenthaler: Long Bonds Are for Fools

Post by vineviz » Fri May 15, 2020 12:57 pm

CULater wrote:
Fri May 15, 2020 11:27 am
vineviz wrote:
Fri May 15, 2020 10:00 am
CULater wrote:
Fri May 15, 2020 9:52 am
Perhaps you aren't the only one with a differing view, who is just as wrong as the others. How do we know?
Because what he wrote in his column was based on a premise that is factually untrue?
can you explain?
Rekenthaler's premise is that there is not rational reason for anyone to buy and hold long-term bonds. He says, without any sort of qualification, "Today’s investors are buying long bonds with the thought of trading them later."

That's patently untrue. It might be why he THINKS all investors buy long-term bonds, but there's no evidence that is is the case.

For one thing, long-term US Treasuries and long-term TIPS are the closest thing that most investors (retail and otherwise) have to a risk-free asset so there are clearly natural and logical reasons that investors would own long-term bonds that have no speculative motive whatsoever.

For another thing, if what he alleges is actually true then we'd see dramatically higher trading levels among long-term bond funds than we'd see among intermediate- and short-term bond funds. With the exception of iShares 20+ Year Treasury Bond ETF (TLT), that's not generally what we see. The average daily volume of long-term Treasury ETFs (as a percentage of AUM) is barely more than that of intermediate-term Treasury ETFs.
"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: Rekenthaler: Long Bonds Are for Fools

Post by bgf » Fri May 15, 2020 1:39 pm

the long term investor will invest in long duration bond funds in hopes of greater return than a total bond fund, right?

Even without caring about short term correlations or rebalancing, even at current low rates, he can fairly expect long term bonds to have a greater return than a total bond fund, right?
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Re: Rekenthaler: Long Bonds Are for Fools

Post by palanzo » Fri May 15, 2020 1:41 pm

fredflinstone wrote:
Fri May 15, 2020 12:47 pm
I've heard variations of this argment since joining this Forum 10 years ago. The argument was wrong then and is wrong now.

By the way, at 1.3% yield, US 30-year treasuries are a bargain compared to Swiss 10-year treasuries (current yield of -0.554%).
Were you thinking of buying Swiss 10-year treasuries? What about Zimbabwe 30-year treasuries?

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Re: Rekenthaler: Long Bonds Are for Fools

Post by 1130Super » Fri May 15, 2020 1:51 pm

And what if the long term bonds continue to drop for the next 10 years and end up -5%. For all anyone knows we have deflation coming our way and 1% treasuries are a bargain and have a real return of 4%

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Re: Rekenthaler: Long Bonds Are for Fools

Post by JBTX » Fri May 15, 2020 2:16 pm

vineviz wrote:
Fri May 15, 2020 12:57 pm
CULater wrote:
Fri May 15, 2020 11:27 am
vineviz wrote:
Fri May 15, 2020 10:00 am
CULater wrote:
Fri May 15, 2020 9:52 am
Perhaps you aren't the only one with a differing view, who is just as wrong as the others. How do we know?
Because what he wrote in his column was based on a premise that is factually untrue?
can you explain?
Rekenthaler's premise is that there is not rational reason for anyone to buy and hold long-term bonds. He says, without any sort of qualification, "Today’s investors are buying long bonds with the thought of trading them later."

That's patently untrue. It might be why he THINKS all investors buy long-term bonds, but there's no evidence that is is the case.

For one thing, long-term US Treasuries and long-term TIPS are the closest thing that most investors (retail and otherwise) have to a risk-free asset so there are clearly natural and logical reasons that investors would own long-term bonds that have no speculative motive whatsoever.

For another thing, if what he alleges is actually true then we'd see dramatically higher trading levels among long-term bond funds than we'd see among intermediate- and short-term bond funds. With the exception of iShares 20+ Year Treasury Bond ETF (TLT), that's not generally what we see. The average daily volume of long-term Treasury ETFs (as a percentage of AUM) is barely more than that of intermediate-term Treasury ETFs.

About the only rational return based reason to hold long term bonds is you think long term rates will go negative. Otherwise the return is so low it doesn't seem worth it.

Now some people own them, passively and don't pay any attention to how they are valued. Others hold them as a hedge or insurance against recessions n

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Re: Rekenthaler: Long Bonds Are for Fools

Post by Noobvestor » Fri May 15, 2020 2:24 pm

1130Super wrote:
Fri May 15, 2020 1:51 pm
And what if the long term bonds continue to drop for the next 10 years and end up -5%.
Then we'll break records the likes of which history has never seen, and I personally would avoid them like the plague. I'm not interested in paying 5% for the Treasury to hold my money when I can put it in cash at 0% (or slightly negative if I have to pay to house it in a bank vault). I for one (assuming Treasuries were to go negative across the board) will have to rethink my portfolio (which has ITTs). I don't think it'll happen, though. The US will be taking out a lot of loans in the coming years (this is known info, not speculation), which I assume will keep rates competitive.
Last edited by Noobvestor on Fri May 15, 2020 2:26 pm, edited 1 time in total.
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Re: Rekenthaler: Long Bonds Are for Fools

Post by Robot Monster » Fri May 15, 2020 2:25 pm

Noobvestor wrote:
Fri May 15, 2020 2:24 pm
1130Super wrote:
Fri May 15, 2020 1:51 pm
And what if the long term bonds continue to drop for the next 10 years and end up -5%.
Then we'll break records the likes of which history has never seen, and I personally would avoid them like the plague. I for one (assuming Treasuries were to go negative across the board) will have to rethink my portfolio (which has ITTs). I don't think it'll happen, though. The US will be taking out a lot of loans in the coming years (this is currently available info, not projecting), which I assume will keep rates competitive.
It's an interesting question how negative bonds could conceivably be. Scott Minerd spoke of the possibility that before year end the possibility that the 10-year rate could overshoot to -2%. Could we really have a -5% on the 30-year? A -10%??

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Re: Rekenthaler: Long Bonds Are for Fools

Post by Noobvestor » Fri May 15, 2020 2:28 pm

Robot Monster wrote:
Fri May 15, 2020 2:25 pm
Noobvestor wrote:
Fri May 15, 2020 2:24 pm
1130Super wrote:
Fri May 15, 2020 1:51 pm
And what if the long term bonds continue to drop for the next 10 years and end up -5%.
Then we'll break records the likes of which history has never seen, and I personally would avoid them like the plague. I for one (assuming Treasuries were to go negative across the board) will have to rethink my portfolio (which has ITTs). I don't think it'll happen, though. The US will be taking out a lot of loans in the coming years (this is currently available info, not projecting), which I assume will keep rates competitive.
It's an interesting question how negative bonds could conceivably be. Scott Minerd spoke of the possibility that before year end the possibility that the 10-year rate could overshoot to -2%. Could we really have a -5% on the 30-year? A -10%??
They could be in theory. In practice, policymakers have said sub-zero yields at the short end (which they control) aren't on the table. So you'd be looking at a scenario where people are paying 2% for 10-years while 0% on the short end is an option. Does that appeal to you? Or anyone?!

https://www.washingtonpost.com/business ... story.html
During the last recession, which ended in 2009, Fed officials considered a variety of tools and chose not to deploy them, Powell has pointed out in the past. “We do not see negative policy rates as likely to be an appropriate policy response here in the U.S.,” he told reporters on March 15. In more recent comments, Fed colleagues have agreed without completely ruling out the option. On May 11, Federal Reserve Bank of Chicago President Charles Evans said: “At best, we’d have to study it more, but I don’t anticipate that being a tool we would be using in the U.S.” On the same day, Atlanta Fed President Raphael Bostic said “I am not a big fan of going into the negative rate territory.”
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe

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Re: Rekenthaler: Long Bonds Are for Fools

Post by Always passive » Fri May 15, 2020 2:45 pm

vineviz wrote:
Fri May 15, 2020 9:51 am
CULater wrote:
Fri May 15, 2020 9:16 am
Rekenthaler argues that long-term investors should avoid long bonds, because at current low rates the expected return is a non-starter. They are better viewed as short-term trading vehicles by retail investors and not buy-and-hold investments. And we know about active trading.
Today’s investors are buying long bonds with the thought of trading them later. They are not planning on a specific date; on the contrary, they probably intend to hold those bonds indefinitely, as a proportion of their strategic asset allocation. But the possibility of exit is in the back of their minds. Otherwise, they wouldn’t have agreed to the transaction.

At today’s prices, long bonds are a fool’s purchase, to be re-sold to greater fools.

By this point, Ben Graham would be holding his head because none of the reasons I have provided for owning long Treasury bonds involve their intrinsic value. They are instead arguments about market structure--claims for why those who don’t care about intrinsic value will buy Treasuries, or for how the Federal Reserve will manipulate sales, or for the rising tide of asset inflation lifting all boats. Graham never advocated securities for those reasons. Nor Jack Bogle, nor Warren Buffett, nor any other fundamental investor who ever lived.
https://www.morningstar.com/articles/97 ... for-fools
Rekenthaler isn’t the only person with this belief, and he’s just as wrong as the others.
Last time I checked, if you buy TLT, the 20+ year Treasury ETF and you hold it to maturity you get 1.24% annually, no mattedr what happens to yields in the interim. So where is he wrong? Unless you decide you are a trader and feel that you can market time. Bonds yields, assuming no default (and I assume treasuries will not) are defined at entry point. Is there anything else that I am missing?

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Re: Rekenthaler: Long Bonds Are for Fools

Post by Robot Monster » Fri May 15, 2020 2:56 pm

Noobvestor wrote:
Fri May 15, 2020 2:28 pm
Robot Monster wrote:
Fri May 15, 2020 2:25 pm

It's an interesting question how negative bonds could conceivably be. Scott Minerd spoke of the possibility that before year end the possibility that the 10-year rate could overshoot to -2%. Could we really have a -5% on the 30-year? A -10%??
They could be in theory. In practice, policymakers have said sub-zero yields at the short end (which they control) aren't on the table. So you'd be looking at a scenario where people are paying 2% for 10-years while 0% on the short end is an option. Does that appeal to you? Or anyone?!
Goldman Sachs says a second wave of coronavirus could make the Fed rethink negative interest rates. Negative rates are a future possibility, I think, despite what the Fed currently says. What if we went massively deflationary? We had -10.3% inflation in 1932.

https://www.thebalance.com/u-s-inflatio ... st-3306093

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Re: Rekenthaler: Long Bonds Are for Fools

Post by vineviz » Fri May 15, 2020 3:04 pm

Always passive wrote:
Fri May 15, 2020 2:45 pm

Last time I checked, if you buy TLT, the 20+ year Treasury ETF and you hold it to maturity you get 1.24% annually, no mattedr what happens to yields in the interim. So where is he wrong? Unless you decide you are a trader and feel that you can market time. Bonds yields, assuming no default (and I assume treasuries will not) are defined at entry point. Is there anything else that I am missing?
I'm not sure you're missing anything, but I'm also not sure what the question is.

Right now I can buy a zero-coupon Treasury bond maturing on 2/15/2050 with a nominal yield-to-maturity of 1.33%. For any money I'm planning to spend in 2050, that's as close to a risk-free investment as I can get. Either that or a TIPS maturing on the same date with a real yield of -0.13% (the TIPS has less inflation risk but slightly more interest rate risk).

If I'm planning a retirement which includes any expected consumption in 2050, one of those two long-term bonds (or some combination of both) is arguably the LEAST speculative investment (i.e. the strategy LEAST dependent on market timing) that I could make.
"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: Rekenthaler: Long Bonds Are for Fools

Post by vineviz » Fri May 15, 2020 3:08 pm

JBTX wrote:
Fri May 15, 2020 2:16 pm
About the only rational return based reason to hold long term bonds is you think long term rates will go negative. Otherwise the return is so low it doesn't seem worth it.
It's also rational to hold long-term bonds if you're a long-term investor who wants to minimize interest rate risk.

Or you think the yield curve will stay approximately where it is today (you'd rather own a bond yielding 1% for the next 20 years than one yielding 0.1%, right)?

Or you realize that trying to time the bond market is just as fool-hardy as trying to time the stock market.
"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: Rekenthaler: Long Bonds Are for Fools

Post by Noobvestor » Fri May 15, 2020 3:14 pm

Robot Monster wrote:
Fri May 15, 2020 2:56 pm
Goldman Sachs says a second wave of coronavirus could make the Fed rethink negative interest rates. Negative rates are a future possibility, I think, despite what the Fed currently says. What if we went massively deflationary? We had -10.3% inflation in 1932.
I expect that if Treasury rates go a bit negative, most retail investors will bail for 0% yields on cash. If they go substantially negative, basically everyone who isn't an institutional investor will get out, being unwilling to pay rather than get paid to take duration risk.

The precedent so far in Europe has been to avoid dinging personal savings with negative rates. There are some potentially massive risks to pushing people out of money markets with negative short rates, as the article I linked described.

So could we see negative rates, sure. Will it impact how retail investors invest, I would assume so. Maybe not the die-hards who believe we're heading for negative 5%, but me, personally, I'll be looking around for high-quality alternatives.
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Re: Rekenthaler: Long Bonds Are for Fools

Post by JBTX » Fri May 15, 2020 3:15 pm

vineviz wrote:
Fri May 15, 2020 3:08 pm
JBTX wrote:
Fri May 15, 2020 2:16 pm
About the only rational return based reason to hold long term bonds is you think long term rates will go negative. Otherwise the return is so low it doesn't seem worth it.
It's also rational to hold long-term bonds if you're a long-term investor who wants to minimize interest rate risk.

Or you think the yield curve will stay approximately where it is today (you'd rather own a bond yielding 1% for the next 20 years than one yielding 0.1%, right)?

Or you realize that trying to time the bond market is just as fool-hardy as trying to time the stock market.
As somebody pointed out the Fed has target of 2% inflation. I would say odds are fed will hit it, or exceed it. If TIPS have a real rate of zero or more, why would you lock into 30 year treasury at 1.2% nominal?

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Re: Rekenthaler: Long Bonds Are for Fools

Post by Always passive » Sat May 16, 2020 12:01 am

vineviz wrote:
Fri May 15, 2020 3:04 pm
Always passive wrote:
Fri May 15, 2020 2:45 pm

Last time I checked, if you buy TLT, the 20+ year Treasury ETF and you hold it to maturity you get 1.24% annually, no mattedr what happens to yields in the interim. So where is he wrong? Unless you decide you are a trader and feel that you can market time. Bonds yields, assuming no default (and I assume treasuries will not) are defined at entry point. Is there anything else that I am missing?
I'm not sure you're missing anything, but I'm also not sure what the question is.

Right now I can buy a zero-coupon Treasury bond maturing on 2/15/2050 with a nominal yield-to-maturity of 1.33%. For any money I'm planning to spend in 2050, that's as close to a risk-free investment as I can get. Either that or a TIPS maturing on the same date with a real yield of -0.13% (the TIPS has less inflation risk but slightly more interest rate risk).

If I'm planning a retirement which includes any expected consumption in 2050, one of those two long-term bonds (or some combination of both) is arguably the LEAST speculative investment (i.e. the strategy LEAST dependent on market timing) that I could make.
I was answering to someone that was challenging the article’s point that long term bonds are for fools.
The amazing thing is that interest rates are so low that in essence you are paying the government for holding a long term bond. Treasuries provide a return below inflation. TIPs are -.13%.
Thus, the only purpose that I see for long term bonds is a kind of insurance. When equities are falling, like now, Long term treasuries do really well because they have a negative correlation with equities, so like gold, some people holding for that purpose. But as an investment is for fools!

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Re: Rekenthaler: Long Bonds Are for Fools

Post by rossington » Sat May 16, 2020 1:55 am

vineviz wrote:
Fri May 15, 2020 3:08 pm
JBTX wrote:
Fri May 15, 2020 2:16 pm
About the only rational return based reason to hold long term bonds is you think long term rates will go negative. Otherwise the return is so low it doesn't seem worth it.
It's also rational to hold long-term bonds if you're a long-term investor who wants to minimize interest rate risk.

Or you think the yield curve will stay approximately where it is today (you'd rather own a bond yielding 1% for the next 20 years than one yielding 0.1%, right)?

Or you realize that trying to time the bond market is just as fool-hardy as trying to time the stock market.
But as the article stated:

"Would you exchange $100,000 for a promise to receive $143,371 in April 2050? The question is rhetorical: Your answer is “No.” No matter how reputable the counterparty, 30 years is a very long time to wait, and a 43% cumulative gain is a meager return for your very large expenditure of patience."

30 years is a long time to wait.

I will bet on stocks for a much better return in less than 30 years, and a long term investment grade bond fund should outperform a treasuries fund into the foreseeable future.
"Success is going from failure to failure without loss of enthusiasm." Winston Churchill.

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Re: Rekenthaler: Long Bonds Are for Fools

Post by vineviz » Sat May 16, 2020 5:37 am

Always passive wrote:
Sat May 16, 2020 12:01 am
I was answering to someone that was challenging the article’s point that long term bonds are for fools.
The only fool is a long-term investor who owns bonds that AREN’T long-term bonds.

Rekenthaler has it exactly backwards.
"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: Rekenthaler: Long Bonds Are for Fools

Post by bgf » Sat May 16, 2020 6:11 am

vineviz wrote:
Sat May 16, 2020 5:37 am
Always passive wrote:
Sat May 16, 2020 12:01 am
I was answering to someone that was challenging the article’s point that long term bonds are for fools.
The only fool is a long-term investor who owns bonds that AREN’T long-term bonds.

Rekenthaler has it exactly backwards.
I've wondered why target date funds don't hold bonds with maturities out to the retirement date and beyond. Why is that? Cost? Probably not. Complexity? Probably not? So why? I don't ask this as a challenge to you. Matching duration to retirement makes sense to me... if target date is 2040, why not hold bonds with 20+ year duration?
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Re: Rekenthaler: Long Bonds Are for Fools

Post by ignition » Sat May 16, 2020 6:27 am

vineviz wrote:
Fri May 15, 2020 3:04 pm
I'm not sure you're missing anything, but I'm also not sure what the question is.

Right now I can buy a zero-coupon Treasury bond maturing on 2/15/2050 with a nominal yield-to-maturity of 1.33%. For any money I'm planning to spend in 2050, that's as close to a risk-free investment as I can get. Either that or a TIPS maturing on the same date with a real yield of -0.13% (the TIPS has less inflation risk but slightly more interest rate risk).

If I'm planning a retirement which includes any expected consumption in 2050, one of those two long-term bonds (or some combination of both) is arguably the LEAST speculative investment (i.e. the strategy LEAST dependent on market timing) that I could make.
Yes, but you would be almost certain to not make any money after inflation. So why would you that?

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Re: Rekenthaler: Long Bonds Are for Fools

Post by vineviz » Sat May 16, 2020 6:33 am

bgf wrote:
Sat May 16, 2020 6:11 am

I've wondered why target date funds don't hold bonds with maturities out to the retirement date and beyond. Why is that? Cost? Probably not. Complexity? Probably not? So why? I don't ask this as a challenge to you. Matching duration to retirement makes sense to me... if target date is 2040, why not hold bonds with 20+ year duration?
Some target date funds do make some attempt at this (State Street and DFA, for instance, plus Fidelity to a lesser degree). The Dimensional 2030 Target Date fund (DRIWX) has an average duration of 19.41 years, according to Morningstar.

But I suspect the problem is mainly a marketing problem: investors have convinced themselves (or financial gurus have convinced them) that principal fluctuations in bond funds are a thing to avoid at all cost, so I suspect that fund companies find it easier to go along with the crowd than to take a stand in favor of the smarter allocation.
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Re: Rekenthaler: Long Bonds Are for Fools

Post by vineviz » Sat May 16, 2020 6:40 am

ignition wrote:
Sat May 16, 2020 6:27 am

Yes, but you would be almost certain to not make any money after inflation. So why would you that?
Because I'm just as certain to not LOSE any money after inflation. Buying short-term bonds and rolling them over doesn't provide that kind of certainty.

The only reason I save and invest now is to provide income for my household later, and at my age a 100% equity portfolio isn't the best way to do that IMHO. My bond allocation is relatively low (about 15-20%) but it's not 0%. And given that I do benefit from holding SOME bonds, the only smart choice is long-term bonds.

Personally I rely primarily on long-term nominal Treasuries and long-term TIPS, but I do hold some taxable municipal bonds and a handful of corporate bonds as well.
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Re: Rekenthaler: Long Bonds Are for Fools

Post by bgf » Sat May 16, 2020 6:59 am

vineviz wrote:
Sat May 16, 2020 6:33 am
bgf wrote:
Sat May 16, 2020 6:11 am

I've wondered why target date funds don't hold bonds with maturities out to the retirement date and beyond. Why is that? Cost? Probably not. Complexity? Probably not? So why? I don't ask this as a challenge to you. Matching duration to retirement makes sense to me... if target date is 2040, why not hold bonds with 20+ year duration?
Some target date funds do make some attempt at this (State Street and DFA, for instance, plus Fidelity to a lesser degree). The Dimensional 2030 Target Date fund (DRIWX) has an average duration of 19.41 years, according to Morningstar.

But I suspect the problem is mainly a marketing problem: investors have convinced themselves (or financial gurus have convinced them) that principal fluctuations in bond funds are a thing to avoid at all cost, so I suspect that fund companies find it easier to go along with the crowd than to take a stand in favor of the smarter allocation.
Thanks. Looks like DFA does only short term and 2 year for 2050, but state street does what you say, 2050 has 10% in long term treasuries. Very interesting and something to think about.
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Re: Rekenthaler: Long Bonds Are for Fools

Post by ignition » Sat May 16, 2020 7:02 am

vineviz wrote:
Sat May 16, 2020 6:40 am
ignition wrote:
Sat May 16, 2020 6:27 am

Yes, but you would be almost certain to not make any money after inflation. So why would you that?
Because I'm just as certain to not LOSE any money after inflation. Buying short-term bonds and rolling them over doesn't provide that kind of certainty.

The only reason I save and invest now is to provide income for my household later, and at my age a 100% equity portfolio isn't the best way to do that IMHO. My bond allocation is relatively low (about 15-20%) but it's not 0%. And given that I do benefit from holding SOME bonds, the only smart choice is long-term bonds.

Personally I rely primarily on long-term nominal Treasuries and long-term TIPS, but I do hold some taxable municipal bonds and a handful of corporate bonds as well.
I just don't see the point in holding bonds for consumption in 2050. I'd rather hold equities then.

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Re: Rekenthaler: Long Bonds Are for Fools

Post by Always passive » Sat May 16, 2020 7:13 am

vineviz wrote:
Sat May 16, 2020 5:37 am
Always passive wrote:
Sat May 16, 2020 12:01 am
I was answering to someone that was challenging the article’s point that long term bonds are for fools.
The only fool is a long-term investor who owns bonds that AREN’T long-term bonds.

Rekenthaler has it exactly backwards.
Unless inflation for the next 20+ years is below the current YTM of this ETF, about 1.5%, you will lose money in real terms. Does that not seem to you a foolish thing to do? Please help me understand your logic.

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Re: Rekenthaler: Long Bonds Are for Fools

Post by L82GAME » Sat May 16, 2020 7:16 am

This is an interesting post, thank you. I'm still learning (aren't we all?), but there are several themes raised in this thread that I'd like to address, question and learn from.

First, I think the thrust of Rekenthaler's article is not that long-term treasuries are necessarily a poor investment when used strategically as a tool to build a specific long-term strategy, as 30 year bonds may have their place within portfolios geared toward long-term and stable income generation during the decumulation phase of an investor's life (i.e., true buy and hold strategies, as a 30 year bond will eventually return the principal and interest as promised). Rather, I think Rekenthaler attempts to clarify the risks associated with such investments relative to one's investment strategy, and that they don't suit his personal strategy, nor do they suit a profit-generation strategy, "This column wasn’t written to dissuade long-Treasury investors. Its intent, instead, is to make explicit the grounds for owning such securities--either for noneconomic reasons or for generating a trading profit."

Second, Risk is inherent in all investments, including bonds. I think the primary risks inherent to long-term treasuries include price risk (e.g., the price of the security will fall due to an increase in interest rates - Swedroe, "Winning Bond Strategy") and inflation risk (e.g., the longer the maturity of an instrument, the greater the inflation risk - Swedroe, "Winning Bond Strategy"). Also, among various durations of Treasury instruments (i.e., bills, notes and bonds), 30 year bonds have the greatest correlation to US equities, relatively speaking (Swedroe - "Winning Bond Strategy).

Third, Treasuries should not be viewed as "...an alternative to stocks" but instead as a "...source of regular income and as a moderating influence on a stock portfolio..." (Van Ness - "Why Bother With Bonds"). Conversations herein comparing the returns of 30 year Treasury bonds to the expected return on equities over the long term miss the point of holding a diversified portfolio that can include short to mid-term bond holdings that exhibit low correlation to equities and can therefore stabilize portfolios in market downturns, allowing for opportunistic rebalancing into stocks at such times. This is a reasonable approach for most investors in their accumulation phase of life. Bonds vs. stocks should not be viewed relative to one another as an "either/or" proposition.

We need to understand the securities we choose to invest in (be they equities or debt), we need to understand the risks inherent to such investments, we need to understand the principles of diversification within and among such securities (e.g., a sector of equities vs. "the whole haystack", and an AA comprised of both stocks and bonds), and we need to understand the pitfalls of speculation versus long-term investing relative to the securities involved.

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Re: Rekenthaler: Long Bonds Are for Fools

Post by Chicken Little » Sat May 16, 2020 7:35 am

https://www.bloomberg.com/news/articles ... dgment-day

The milestones share a common theme: Investors are mopping up the sales as long as central banks engage in so-called quantitative easing, buying an unlimited amount of debt to counter the ravages of the pandemic. But at the first whiff of a recovery, or a pullback from policy makers, all bets may be off. Throw in the threat of inflation amid a global fiscal splurge exceeding $8 trillion, and bond investors look set for a toxic cocktail of risks in the not-too-distant future.

Noise?

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Re: Rekenthaler: Long Bonds Are for Fools

Post by vineviz » Sat May 16, 2020 7:56 am

ignition wrote:
Sat May 16, 2020 7:02 am

I just don't see the point in holding bonds for consumption in 2050. I'd rather hold equities then.
My goal is to try to maximize my lifetime consumption, and a lifelong 100% equity allocation isn't going to do that for me.

If it does for you that's great, but surely you can see that not everyone is going to want to do that?
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Re: Rekenthaler: Long Bonds Are for Fools

Post by anon_investor » Sat May 16, 2020 8:03 am

Always passive wrote:
Sat May 16, 2020 7:13 am
vineviz wrote:
Sat May 16, 2020 5:37 am
Always passive wrote:
Sat May 16, 2020 12:01 am
I was answering to someone that was challenging the article’s point that long term bonds are for fools.
The only fool is a long-term investor who owns bonds that AREN’T long-term bonds.

Rekenthaler has it exactly backwards.
Unless inflation for the next 20+ years is below the current YTM of this ETF, about 1.5%, you will lose money in real terms. Does that not seem to you a foolish thing to do? Please help me understand your logic.
Because risk free short term and intermediate bonds pay even less. A lot less actually... I mean a lot a lot less...

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Re: Rekenthaler: Long Bonds Are for Fools

Post by vineviz » Sat May 16, 2020 8:05 am

Always passive wrote:
Sat May 16, 2020 7:13 am
vineviz wrote:
Sat May 16, 2020 5:37 am
Always passive wrote:
Sat May 16, 2020 12:01 am
I was answering to someone that was challenging the article’s point that long term bonds are for fools.
The only fool is a long-term investor who owns bonds that AREN’T long-term bonds.

Rekenthaler has it exactly backwards.
Unless inflation for the next 20+ years is below the current YTM of this ETF, about 1.5%, you will lose money in real terms. Does that not seem to you a foolish thing to do? Please help me understand your logic.
I have no skill that would allow me to do a better job than other investors at predicting the future rate of inflation, so I prefer not to try.

I've set goals for my retirement income that, in my estimation, are most likely to be met using some combination of risk-free assets (long-term bonds) and risky assets (stocks). What seems foolish about that?
"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: Rekenthaler: Long Bonds Are for Fools

Post by Forester » Sat May 16, 2020 8:16 am

Always passive wrote:
Sat May 16, 2020 7:13 am
vineviz wrote:
Sat May 16, 2020 5:37 am
Always passive wrote:
Sat May 16, 2020 12:01 am
I was answering to someone that was challenging the article’s point that long term bonds are for fools.
The only fool is a long-term investor who owns bonds that AREN’T long-term bonds.

Rekenthaler has it exactly backwards.
Unless inflation for the next 20+ years is below the current YTM of this ETF, about 1.5%, you will lose money in real terms. Does that not seem to you a foolish thing to do? Please help me understand your logic.
Maybe in isolation LT bonds are questionnable but held alongside stocks they'll likely provide rebalancing ammunition when it's most needed.

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Re: Rekenthaler: Long Bonds Are for Fools

Post by vineviz » Sat May 16, 2020 8:21 am

L82GAME wrote:
Sat May 16, 2020 7:16 am
Rather, I think Rekenthaler attempts to clarify the risks associated with such investments relative to one's investment strategy, and that they don't suit his personal strategy, nor do they suit a profit-generation strategy, "This column wasn’t written to dissuade long-Treasury investors. Its intent, instead, is to make explicit the grounds for owning such securities--either for noneconomic reasons or for generating a trading profit."
The issue I have, and I don't think I'm alone, is that Rekenthaler is making a claim that those two rationales - noneconomic reasons (whatever that is) and speculative trading - are the ONLY two possible rationales. He ignores the most important rational, IMHO, which is that long-term bonds are the closest thing that long-term investors have to a risk-free asset.
L82GAME wrote:
Sat May 16, 2020 7:16 am
Also, among various durations of Treasury instruments (i.e., bills, notes and bonds), 30 year bonds have the greatest correlation to US equities, relatively speaking (Swedroe - "Winning Bond Strategy).
Swedroe is barking up the wrong tree on this point. Treasury instruments all have the same correlation with equities as each other, certainly within any reasonable confidence interval. Since 2002, the average monthly correlation of the following iShares Treasury ETFs with US stocks:

Shares 1-3 Year Treasury Bond ETF (SHY) = -0.36
iShares 7-10 Year Treasury Bond ETF (IEF) = -0.34
iShares 20+ Year Treasury Bond ETF (TLT) = -0.33

That difference is inconsequential considering the difference in variances (which make TLT a much more effective diversifier).
L82GAME wrote:
Sat May 16, 2020 7:16 am
Conversations herein comparing the returns of 30 year Treasury bonds to the expected return on equities over the long term miss the point of holding a diversified portfolio that can include short to mid-term bond holdings that exhibit low correlation to equities and can therefore stabilize portfolios in market downturns, allowing for opportunistic rebalancing into stocks at such times.
If the goal is to create a "diversified portfolio", there's no question that long-term nominal Treasuries do that better. The idea that short- or intermediate-term bonds are better for stabilizing an equity portfolio during downturns is based on neither theory nor experience.
"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: Rekenthaler: Long Bonds Are for Fools

Post by L82GAME » Sat May 16, 2020 8:51 am

vineviz wrote:
Sat May 16, 2020 8:21 am
L82GAME wrote:
Sat May 16, 2020 7:16 am
Rather, I think Rekenthaler attempts to clarify the risks associated with such investments relative to one's investment strategy, and that they don't suit his personal strategy, nor do they suit a profit-generation strategy, "This column wasn’t written to dissuade long-Treasury investors. Its intent, instead, is to make explicit the grounds for owning such securities--either for noneconomic reasons or for generating a trading profit."
The issue I have, and I don't think I'm alone, is that Rekenthaler is making a claim that those two rationales - noneconomic reasons (whatever that is) and speculative trading - are the ONLY two possible rationales. He ignores the most important rational, IMHO, which is that long-term bonds are the closest thing that long-term investors have to a risk-free asset. That's a fair point, and FWIW, I agree with your assertion that LT bonds are the closest thing that long-term investors have to a low-correlation asset relative to equities. I tried to make that point in my post above. However, to characterize bonds as risk-free is inaccurate.
L82GAME wrote:
Sat May 16, 2020 7:16 am
Also, among various durations of Treasury instruments (i.e., bills, notes and bonds), 30 year bonds have the greatest correlation to US equities, relatively speaking (Swedroe - "Winning Bond Strategy).
Swedroe is barking up the wrong tree on this point. Treasury instruments all have the same correlation with equities as each other, certainly within any reasonable confidence interval. Since 2002, the average monthly correlation of the following iShares Treasury ETFs with US stocks:

Shares 1-3 Year Treasury Bond ETF (SHY) = -0.36
iShares 7-10 Year Treasury Bond ETF (IEF) = -0.34
iShares 20+ Year Treasury Bond ETF (TLT) = -0.33

That difference is inconsequential considering the difference in variances (which make TLT a much more effective diversifier). That's a fair point, and I apologize for not using more updated data, as I was quoting from Swedroe's 2006 book
L82GAME wrote:
Sat May 16, 2020 7:16 am
Conversations herein comparing the returns of 30 year Treasury bonds to the expected return on equities over the long term miss the point of holding a diversified portfolio that can include short to mid-term bond holdings that exhibit low correlation to equities and can therefore stabilize portfolios in market downturns, allowing for opportunistic rebalancing into stocks at such times.
If the goal is to create a "diversified portfolio", there's no question that long-term nominal Treasuries do that better. The idea that short- or intermediate-term bonds are better for stabilizing an equity portfolio during downturns is based on neither theory nor experience.My intention was not to exclusively refer to short and intermediate-term bonds as the best "diversifiers". US Treasuries should be considered relative to the "liability matching" intentions and associated timelines of the investor. Depending on one's goals, different Treasury instruments get the job done differently. Therefore, a statement that short or intermediate-term treasuries are not better for downturns should be considered relative to one's investment goals and timeline.

Thanks,vineviz. I really appreciate the counterpoints. Please see my comments above, in-line.

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Re: Rekenthaler: Long Bonds Are for Fools

Post by vineviz » Sat May 16, 2020 9:10 am

L82GAME wrote:
Sat May 16, 2020 8:51 am
vineviz wrote:
Sat May 16, 2020 8:21 am
The issue I have, and I don't think I'm alone, is that Rekenthaler is making a claim that those two rationales - noneconomic reasons (whatever that is) and speculative trading - are the ONLY two possible rationales. He ignores the most important rational, IMHO, which is that long-term bonds are the closest thing that long-term investors have to a risk-free asset.
That's a fair point, and FWIW, I agree with your assertion that LT bonds are the closest thing that long-term investors have to a low-correlation asset relative to equities. I tried to make that point in my post above. However, to characterize bonds as risk-free is inaccurate.
Thanks.

I do want to reinforce something in particular, which is my point that "long-term bonds are the closest thing that long-term investors have to a risk-free asset. "

This isn't hyperbole, and it goes much deeper than just correlations.

If we could design a truly and completely risk-free asset for an investor it would be a series of zero-coupon inflation-indexed bonds (i.e. a zero-coupon TIPS) with maturities that exactly matched (in time and amount) the investor's future consumption pattern.

Because this asset doesn't exist, we are forced to approximate it and the assets that most CLOSELY match the characteristics of that ideal risk-free asset are zero-coupon nominal Treasury bonds, coupon-paying TIPS, income annuities, and Social Security.

Zero-coupon nominal Treasury bonds aren't quite risk-free for investors whose future consumption will (in whole or part) be in real terms instead of nominal terms.

TIPS aren't quite risk-free because they have coupon payments and therefore reinvestment risk.

Income annuities aren't quite risk-free because they are not inflation-linked and expose the investor to some credit risk, but they do solve for longevity risk.

Social Security is pretty much risk-free (and solves the longevity risk problem inherent in bond-based solutions) but we can't invest directly in it.

Ergo, it should be clear that the "closest thing that long-term investors have to a risk-free asset" is some combination of nominal bonds, TIPS, and/or income annuities that match the investor's future consumption pattern either directly (i.e. cash flow matching) or indirectly (i.e. duration matching). For a long-term investor, by definition this means long-term bonds are closer to the risk-free asset than short-term bonds are.
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Re: Rekenthaler: Long Bonds Are for Fools

Post by L82GAME » Sat May 16, 2020 10:01 am

vineviz wrote:
Sat May 16, 2020 9:10 am
L82GAME wrote:
Sat May 16, 2020 8:51 am
vineviz wrote:
Sat May 16, 2020 8:21 am
The issue I have, and I don't think I'm alone, is that Rekenthaler is making a claim that those two rationales - noneconomic reasons (whatever that is) and speculative trading - are the ONLY two possible rationales. He ignores the most important rational, IMHO, which is that long-term bonds are the closest thing that long-term investors have to a risk-free asset.
That's a fair point, and FWIW, I agree with your assertion that LT bonds are the closest thing that long-term investors have to a low-correlation asset relative to equities. I tried to make that point in my post above. However, to characterize bonds as risk-free is inaccurate.
Thanks.

I do want to reinforce something in particular, which is my point that "long-term bonds are the closest thing that long-term investors have to a risk-free asset. "

This isn't hyperbole, and it goes much deeper than just correlations.

If we could design a truly and completely risk-free asset for an investor it would be a series of zero-coupon inflation-indexed bonds (i.e. a zero-coupon TIPS) with maturities that exactly matched (in time and amount) the investor's future consumption pattern.

Because this asset doesn't exist, we are forced to approximate it and the assets that most CLOSELY match the characteristics of that ideal risk-free asset are zero-coupon nominal Treasury bonds, coupon-paying TIPS, income annuities, and Social Security.

Zero-coupon nominal Treasury bonds aren't quite risk-free for investors whose future consumption will (in whole or part) be in real terms instead of nominal terms.

TIPS aren't quite risk-free because they have coupon payments and therefore reinvestment risk.

Income annuities aren't quite risk-free because they are not inflation-linked and expose the investor to some credit risk, but they do solve for longevity risk.

Social Security is pretty much risk-free (and solves the longevity risk problem inherent in bond-based solutions) but we can't invest directly in it.

Ergo, it should be clear that the "closest thing that long-term investors have to a risk-free asset" is some combination of nominal bonds, TIPS, and/or income annuities that match the investor's future consumption pattern either directly (i.e. cash flow matching) or indirectly (i.e. duration matching). For a long-term investor, by definition this means long-term bonds are closer to the risk-free asset than short-term bonds are.
Thanks again. I think we can agree that the benefit of holding Treasuries in a portfolio goes deeper than correlations in that they pose no credit risk (and if they did, we'd have bigger things to worry about than this good-natured back and forth) thus providing stable investments that offer necessary ballast to a portfolio, and should therefore not be considered as an "either/or" binary proposition for investment relative to equities?

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Re: Rekenthaler: Long Bonds Are for Fools

Post by jhsu802701 » Sat May 16, 2020 10:15 am

Everyone here is talking about deflation and negative interest rates.

What makes you so sure that the opposite is impossible? The Federal Reserve has begun buying corporate bonds, junk bonds, and ETFs. It's pulling out all stops to promote inflation.

A possible scenario is deflation and negative interest rates followed by an abrupt pivot to high inflation and interest rates.

If you own long-term bonds now, you're betting that you can get out just before everyone else does. Of course, everyone else is trying to do the same thing. I don't know about you, but if I have to be quicker on the trigger than everyone else, I'm not viable.

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Re: Rekenthaler: Long Bonds Are for Fools

Post by CULater » Sat May 16, 2020 10:17 am

If the goal is to create a "diversified portfolio", there's no question that long-term nominal Treasuries do that better. The idea that short- or intermediate-term bonds are better for stabilizing an equity portfolio during downturns is based on neither theory nor experience.
As it turns out, there isn't much difference between holding long-term treasuries and intermediate-term treasuries along with TSM in a 60/40 portfolio in terms of portfolio drawdowns. Over the period 1981-2020, the maximum drawdown was -26.9% holding LTT and it was -27.9% holding ITT. The Sharpe Ratios were 0.66 and 0.60 respectively. Year-to-date, the maximum drawdowns have been -18.7% and -19.6% holding LTT and ITT respectively. There has been only a marginal drawdown benefit for holding LTT in exchange for accepting the greater term risk.
Last edited by CULater on Sat May 16, 2020 10:35 am, edited 2 times in total.
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Re: Rekenthaler: Long Bonds Are for Fools

Post by vineviz » Sat May 16, 2020 10:19 am

jhsu802701 wrote:
Sat May 16, 2020 10:15 am
If you own long-term bonds now, you're betting that you can get out just before everyone else does.
Or you’re deciding that you don’t want to bet at all.

If you don’t want to have an unexpected loss, choose an investment that won’t give you one. That’s what long-term bond investors have been doing for decades, if not centuries.
"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: Rekenthaler: Long Bonds Are for Fools

Post by dharrythomas » Sat May 16, 2020 10:47 am

bgf wrote:
Fri May 15, 2020 1:39 pm
the long term investor will invest in long duration bond funds in hopes of greater return than a total bond fund, right?

Even without caring about short term correlations or rebalancing, even at current low rates, he can fairly expect long term bonds to have a greater return than a total bond fund, right?
I think it depends. If depends on the movement of interest rates and the timing. If you invest in long term bonds at an interest rate of less than 1.5%, you’ve locked in a low absolute return. If interest rates go up, the principal of the fund drops. My experience has been with falling interest rates, in which case locking in long bonds was a good move. When you lock in low rates, there is little potential upside and much downside risk, with little reward.

Inflation target is 2%, the government is aiming for me to have fewer real dollars in 2050 before taxes than I’m being asked to invest today, I am not enthusiastic in this situation about long term bonds.

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Re: Rekenthaler: Long Bonds Are for Fools

Post by dmcmahon » Sat May 16, 2020 10:49 am

fredflinstone wrote:
Fri May 15, 2020 12:47 pm
I've heard variations of this argment since joining this Forum 10 years ago. The argument was wrong then and is wrong now.

By the way, at 1.3% yield, US 30-year treasuries are a bargain compared to Swiss 10-year treasuries (current yield of -0.554%).
Why is it wrong? It’s essentially the bigger fool theory. Sure enough, bigger and bigger fools keep buying, 10 years on from the 2009 crisis. Bond holders are relying on someone else accepting an even lower yield in the future.

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Re: Rekenthaler: Long Bonds Are for Fools

Post by jhsu802701 » Sat May 16, 2020 10:59 am

vineviz wrote:
Sat May 16, 2020 10:19 am
jhsu802701 wrote:
Sat May 16, 2020 10:15 am
If you own long-term bonds now, you're betting that you can get out just before everyone else does.
Or you’re deciding that you don’t want to bet at all.

If you don’t want to have an unexpected loss, choose an investment that won’t give you one. That’s what long-term bond investors have been doing for decades, if not centuries.
Are you that sure that today's historic microscopic interest rates can persist for 20 to 30 years?

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Re: Rekenthaler: Long Bonds Are for Fools

Post by Elysium » Sat May 16, 2020 11:02 am

CULater wrote:
Sat May 16, 2020 10:17 am
If the goal is to create a "diversified portfolio", there's no question that long-term nominal Treasuries do that better. The idea that short- or intermediate-term bonds are better for stabilizing an equity portfolio during downturns is based on neither theory nor experience.
As it turns out, there isn't much difference between holding long-term treasuries and intermediate-term treasuries along with TSM in a 60/40 portfolio in terms of portfolio drawdowns. Over the period 1981-2020, the maximum drawdown was -26.9% holding LTT and it was -27.9% holding ITT. The Sharpe Ratios were 0.66 and 0.60 respectively. Year-to-date, the maximum drawdowns have been -18.7% and -19.6% holding LTT and ITT respectively. There has been only a marginal drawdown benefit for holding LTT in exchange for accepting the greater term risk.
A 1% difference in drawdown and a difference of 0.06 in increased Sharpe ratio is indeed huge when compounded over that many years. The difference is not only a smoother ride but also a larger ending balance.

There may be many reasons for not owning LTT bonds, but benefits from last 40 years or even 20 years isn't one of them. Clearly, holding LTT were the better option since 1981 or 2000 compared to anything else.

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Re: Rekenthaler: Long Bonds Are for Fools

Post by Elysium » Sat May 16, 2020 11:05 am

jhsu802701 wrote:
Sat May 16, 2020 10:59 am
vineviz wrote:
Sat May 16, 2020 10:19 am
jhsu802701 wrote:
Sat May 16, 2020 10:15 am
If you own long-term bonds now, you're betting that you can get out just before everyone else does.
Or you’re deciding that you don’t want to bet at all.

If you don’t want to have an unexpected loss, choose an investment that won’t give you one. That’s what long-term bond investors have been doing for decades, if not centuries.
Are you that sure that today's historic microscopic interest rates can persist for 20 to 30 years?
He isn't betting on rates one way or other, in fact his argument is that LTT today guarantees 1%+ rates it is offering, but those who are not investing in LTT are betting on rates going higher, otherwise there is no reason for them to chose bonds yielding 0.50% (ITT) compared to bonds yielding 1% (LTT). Those who select ITT are betting, they'll be able to re-invest their 0.50% bonds at a higher rate in a few years, while the LTT investor is content with 1% rate for the next 20 because it guarantees them that.

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vineviz
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Re: Rekenthaler: Long Bonds Are for Fools

Post by vineviz » Sat May 16, 2020 11:13 am

dmcmahon wrote:
Sat May 16, 2020 10:49 am
fredflinstone wrote:
Fri May 15, 2020 12:47 pm
I've heard variations of this argment since joining this Forum 10 years ago. The argument was wrong then and is wrong now.

By the way, at 1.3% yield, US 30-year treasuries are a bargain compared to Swiss 10-year treasuries (current yield of -0.554%).
Why is it wrong? It’s essentially the bigger fool theory. Sure enough, bigger and bigger fools keep buying, 10 years on from the 2009 crisis. Bond holders are relying on someone else accepting an even lower yield in the future.
In 2009 an investor could have purchased a 30-year Treasury bond with a yield of 4.5% or better.

Today, a 20-year Treasury bond yields just 1%.

Who, exactly, is the greater fool in this story?
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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