How Do I Look At The Current Strategy Of Buying Long Term Treasuries?
How Do I Look At The Current Strategy Of Buying Long Term Treasuries?
Good Morning ,
All the information I've read on long term treasuries indicates they are the best fixed income diversifier to a high equity (80 %) portfolio.
Using Portfolio visualizer going back to the late 90's they seem to offer the best balance due to their negative correlations with stocks in terms of
offering positive returns when stocks are showing negative returns and softening max drawdowns while improving overall portfolio performance over
time.
I currently don't need more than less than 1% withdrawals from my portfolio after social security, pension and a part time job and currently have a couple
of years in VTIP short duration TIPS and the rest in VGIT intermediate term treasuries.
I'm thinking of holding up to an addition 5 years in VGIT for potential withdrawals in the case of a prolonged downturn in equity markets and moving the
rest to VGLT Vanguard Long Term Treasuries as an overall diversifier.
My only concern is the timing of that move. Interest rates are almost surely going to rise .25 % to .50 % sometime next year and with the duration of
that fund being around 18 years, I'm wondering if the 8-9% loss in NAV in the last year is already reflecting that or I could expect another decrease of that
approximate % if interest rates are increased .50 % ?
Or do I take the Boglehead approach of ' I know nothing ' and make this transition?
Thank You
All the information I've read on long term treasuries indicates they are the best fixed income diversifier to a high equity (80 %) portfolio.
Using Portfolio visualizer going back to the late 90's they seem to offer the best balance due to their negative correlations with stocks in terms of
offering positive returns when stocks are showing negative returns and softening max drawdowns while improving overall portfolio performance over
time.
I currently don't need more than less than 1% withdrawals from my portfolio after social security, pension and a part time job and currently have a couple
of years in VTIP short duration TIPS and the rest in VGIT intermediate term treasuries.
I'm thinking of holding up to an addition 5 years in VGIT for potential withdrawals in the case of a prolonged downturn in equity markets and moving the
rest to VGLT Vanguard Long Term Treasuries as an overall diversifier.
My only concern is the timing of that move. Interest rates are almost surely going to rise .25 % to .50 % sometime next year and with the duration of
that fund being around 18 years, I'm wondering if the 8-9% loss in NAV in the last year is already reflecting that or I could expect another decrease of that
approximate % if interest rates are increased .50 % ?
Or do I take the Boglehead approach of ' I know nothing ' and make this transition?
Thank You
Last edited by BigDGB on Fri Nov 26, 2021 12:34 pm, edited 1 time in total.
Re: How Do I Look At The Current Strategy Of Buying Long Term Treasuries?
The "Boglehead" approach would be buying a broad market index of bonds, not just long term ones of a single type, and to be buying and rebalancing them to maintain ones risk profile (exposure to stocks) over time.
As far as I'm concerned, buying bonds of a term longer than you expect to hold them seems ridiculous. Bonds promise you a specific interest rate and return of principle if you hold them to maturity. They make no promises about the the market prices for them to zig while stocks zag.
It might turn out that their future returns are uncorrelated enough to work out that way, but if my primary purpose for holding bonds was as a trading strategy to sell them at some other point to buy stocks, I would just be buying stocks to begin with rather than expecting that bonds will act as a market-timing strategy... so it seems even sillier to me to try and market time the buying of the bonds that you hope will have some intrinsic market-timing ability built into them.
As far as I'm concerned, buying bonds of a term longer than you expect to hold them seems ridiculous. Bonds promise you a specific interest rate and return of principle if you hold them to maturity. They make no promises about the the market prices for them to zig while stocks zag.
It might turn out that their future returns are uncorrelated enough to work out that way, but if my primary purpose for holding bonds was as a trading strategy to sell them at some other point to buy stocks, I would just be buying stocks to begin with rather than expecting that bonds will act as a market-timing strategy... so it seems even sillier to me to try and market time the buying of the bonds that you hope will have some intrinsic market-timing ability built into them.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
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Re: How Do I Look At The Current Strategy Of Buying Long Term Treasuries?
I don't know. But I do think it is important to be aware of the actual historical record of correlations between stocks and long-term Treasury bonds. "Since the late nineties" is not a good representative sample.
There have been long periods of positive correlation, just as long and just as strong as the current period of negative correlation.
"Stocks and bonds 'are' uncorrelated" is reasonably well supported by history. "Stocks and bonds 'have' negative correlation" is not.
I don't think it's a good idea to pursue any strategy that counts on robust negative correlation.
Of course some people construct parlays of predictions, assumptions, and tendencies--the correlation will be negative if XYZ, and XYZ will happen if the Fed does ABC, and the Fed is sure to do ABC, therefore... The correlation only goes positive when QRS happens, and QRS is not going to happen, therefore...
There have been long periods of positive correlation, just as long and just as strong as the current period of negative correlation.
"Stocks and bonds 'are' uncorrelated" is reasonably well supported by history. "Stocks and bonds 'have' negative correlation" is not.
I don't think it's a good idea to pursue any strategy that counts on robust negative correlation.
Of course some people construct parlays of predictions, assumptions, and tendencies--the correlation will be negative if XYZ, and XYZ will happen if the Fed does ABC, and the Fed is sure to do ABC, therefore... The correlation only goes positive when QRS happens, and QRS is not going to happen, therefore...
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Re: How Do I Look At The Current Strategy Of Buying Long Term Treasuries?
As nisiprius notes, the negative correlation is a relatively recent phenomenon and shouldn't be counted on.BigDGB wrote: ↑Fri Nov 26, 2021 8:57 am Good Morning ,
All the information I've read on long term treasuries indicates they are the best fixed income diversifier to a high equity (80 %) portfolio.
Using Portfolio visualizer going back to the late 90's they seem to offer the best balance due to their negative correlations with stocks in terms of
offering positive returns when stocks are showing negative returns and softening max drawdowns while improving overall portfolio performance over
time.
I currently don't need more than less than 1% withdrawals from my portfolio after social security, pension and a part time job and currently have a couple
of years in VTIP short duration TIPS and the rest in VGIT intermediate term treasuries.
I'm thinking of holding up to an addition 5 years in VGIT for potential withdrawals in the case of a prolonged downturn in equity markets and moving the
rest to VGLT Vanguard Long Term Treasuries as an overall diversifier.
My only concern is the timing of that move. Interest rates are almost surely going to rise .25 % to .50 % sometime next year and with the duration of
that fund being around 18 years, I'm wondering if the 8-9% loss in NAV in the last year is already reflecting that or I could expect another decrease of that
approximate % if interest rates are increased .50 % ?
Or do I take the Boglehead approach of ' I know nothing ' and make this transition?
Thank You
What is true is that your bond duration should match your anticipated timeline. You can do that by holding a single fund with that duration, or multiple funds whose weighted durations match your need. That strategy can work out better depending on the interest rate environment, but requires you to annually tweak your allocations. That's the beauty of intermediate-term funds. You don't need to think about them until the last few years. Behavioral error is usually your biggest risk, which these eliminate.
Re: How Do I Look At The Current Strategy Of Buying Long Term Treasuries?
Good perspective. Thank You for taking the time to give me your thoughts.JoMoney wrote: ↑Fri Nov 26, 2021 9:19 am The "Boglehead" approach would be buying a broad market index of bonds, not just long term ones of a single type, and to be buying and rebalancing them to maintain ones risk profile (exposure to stocks) over time.
As far as I'm concerned, buying bonds of a term longer than you expect to hold them seems ridiculous. Bonds promise you a specific interest rate and return of principle if you hold them to maturity. They make no promises about the the market prices for them to zig while stocks zag.
It might turn out that their future returns are uncorrelated enough to work out that way, but if my primary purpose for holding bonds was as a trading strategy to sell them at some other point to buy stocks, I would just be buying stocks to begin with rather than expecting that bonds will act as a market-timing strategy... so it seems even sillier to me to try and market time the buying of the bonds that you hope will have some intrinsic market-timing ability built into them.
Re: How Do I Look At The Current Strategy Of Buying Long Term Treasuries?
Thank You for providing the extended graph on correlation.nisiprius wrote: ↑Fri Nov 26, 2021 2:33 pm I don't know. But I do think it is important to be aware of the actual historical record of correlations between stocks and long-term Treasury bonds. "Since the late nineties" is not a good representative sample.
There have been long periods of positive correlation, just as long and just as strong as the current period of negative correlation.
"Stocks and bonds 'are' uncorrelated" is reasonably well supported by history. "Stocks and bonds 'have' negative correlation" is not.
I don't think it's a good idea to pursue any strategy that counts on robust negative correlation.
Of course some people construct parlays of predictions, assumptions, and tendencies--the correlation will be negative if XYZ, and XYZ will happen if the Fed does ABC, and the Fed is sure to do ABC, therefore... The correlation only goes positive when QRS happens, and QRS is not going to happen, therefore...
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Re: How Do I Look At The Current Strategy Of Buying Long Term Treasuries?
This is a very controversial topic where opinions differ.
The correlation between stocks and LTTs has historically on average been near zero (see nisiprius' graph). So it's foolish to buy them thinking that they'll protect you in the stock market downturn (they might or they might not...).
My view is that LTTs are a low expected return, high volatility asset and investor needs very specific reasons to hold them, like a liability matching portfolio (and even there long term TIPS are often the right choice).
My recommendation for most investors is Intermediate Term Treasuries. I don't currently hold them as I-bonds and EE-bonds are clearly superior in my case, but I could consider holding them in the future. Total Bond Market is also okay (slightly higher risk, slightly higher return).
The correlation between stocks and LTTs has historically on average been near zero (see nisiprius' graph). So it's foolish to buy them thinking that they'll protect you in the stock market downturn (they might or they might not...).
My view is that LTTs are a low expected return, high volatility asset and investor needs very specific reasons to hold them, like a liability matching portfolio (and even there long term TIPS are often the right choice).
My recommendation for most investors is Intermediate Term Treasuries. I don't currently hold them as I-bonds and EE-bonds are clearly superior in my case, but I could consider holding them in the future. Total Bond Market is also okay (slightly higher risk, slightly higher return).
25% VTI | 25% VXUS | 12.5% AVUV | 10% AVDV | 2.5% VWO | 25% BND/SCHR/SCHP
Re: How Do I Look At The Current Strategy Of Buying Long Term Treasuries?
I'm afraid this is not correct on two accounts:BigDGB wrote: ↑Fri Nov 26, 2021 8:57 am Interest rates are almost surely going to rise .25 % to .50 % sometime next year and with the duration of
that fund being around 18 years, I'm wondering if the 8-9% loss in NAV in the last year is already reflecting that or I could expect another decrease of that
approximate % if interest rates are increased .50 % ?
1) If interest rates do go up, bond prices (and NAV of bond funds) go down. They move in lock step at any second. This is just a mathematical fact. It is not possible for a bond fund to drop in NAV somehow ahead of time, anticipating a future interest rate increase.
2) If the market shared your opinion that interest rates will "almost surely" rise by next year by 0.5% or whatever, then they would have moved by that amount already. At any given time, the market reflects the buying and selling of all participants, and if most participants would expect a price drop (rate increase) soon, they would not buy bonds at today's prices, and the prices would quickly reflect that. Bottom line, the chances of interest rates going up are about the same as the chances of rates going down. That is true now, and at any time.
30% US Stocks | 30% Int Stocks | 40% Bonds
Re: How Do I Look At The Current Strategy Of Buying Long Term Treasuries?
What is wrong with your current plan? Why do you want to change it?
"The only thing that makes life possible is permanent, intolerable uncertainty; not knowing what comes next." ~Ursula LeGuin
Re: How Do I Look At The Current Strategy Of Buying Long Term Treasuries?
Thank You for your feedback. I misspoke before when I stated my current bond ETF is VGIT Intermediate Treasuries, when it is actually BIV Vanguard Intermediate Core Bond ETF, with approximately 58% treasuries and 42 % investment grade corporates and it has had a better annual CAGR than VGIT ( approximately 1% ) since its inception in 1994 as the mutual fund version vs. the mutual fund version of VGIT, with a worst year of approximately 3.5% vs 2.8% for VGIT during the 2008 financial crisis and virtually identical metrics in my portfolio when back tested on PV, so like BND, it is ever so slightly more risky with better returns than BND also, so I think I'll just stay put and quit second guessing...ivgrivchuck wrote: ↑Fri Nov 26, 2021 3:29 pm This is a very controversial topic where opinions differ.
The correlation between stocks and LTTs has historically on average been near zero (see nisiprius' graph). So it's foolish to buy them thinking that they'll protect you in the stock market downturn (they might or they might not...).
My view is that LTTs are a low expected return, high volatility asset and investor needs very specific reasons to hold them, like a liability matching portfolio (and even there long term TIPS are often the right choice).
My recommendation for most investors is Intermediate Term Treasuries. I don't currently hold them as I-bonds and EE-bonds are clearly superior in my case, but I could consider holding them in the future. Total Bond Market is also okay (slightly higher risk, slightly higher return).
Re: How Do I Look At The Current Strategy Of Buying Long Term Treasuries?
Re: How Do I Look At The Current Strategy Of Buying Long Term Treasuries?
If it ain't broke...
"The only thing that makes life possible is permanent, intolerable uncertainty; not knowing what comes next." ~Ursula LeGuin
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Re: How Do I Look At The Current Strategy Of Buying Long Term Treasuries?
Maybe it is broken but we just don't know yet.
That said, with a <1% withdrawal rate, the OP could put it all in frozen orange juice concentrate and probably be alright.
The Sensible Steward
Re: How Do I Look At The Current Strategy Of Buying Long Term Treasuries?
An aggressive allocation of at least 80% equities with a couple years' expenses in short term TIPS and the rest of fixed income in intermediate treasuries? If that's broken, it's not going to be those bonds' fault. It's a perfectly reasonable plan considering the low rate rate of withdrawal.willthrill81 wrote: ↑Fri Nov 26, 2021 5:20 pmMaybe it is broken but we just don't know yet.
That said, with a <1% withdrawal rate, the OP could put it all in frozen orange juice concentrate and probably be alright.
"The only thing that makes life possible is permanent, intolerable uncertainty; not knowing what comes next." ~Ursula LeGuin
Re: How Do I Look At The Current Strategy Of Buying Long Term Treasuries?
LT bonds are riskier regardless of one's investment horizon. The argument that bond duration be matched to retirement timeline has flaws.
Amateur Self-Taught Senior Macro Strategist
Re: How Do I Look At The Current Strategy Of Buying Long Term Treasuries?
The reason long Treasuries might be a good diversifier for a high stock allocation is not specifically that the correlation will be negative. Being around zero is enough. Other requirements for this to be effective include high return and high volatility. Otherwise you are just diluting risk. Of course, just diluting risk is what most people want bonds for in the first place. A high stock allocation plus long bonds may be an optimally efficient portfolio but it will certainly be a risky portfolio.