Simulated Future 10 Year Treasury Returns

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
Topic Author
antman50
Posts: 28
Joined: Wed Aug 12, 2020 11:54 am

Simulated Future 10 Year Treasury Returns

Post by antman50 »

Hello -

I am new to the Boglehead community and could use some help. I help some family and friends strip out the complexity of their portfolios and for the most part, am aligned with what I've read so far on here. TYFYS. One area where I keep getting stuck is the viability of fixed income. I really struggle with thinking that a conservative investor should be loading up on fixed income. A friend helped me develop this spreadsheet after reviewing NYU Professor Damodaran's formulas.

https://postimg.cc/7GpzxLFt

The simulated returns don't factor in inflation or fees (fees assumed to be minimal). I understand that speculation is not a part of the Boglehead community but with rates so low, it makes me feel like a recommendation of 50-80% of capital to fixed income makes me an interest speculator :( The way I see it, the only way to make a reasonable positive nominal return from bonds is if rates go lower. Not saying that it's not possible, but if I look at real returns, https://www.treasury.gov/resource-cente ... =realyield, the rates are already negative across the board.

The real battle I'm facing is putting friends or family in a position where half their money is a net loser and might not have the correlation benefits or pop when I need it most that bonds have had over the last 40 years. The 40-year stretch preceding this current one would put a ton of stress on a conservative investor and they could potentially run out of money.

Am I viewing this incorrectly? Am I overthinking this? Have I gotten in my own head?

Very willing to read any research or data that the community can bring my way!

Thank you.
User avatar
willthrill81
Posts: 21355
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Simulated Future 10 Year Treasury Returns

Post by willthrill81 »

Unless inflation is about 1% or lower and/or interest rates fall even more, 10 year Treasuries bought today are pretty much certain to lose out to inflation before taxes over the next decade. Why any knowledgeable investor would try to deny this seems incredulous to me, but some here clearly seem to. I think that normalcy bias may play a big role.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
protagonist
Posts: 6763
Joined: Sun Dec 26, 2010 12:47 pm

Re: Simulated Future 10 Year Treasury Returns

Post by protagonist »

I agree with both of you above.
I just had some CDs mature and for now I am keeping that money in my online bank account , interest 1.01%. I figure with inflation so low I am probably at least breaking even in real terms, at least for the time being, and at least my money is flexible to jump into something else if and when something more desirable pops up. Tying money up at current rates for any significant amount of time seems risky to me, and the other options don't offer much more of an up side.

I expect stocks to be rather volatile in months to come....things can go either way depending on how the pandemic plays out and its longer term effect on the economy. I wouldn't pay much mind to people's predictions. I also wouldn't pay a lot of attention to the last 40 years that the OP quoted....it was a wholly remarkable period where interest rates came down from historical highs to historical lows. There are no simple answers to make money these days. As a retiree I am just trying to hang on to what I've got and not spend too much time worrying about things I cannot control.
XacTactX
Posts: 66
Joined: Sat May 11, 2019 5:46 pm
Location: Southern California

Re: Simulated Future 10 Year Treasury Returns

Post by XacTactX »

I wish I had an answer to this question so we could go back to the early-mid 2000s and receive 2-3% real yields on Treasuries along with the diversification benefits but I think there is nothing like that in the current landscape.

The real reason I’m posting this is to say: ignore any advice about high dividend stocks, high yield corporates, preferred stock, or any asset that behaves like a stock and has high correlation to stocks. A portfolio of stock/cash will have higher risk adjusted returns and it will support higher SWR than any of these options. Even in a low yield environment diversifying away the risk of equities is the name of the game.
SMLF | ISCF | EMGF | LendingClub | Cash
columbia
Posts: 2988
Joined: Tue Aug 27, 2013 5:30 am

Re: Simulated Future 10 Year Treasury Returns

Post by columbia »

willthrill81 wrote: Wed Aug 19, 2020 9:25 pm Unless inflation is about 1% or lower and/or interest rates fall even more, 10 year Treasuries bought today are pretty much certain to lose out to inflation before taxes over the next decade. Why any knowledgeable investor would try to deny this seems incredulous to me, but some here clearly seem to. I think that normalcy bias may play a big role.
Ding ding ding.
User avatar
jeffyscott
Posts: 9183
Joined: Tue Feb 27, 2007 9:12 am
Location: Wisconsin

Re: Simulated Future 10 Year Treasury Returns

Post by jeffyscott »

protagonist wrote: Wed Aug 19, 2020 9:32 pm I agree with both of you above.
I just had some CDs mature and for now I am keeping that money in my online bank account , interest 1.01%.
Same sort of thing here, except that I went to ultrashort bond fund, since that was more convenient when brokered CDs matured. But I have more recently moved from that to direct CDs at around 2%, when I find them.

Other escapes from low treasury rates that may make sense for others are I and E bonds or stable value funds in employer accounts.
The two greatest enemies of the equity fund investor are expenses and emotions. ― John C. Bogle
Willmunny
Posts: 128
Joined: Mon Jun 16, 2014 6:35 pm

Re: Simulated Future 10 Year Treasury Returns

Post by Willmunny »

willthrill81 wrote: Wed Aug 19, 2020 9:25 pm Unless inflation is about 1% or lower and/or interest rates fall even more, 10 year Treasuries bought today are pretty much certain to lose out to inflation before taxes over the next decade. Why any knowledgeable investor would try to deny this seems incredulous to me, but some here clearly seem to. I think that normalcy bias may play a big role.
Right. And showing the return of a bond fund over the last year or 10 years is not an effective rebuttal to this point. It is simply what the math dictates.
bigskyguy
Posts: 224
Joined: Sat Jan 24, 2015 4:59 pm

Re: Simulated Future 10 Year Treasury Returns

Post by bigskyguy »

columbia wrote: Thu Aug 20, 2020 5:30 am
willthrill81 wrote: Wed Aug 19, 2020 9:25 pm Unless inflation is about 1% or lower and/or interest rates fall even more, 10 year Treasuries bought today are pretty much certain to lose out to inflation before taxes over the next decade. Why any knowledgeable investor would try to deny this seems incredulous to me, but some here clearly seem to. I think that normalcy bias may play a big role.
If one looks at long term financial cycles (see Dalio’s writings - in particular his book Principles), we are now deep into the final period where finances of all types are highly leveraged, returns from all investments are approaching their nadir, and debt levels will of necessity have to fall in order for equilibrium to again establish itself. It is quite conceivable that for the next 10-20 years returns on all investments (equities, fixed, real estate, gold) will indeed disappoint. We are all by nature programmed to expect returns to be what they have been In our experience. That is contrary to what the long term financial cycles suggest will happen.
At 71, my expectation is that equities will likely return 2-5%, fixed income -1% to 0% real for the majority of my remaining time.
I think it is absolutely imperative that one understand where in the long term financial cycle we are in order to plan for the near term (20 year give or take) future.
Am I predicting near term poor returns, no. But I’m not expecting the next 20 years to look at all like the last 40 years. To do so would defy the long term financial cycle premise, which I find both logical and likely.
Seasonal
Posts: 2143
Joined: Sun May 21, 2017 1:49 pm

Re: Simulated Future 10 Year Treasury Returns

Post by Seasonal »

If I had to guess, I'd put 10 year nominal treasuries at 0.64% and TIPS at -1.00%, in both cases plus or minus a lot. https://www.bloomberg.com/markets/rates ... t-bonds/us

Dart boards have about the same accuracy as careful analysis regarding interest rates.

What's the alternative to bonds that has some hope of a reasonable return and doesn't come with lots of risk?
Elysium
Posts: 3226
Joined: Mon Apr 02, 2007 6:22 pm

Re: Simulated Future 10 Year Treasury Returns

Post by Elysium »

willthrill81 wrote: Wed Aug 19, 2020 9:25 pm Unless inflation is about 1% or lower and/or interest rates fall even more, 10 year Treasuries bought today are pretty much certain to lose out to inflation before taxes over the next decade. Why any knowledgeable investor would try to deny this seems incredulous to me, but some here clearly seem to. I think that normalcy bias may play a big role.
What alternative do you suggest for risk free (almost) portion of a portfolio?
Elysium
Posts: 3226
Joined: Mon Apr 02, 2007 6:22 pm

Re: Simulated Future 10 Year Treasury Returns

Post by Elysium »

antman50 wrote: Wed Aug 19, 2020 9:21 pm A friend helped me develop this spreadsheet after reviewing NYU Professor Damodaran's formulas.

https://postimg.cc/7GpzxLFt

The simulated returns don't factor in inflation or fees (fees assumed to be minimal).
Interesting. Do you have the same analysis for 20 Yr Treasury? An added bonus would be do same for TIPS.
bigskyguy
Posts: 224
Joined: Sat Jan 24, 2015 4:59 pm

Re: Simulated Future 10 Year Treasury Returns

Post by bigskyguy »

bigskyguy wrote: Thu Aug 20, 2020 7:44 am
columbia wrote: Thu Aug 20, 2020 5:30 am
willthrill81 wrote: Wed Aug 19, 2020 9:25 pm Unless inflation is about 1% or lower and/or interest rates fall even more, 10 year Treasuries bought today are pretty much certain to lose out to inflation before taxes over the next decade. Why any knowledgeable investor would try to deny this seems incredulous to me, but some here clearly seem to. I think that normalcy bias may play a big role.
If one looks at long term financial cycles (see Dalio’s writings - in particular his book Principles), we are now deep into the final period where finances of all types are highly leveraged, returns from all investments are approaching their nadir, and debt levels will of necessity have to fall in order for equilibrium to again establish itself. It is quite conceivable that for the next 10-20 years returns on all investments (equities, fixed, real estate, gold) will indeed disappoint. We are all by nature programmed to expect returns to be what they have been In our experience. That is contrary to what the long term financial cycles suggest will happen.
At 71, my expectation is that equities will likely return 2-5%, fixed income -1% to 0% real for the majority of my remaining time.
I think it is absolutely imperative that one understand where in the long term financial cycle we are in order to plan for the near term (20 year give or take) future.
Am I predicting near term poor returns, no. But I’m not expecting the next 20 years to look at all like the last 40 years. To do so would defy the long term financial cycle premise, which I find both logical and likely.
Oops, for whatever reason, the portion of this attributed to Columbia was written by me. My bad on the posting. My apologies to Columbia.

Bigskyguy
columbia
Posts: 2988
Joined: Tue Aug 27, 2013 5:30 am

Re: Simulated Future 10 Year Treasury Returns

Post by columbia »

No worries!
User avatar
PicassoSparks
Posts: 160
Joined: Tue Apr 28, 2020 5:41 am

Re: Simulated Future 10 Year Treasury Returns

Post by PicassoSparks »

willthrill81 wrote: Wed Aug 19, 2020 9:25 pm Unless inflation is about 1% or lower and/or interest rates fall even more, 10 year Treasuries bought today are pretty much certain to lose out to inflation before taxes over the next decade. Why any knowledgeable investor would try to deny this seems incredulous to me, but some here clearly seem to. I think that normalcy bias may play a big role.
Treasuries are sold at auction. And then on market. Everyone keeps saying they are virtually certain to lose out to inflation, yet people keep bidding on them at these rates. They are not just individuals but many large financial institutions and investors. Why do you think their normalcy bias is so strong as to force them to not see something “virtually certain“ that you can see?
Always passive
Posts: 694
Joined: Fri Apr 14, 2017 4:25 am
Location: Israel

Re: Simulated Future 10 Year Treasury Returns

Post by Always passive »

Seasonal wrote: Thu Aug 20, 2020 7:49 am If I had to guess, I'd put 10 year nominal treasuries at 0.64% and TIPS at -1.00%, in both cases plus or minus a lot. https://www.bloomberg.com/markets/rates ... t-bonds/us

Dart boards have about the same accuracy as careful analysis regarding interest rates.

What's the alternative to bonds that has some hope of a reasonable return and doesn't come with lots of risk?
Forgive me but the return of a bond is defined by present interest rates, so what most are saying is that bonds are plainly useless.

" With limited room for yields to fall and no limit on how much they can rise, the distribution of potential
returns for bonds and rates is adversely skewed "
Always passive
Posts: 694
Joined: Fri Apr 14, 2017 4:25 am
Location: Israel

Re: Simulated Future 10 Year Treasury Returns

Post by Always passive »

PicassoSparks wrote: Thu Aug 20, 2020 9:36 am
willthrill81 wrote: Wed Aug 19, 2020 9:25 pm Unless inflation is about 1% or lower and/or interest rates fall even more, 10 year Treasuries bought today are pretty much certain to lose out to inflation before taxes over the next decade. Why any knowledgeable investor would try to deny this seems incredulous to me, but some here clearly seem to. I think that normalcy bias may play a big role.
Treasuries are sold at auction. And then on market. Everyone keeps saying they are virtually certain to lose out to inflation, yet people keep bidding on them at these rates. They are not just individuals but many large financial institutions and investors. Why do you think their normalcy bias is so strong as to force them to not see something “virtually certain“ that you can see?
Because for many there is no other option.
User avatar
willthrill81
Posts: 21355
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Simulated Future 10 Year Treasury Returns

Post by willthrill81 »

PicassoSparks wrote: Thu Aug 20, 2020 9:36 am
willthrill81 wrote: Wed Aug 19, 2020 9:25 pm Unless inflation is about 1% or lower and/or interest rates fall even more, 10 year Treasuries bought today are pretty much certain to lose out to inflation before taxes over the next decade. Why any knowledgeable investor would try to deny this seems incredulous to me, but some here clearly seem to. I think that normalcy bias may play a big role.
Treasuries are sold at auction. And then on market. Everyone keeps saying they are virtually certain to lose out to inflation, yet people keep bidding on them at these rates. They are not just individuals but many large financial institutions and investors. Why do you think their normalcy bias is so strong as to force them to not see something “virtually certain“ that you can see?
First, most of the buyers of Treasuries are not individuals; the overwhelming majority are owned by institutional investors, insurance companies, government agencies (i.e. Social Security Administration), and foreign governments. Many of these investors buy and own Treasuries because they have no other alternative; they are captive audiences. Insurance companies, for instance, cannot put everything into stocks.

Second, TIPS explicitly have a negative real yield. The fact that they will lose out to inflation is clearly known when they are purchased. Yet people are still purchasing them because it fits their need. There is more to fixed income than getting a positive real return. Many fail to understand that.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
Seasonal
Posts: 2143
Joined: Sun May 21, 2017 1:49 pm

Re: Simulated Future 10 Year Treasury Returns

Post by Seasonal »

Always passive wrote: Thu Aug 20, 2020 9:50 am
Seasonal wrote: Thu Aug 20, 2020 7:49 am If I had to guess, I'd put 10 year nominal treasuries at 0.64% and TIPS at -1.00%, in both cases plus or minus a lot. https://www.bloomberg.com/markets/rates ... t-bonds/us

Dart boards have about the same accuracy as careful analysis regarding interest rates.

What's the alternative to bonds that has some hope of a reasonable return and doesn't come with lots of risk?
Forgive me but the return of a bond is defined by present interest rates, so what most are saying is that bonds are plainly useless.

" With limited room for yields to fall and no limit on how much they can rise, the distribution of potential
returns for bonds and rates is adversely skewed "
I'm not saying they are useless. Their utility depends on what you're looking for and whether there are alternatives available that better meet your goals.

It's not clear how far yields can fall. In considering whether things are adversely skewed you'd have to consider the chances of various scenarios. For example, in theory rates go very negative or very positive, but how likely are those to happen?
Seasonal
Posts: 2143
Joined: Sun May 21, 2017 1:49 pm

Re: Simulated Future 10 Year Treasury Returns

Post by Seasonal »

willthrill81 wrote: Thu Aug 20, 2020 9:54 am
PicassoSparks wrote: Thu Aug 20, 2020 9:36 am
willthrill81 wrote: Wed Aug 19, 2020 9:25 pm Unless inflation is about 1% or lower and/or interest rates fall even more, 10 year Treasuries bought today are pretty much certain to lose out to inflation before taxes over the next decade. Why any knowledgeable investor would try to deny this seems incredulous to me, but some here clearly seem to. I think that normalcy bias may play a big role.
Treasuries are sold at auction. And then on market. Everyone keeps saying they are virtually certain to lose out to inflation, yet people keep bidding on them at these rates. They are not just individuals but many large financial institutions and investors. Why do you think their normalcy bias is so strong as to force them to not see something “virtually certain“ that you can see?
First, most of the buyers of Treasuries are not individuals; the overwhelming majority are owned by institutional investors, insurance companies, government agencies (i.e. Social Security Administration), and foreign governments. Many of these investors buy and own Treasuries because they have no other alternative; they are captive audiences. Insurance companies, for instance, cannot put everything into stocks.

Second, TIPS explicitly have a negative real yield. The fact that they will lose out to inflation is clearly known when they are purchased. Yet people are still purchasing them because it fits their need. There is more to fixed income than getting a positive real return. Many fail to understand that.
Many institutional purchases are ultimately on behalf of underlying individuals.

"There is more to fixed income than getting a positive real return. Many fail to understand that." Yep.
User avatar
coingaroo
Posts: 93
Joined: Fri Apr 26, 2019 11:31 am

Re: Simulated Future 10 Year Treasury Returns

Post by coingaroo »

Consider a situation where rates moderately increase (increasing your yield), and decrease when it is perfectly timed with the collapse of your stock holdings. You rebalance quarterly and get some rebalancing bonus.
User avatar
willthrill81
Posts: 21355
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Simulated Future 10 Year Treasury Returns

Post by willthrill81 »

coingaroo wrote: Thu Aug 20, 2020 10:01 am Consider a situation where rates moderately increase (increasing your yield), and decrease when it is perfectly timed with the collapse of your stock holdings. You rebalance quarterly and get some rebalancing bonus.
The rebalancing 'bonus' has been shown to largely be a myth in many prior threads. Rebalancing has historically hurt investors at least as often as it has helped them.

I'd argue that the seemingly most common reasons that most here own fixed income are (1) to serve as ballast in a portfolio otherwise comprised mostly of stocks and/or (2) to safeguard funds that they are not willing to put at risk over some future period of time, such as five or ten years. Both of those reasons are still valid even if bonds lose to inflation over the next decade.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
Always passive
Posts: 694
Joined: Fri Apr 14, 2017 4:25 am
Location: Israel

Re: Simulated Future 10 Year Treasury Returns

Post by Always passive »

Seasonal wrote: Thu Aug 20, 2020 9:59 am
willthrill81 wrote: Thu Aug 20, 2020 9:54 am
PicassoSparks wrote: Thu Aug 20, 2020 9:36 am
willthrill81 wrote: Wed Aug 19, 2020 9:25 pm Unless inflation is about 1% or lower and/or interest rates fall even more, 10 year Treasuries bought today are pretty much certain to lose out to inflation before taxes over the next decade. Why any knowledgeable investor would try to deny this seems incredulous to me, but some here clearly seem to. I think that normalcy bias may play a big role.
Treasuries are sold at auction. And then on market. Everyone keeps saying they are virtually certain to lose out to inflation, yet people keep bidding on them at these rates. They are not just individuals but many large financial institutions and investors. Why do you think their normalcy bias is so strong as to force them to not see something “virtually certain“ that you can see?
First, most of the buyers of Treasuries are not individuals; the overwhelming majority are owned by institutional investors, insurance companies, government agencies (i.e. Social Security Administration), and foreign governments. Many of these investors buy and own Treasuries because they have no other alternative; they are captive audiences. Insurance companies, for instance, cannot put everything into stocks.

Second, TIPS explicitly have a negative real yield. The fact that they will lose out to inflation is clearly known when they are purchased. Yet people are still purchasing them because it fits their need. There is more to fixed income than getting a positive real return. Many fail to understand that.
Many institutional purchases are ultimately on behalf of underlying individuals.

"There is more to fixed income than getting a positive real return. Many fail to understand that." Yep.
Unless of course the investor depends on the yield. Most retirees are in that club!
Seasonal
Posts: 2143
Joined: Sun May 21, 2017 1:49 pm

Re: Simulated Future 10 Year Treasury Returns

Post by Seasonal »

Always passive wrote: Thu Aug 20, 2020 10:59 am
Seasonal wrote: Thu Aug 20, 2020 9:59 am
willthrill81 wrote: Thu Aug 20, 2020 9:54 am
PicassoSparks wrote: Thu Aug 20, 2020 9:36 am
willthrill81 wrote: Wed Aug 19, 2020 9:25 pm Unless inflation is about 1% or lower and/or interest rates fall even more, 10 year Treasuries bought today are pretty much certain to lose out to inflation before taxes over the next decade. Why any knowledgeable investor would try to deny this seems incredulous to me, but some here clearly seem to. I think that normalcy bias may play a big role.
Treasuries are sold at auction. And then on market. Everyone keeps saying they are virtually certain to lose out to inflation, yet people keep bidding on them at these rates. They are not just individuals but many large financial institutions and investors. Why do you think their normalcy bias is so strong as to force them to not see something “virtually certain“ that you can see?
First, most of the buyers of Treasuries are not individuals; the overwhelming majority are owned by institutional investors, insurance companies, government agencies (i.e. Social Security Administration), and foreign governments. Many of these investors buy and own Treasuries because they have no other alternative; they are captive audiences. Insurance companies, for instance, cannot put everything into stocks.

Second, TIPS explicitly have a negative real yield. The fact that they will lose out to inflation is clearly known when they are purchased. Yet people are still purchasing them because it fits their need. There is more to fixed income than getting a positive real return. Many fail to understand that.
Many institutional purchases are ultimately on behalf of underlying individuals.

"There is more to fixed income than getting a positive real return. Many fail to understand that." Yep.
Unless of course the investor depends on the yield. Most retirees are in that club!
As far as I can tell, a majority of US retirees depend primarily on Social Security. https://www.ssa.gov/news/press/factshee ... ct-alt.pdf

I'd imagine most of those that need more have a more balanced portfolio. It's certainly a recommendation around here.

What evidence do you have that most retirees depend on yield?
Always passive
Posts: 694
Joined: Fri Apr 14, 2017 4:25 am
Location: Israel

Re: Simulated Future 10 Year Treasury Returns

Post by Always passive »

Frankly I do not, but I have made the assumption that one cannot live from SS. Again, maybe I am wrong on this assumption.
Post Reply