Treasury Bonds are the Only Bonds You Need

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CULater
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Re: Treasury Bonds are the Only Bonds You Need

Post by CULater » Fri Aug 03, 2018 8:57 am

For the period 1991- present, the correlation between Vanguard's Long Term Treasury fund and the S&P 500 was -0.24, while the correlation of the Intermediate Term Treasury fund and the S&P was -0.20. So, the LTT fund offered marginally better diversification but not enough to write home about, IMO. Over that same period of time, a 50/50 allocation between stocks and treasuries returned about 1% more annually if the bonds were long term treasuries vs. intermediate treasuries; so holding longer duration treasuries with higher interest rate was the winner over this period of time. But, that's because interest rates were falling significantly over this period. In a rising rate environment, the results would be reversed. Sometimes term risk pays off and sometimes it doesn't. If it were me, I'd just hold intermediate treasuries for their lower term risk since they provide about the same diversification benefit with less risk of rising interest rates.

BTW, the Permanent Portfolio divides it's treasury allocation between long treasuries and T-bills, so the average duration of the bond holdings is close to simply holding intermediate term treasuries.
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Doc
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Re: Treasury Bonds are the Only Bonds You Need

Post by Doc » Fri Aug 03, 2018 9:10 am

CULater wrote:
Fri Aug 03, 2018 8:17 am
According to Vanguard, the Total Bond Market fund has an average duration of about 6 years, while the Intermediate Term Treasury fund has average duration of 5 years. So, the ITT fund has lower term risk than TBM (risk of rising interest rates). Over the period 1987 - present (30 years), an allocation equally divided between U.S. stocks and bonds, rebalanced annually, had a small advantage in total return, volatility, worst drawdown, and risk-adjusted return if the bond portion was intermediate treasuries vs. TBM. This is the case even though the average yield of TBM was higher than for ITT. I don't see any compelling reason to invest in TBM vs. Intermediate Treasuries based on these data so if I had the choice I'd do 5 year treasuries. They'll probably hold up a little better during rising interest rates and also offer better drawdown protection than TBM.
Now redo your analysis for an 80/20 AA. I'l bet you a Starbuck's that the Intermediate Treasury case did even better. And if you rebalnce even more frequently you will see still better returns for the Treasury case. Two Starbuck's? :D

For high equity portfolios what makes up the bond portion has little effect on the total return or variance of your portfolio long term because equities account for almost all of the effect for both return and risk. So the bond portion should be allocated to those sectors that have the least covariance or even negative covariance with equities. And that's Treasuries not corporates or MBS which are a large part of TBM.

What the duration of those Treasuries should be I'll leave to others to answer.
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vineviz
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Re: Treasury Bonds are the Only Bonds You Need

Post by vineviz » Fri Aug 03, 2018 9:45 am

acegolfer wrote:
Fri Aug 03, 2018 8:06 am
vineviz wrote:
Thu Aug 02, 2018 2:50 pm
When the duration is less than the investment horizon, reinvestment risk dominates market price risk. When duration is longer than the investment horizon, market price risk dominates reinvestment risk. When duration EQUALS investment horizon, the two risks perfectly cancel out.
Can you explain "perfectly"?

I understand that as interest rate increases, the market portfolio value will decrease and the reinvestment value will increase. Will they move by the same amount at the duration?
Yes, in essence "duration" has two meanings or implications.

The first, which most people know, is that it is an estimate of how much the price will change given a particular change in yields. But the Bogleheads wiki entry on "Duration" contains the second implication:
Thus duration represents the length of time it would take for the total value of the fund, with dividends reinvested, to be worth exactly what it would have been worth had interest rates not risen. To be absolutely assured of receiving a given sum on a future date (assuming parallel shifts of the yield curve), therefore, you should gradually reduce the duration as the date approaches.
I used the word "perfectly" with the intent to stress that this relationship is definitional, not merely anecdotal. However duration, like many other bond parameters is an estimate. Second and third order effects (like convexity) can add a small layer of imprecision.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

gmaynardkrebs
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Re: Treasury Bonds are the Only Bonds You Need

Post by gmaynardkrebs » Fri Aug 03, 2018 10:34 am

If this quote from the OP's article is true:
Bonds with credit [risk] only have higher yields because they have a chance of default. In the aggregate, if the market is efficient, the yield premium should compensate for the amount of bond defaults. Said another way: Over the long-term, there is no reason for the universe of credit bonds to outperform Treasury bonds; the performance loss from defaults should be equal to the yield premium.
Why isn't this also true (substituting equities for bonds):
Equities only have higher yields (ie., returns) because they have a significant chance of losing money. In the aggregate, if the market is efficient, the return premium should compensate for the risk of loss. Said another way: Over the long-term, there is no reason for the universe of equities to outperform Treasury bonds; the risk of loss should be equal to the yield premium.
By this logic, shouldn't we all be 100% Treasuries?

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vineviz
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Re: Treasury Bonds are the Only Bonds You Need

Post by vineviz » Fri Aug 03, 2018 11:01 am

gmaynardkrebs wrote:
Fri Aug 03, 2018 10:34 am
If this quote from the OP's article is true:
Bonds with credit [risk] only have higher yields because they have a chance of default. In the aggregate, if the market is efficient, the yield premium should compensate for the amount of bond defaults. Said another way: Over the long-term, there is no reason for the universe of credit bonds to outperform Treasury bonds; the performance loss from defaults should be equal to the yield premium.
Why isn't this also true (substituting equities for bonds):
Becasue it isn't true for corporate bonds either. The article's author should know better,

The return of corporate bonds should be equal to similar duration treasuries PLUS the PREMIUM that investors demand for taking the risk of the bonds defaulting PLUS the yield required to make up for the rate of default MINUS the realized rate of defaults..

The author left out two of the four components.

I happen to agree with the conclusion (treasuries are the only bonds you need) because investors can easily replicate the 2nd, 3rd, and 4th components by just holding the stocks themselves.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Portfolio7
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Re: Treasury Bonds are the Only Bonds You Need

Post by Portfolio7 » Fri Aug 03, 2018 12:09 pm

AerialWombat wrote:
Thu Aug 02, 2018 11:38 pm
Portfolio7 wrote:
Thu Aug 02, 2018 1:56 pm
vineviz wrote:
Thu Aug 02, 2018 11:42 am
As a rule, the duration of your bonds should match your investment horizon. If you are more 10 years from retirement, the bulk of your bonds should be intermediate or long-term bonds, not a cash-like pseudo-insurance product like a GIC.
I thought that guidance was meant primarily to prevent investment in bonds with a duration longer than your horizon, not so much the other way around? It works both ways, but when you aren't getting paid for the extra duration risk, why take it on? I'm not a disinterested observer btw, my Fixed Income is largely in a Stable Value fund earning about 3% as well. If I get paid for the duration, I like Intermediate Treasuries, and a skoosh of TIPS. However, I'm not going to claim any bond expertise, I've been slowly trying to build a framework to understand these trade-offs so this is an interesting discussion for me.
You’re in a SVF at 3%? May I ask which one? Thanks!
For context, my employer 401K is managed by Vanguard, but the portal through which I decide on allocations and get statements is Fidelity. The Fund itself is managed by 8 separate firms, but the largest chunk is managed by PIMCO. There are 6 Insurance wrap providors. As of the beginning of the year, the avg effective duration of the underlying bonds was 3.94 years, avg wtd coupon 2.97%, blended yield 2.68%. I don't know what those numbers really mean in context, I just track the quarterly return, and for the past year or two the quarterly returns have been averaging just over 3%. It used to be called Stable Value, now it's called Interest Income, but the structure of the fund didn't change.
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Portfolio7
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Re: Treasury Bonds are the Only Bonds You Need

Post by Portfolio7 » Fri Aug 03, 2018 12:13 pm

vineviz wrote:
Thu Aug 02, 2018 2:50 pm
Portfolio7 wrote:
Thu Aug 02, 2018 1:56 pm
vineviz wrote:
Thu Aug 02, 2018 11:42 am
As a rule, the duration of your bonds should match your investment horizon. If you are more 10 years from retirement, the bulk of your bonds should be intermediate or long-term bonds, not a cash-like pseudo-insurance product like a GIC.
I thought that guidance was meant primarily to prevent investment in bonds with a duration longer than your horizon, not so much the other way around? It works both ways, but when you aren't getting paid for the extra duration risk, why take it on?
With any financial topic there are layers upon layers of complexity, but I think about bond duration vs investment horizon primarily as a tradeoff between two dominant types of interest rate related uncertainty:
  • reinvestment risk
  • market price risk
[/i]
Thanks for the response, it's true I wasn't considering the reinvestment risk. I see the balance. Lots to think about. Much appreciated.
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patrick013
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Re: Treasury Bonds are the Only Bonds You Need

Post by patrick013 » Fri Aug 03, 2018 12:58 pm

mongstradamus wrote:
Fri Aug 03, 2018 12:28 am
So I officially don't know what to think.
Well you're not going to get a good yield out of a 20 year
bond that yields 3.1% YTM today no matter what duration or
maturity immunization concept can do. The average yield
for a TRSY 10 is 6.32%. I'd be saying why did I buy a bond
at 3.1% when market yields are moving upward. The bond
portfolio would certainly fall behind for quite some time.
The mortgage crisis created some awfully low yields and unhappy
buyers so I wouldn't think those rates are normal rates.

Anyway, the secret for a semi-active approach is quite simple.
When bonds are expected to have higher interest rates lower bond
maturities, and when bonds are expected to have lower interest
rates lengthen bond maturities. The trend will be your friend.
There will be a time to go long term and put something in your
bond portfolio worth keeping. That hasn't been ruled out.

It's amazing how many ads appear in the paper for long term bond
funds with great records, shortly before the base rate (FFR) is
expected to rise. Have to wait and see.
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gmaynardkrebs
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Re: Treasury Bonds are the Only Bonds You Need

Post by gmaynardkrebs » Fri Aug 03, 2018 1:48 pm

patrick013 wrote:
Fri Aug 03, 2018 12:58 pm
...When bonds are expected to have higher interest rates lower bond
maturities, and when bonds are expected to have lower interest
rates lengthen bond maturities...
But only do that if you think you are one of a small handful of investors who have made the shocking discovery that the Fed is raising rates. Otherwise, match your duration to your liabilities.

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permport
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Re: Treasury Bonds are the Only Bonds You Need

Post by permport » Fri Aug 03, 2018 2:04 pm

I agree with the assessment that Treasurys are all one needs -- corporates, munis, fallen angels, etc. can be avoided. However, I am of the opinion that the treasury bonds should be internationally diversified. You want sovereigns from all over the world just in case something happens to your home country during your investment lifetime. :sharebeer
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spdoublebass
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Re: Treasury Bonds are the Only Bonds You Need

Post by spdoublebass » Fri Aug 03, 2018 6:21 pm

permport wrote:
Fri Aug 03, 2018 2:04 pm
I agree with the assessment that Treasurys are all one needs -- corporates, munis, fallen angels, etc. can be avoided. However, I am of the opinion that the treasury bonds should be internationally diversified. You want sovereigns from all over the world just in case something happens to your home country during your investment lifetime. :sharebeer
Just curious, where do you buy International Treasury Bonds? Just a fund?
I'm trying to think, but nothing happens

acegolfer
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Re: Treasury Bonds are the Only Bonds You Need

Post by acegolfer » Fri Aug 03, 2018 6:22 pm

This is also supported by CAPM. It says capital market line is a portfolio of market portfolio and risk-free asset. Suppose your investment horizon is X years. According to another poster, X-yr duration T-bond is risk-free at X yrs. So for your X-yr investment horizon, X-yr duration T-bond (not aggregate bond market) is the best proxy for the risk-free asset. A portfolio of TSM and X-yr duration T-bond will be efficient (=highest return for given risk). The combination will depend on your risk averse level.

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IlikeJackB
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Re: Treasury Bonds are the Only Bonds You Need

Post by IlikeJackB » Fri Aug 03, 2018 6:48 pm

spdoublebass wrote:
Fri Aug 03, 2018 6:21 pm
permport wrote:
Fri Aug 03, 2018 2:04 pm
I agree with the assessment that Treasurys are all one needs -- corporates, munis, fallen angels, etc. can be avoided. However, I am of the opinion that the treasury bonds should be internationally diversified. You want sovereigns from all over the world just in case something happens to your home country during your investment lifetime. :sharebeer
Just curious, where do you buy International Treasury Bonds? Just a fund?
Here's one option: https://www.ishares.com/us/products/239 ... y-bond-etf
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Whakamole
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Re: Treasury Bonds are the Only Bonds You Need

Post by Whakamole » Fri Aug 03, 2018 6:57 pm

spdoublebass wrote:
Fri Aug 03, 2018 6:21 pm
permport wrote:
Fri Aug 03, 2018 2:04 pm
I agree with the assessment that Treasurys are all one needs -- corporates, munis, fallen angels, etc. can be avoided. However, I am of the opinion that the treasury bonds should be internationally diversified. You want sovereigns from all over the world just in case something happens to your home country during your investment lifetime. :sharebeer
Just curious, where do you buy International Treasury Bonds? Just a fund?
The closest I am seeing are global (ex-US) versions: IGOV (iShares International Treasury Bond ETF) and ISHG (iShares 1-3 Year International Treasury Bond ETF), plus others offered by State Street, etc.

jalbert
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Re: Treasury Bonds are the Only Bonds You Need

Post by jalbert » Fri Aug 03, 2018 7:12 pm

But only do that if you think you are one of a small handful of investors who have made the shocking discovery that the Fed is raising rates. Otherwise, match your duration to your liabilities.
An essential part of matching bonds to liabilities is matching the value of the bonds to the cost of the liabilities. Many investors hold bond portfolios to mitigate risk in other assets held and do not hold an asset value in bonds corresponding to the present value of liabilities.

Such a bond portfolio is thus not a liability-matching portfolio, and thus matching its duration to the duration of liabilities may not be optimal. I would consider such a bond portfolio to be a risk management bond portfolio, and corrrlations with riskier assets and modern portfolio theory concepts are more important in choosing the bond subclasses held and their duration(s).
Risk is not a guarantor of return.

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Re: Treasury Bonds are the Only Bonds You Need

Post by jalbert » Fri Aug 03, 2018 7:22 pm

The risk-adjusted return and diversification of bond portfolios is interesting. If you compare total bond market to an intermediate treasury fund, you will see lower volatility in the more diversified bond portfolio, leading one to correctly infer that the diversification of total bond market enhances risk-adjusted return:

https://www.portfoliovisualizer.com/bac ... lBond1=100

But when you combine the bond portfolio with equities, say a 50-50 mix, a different story is told:

https://www.portfoliovisualizer.com/bac ... alBond1=50

Neither is a bad choice.
Risk is not a guarantor of return.

acegolfer
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Re: Treasury Bonds are the Only Bonds You Need

Post by acegolfer » Fri Aug 03, 2018 8:13 pm

vineviz wrote:
Fri Aug 03, 2018 9:45 am
The first, which most people know, is that it is an estimate of how much the price will change given a particular change in yields. But the Bogleheads wiki entry on "Duration" contains the second implication:
Thus duration represents the length of time it would take for the total value of the fund, with dividends reinvested, to be worth exactly what it would have been worth had interest rates not risen. To be absolutely assured of receiving a given sum on a future date (assuming parallel shifts of the yield curve), therefore, you should gradually reduce the duration as the date approaches.
I used the word "perfectly" with the intent to stress that this relationship is definitional, not merely anecdotal. However duration, like many other bond parameters is an estimate. Second and third order effects (like convexity) can add a small layer of imprecision.
Thank you. Now a practical question. Suppose I will retire in 10 years. All my current bond investments are in TBM at 401k/IRA accounts. Where should I transfer this fund to?

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vineviz
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Re: Treasury Bonds are the Only Bonds You Need

Post by vineviz » Fri Aug 03, 2018 8:34 pm

acegolfer wrote:
Fri Aug 03, 2018 8:13 pm
vineviz wrote:
Fri Aug 03, 2018 9:45 am
The first, which most people know, is that it is an estimate of how much the price will change given a particular change in yields. But the Bogleheads wiki entry on "Duration" contains the second implication:
Thus duration represents the length of time it would take for the total value of the fund, with dividends reinvested, to be worth exactly what it would have been worth had interest rates not risen. To be absolutely assured of receiving a given sum on a future date (assuming parallel shifts of the yield curve), therefore, you should gradually reduce the duration as the date approaches.
I used the word "perfectly" with the intent to stress that this relationship is definitional, not merely anecdotal. However duration, like many other bond parameters is an estimate. Second and third order effects (like convexity) can add a small layer of imprecision.
Thank you. Now a practical question. Suppose I will retire in 10 years. All my current bond investments are in TBM at 401k/IRA accounts. Where should I transfer this fund to?
I can only tell you what I would do.

If I were 55 years old and 10 years from retirement, I'd aim to have about 50% of my bond allocation in long-term treasuries, about 40% in intermediate treasuries, and about 10% in short term treasuries. Some would argue that the intermediate and short term portions should be in TIPS, and I think that is reasonable if your stock allocation is below 60%.

Now, I think you could also make a reasonable case that TBM isn't going to vary much from that combination of intermediate and short term treasuries so that 50% in long term treasuries and 50% in TBM would be entirely justifiable IMO at age 55. By the time I hit age 70, I expect long-term bonds will be down to 25% of my bond allocation.
"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: Treasury Bonds are the Only Bonds You Need

Post by spdoublebass » Fri Aug 03, 2018 8:43 pm

vineviz wrote:
Fri Aug 03, 2018 8:34 pm

By the time I hit age 70, I expect long-term bonds will be down to 25% of my bond allocation.
Will you just glide down to 25%? Or will you not reinvest dividends? I'm just curious and trying to follow.
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vineviz
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Re: Treasury Bonds are the Only Bonds You Need

Post by vineviz » Fri Aug 03, 2018 8:49 pm

spdoublebass wrote:
Fri Aug 03, 2018 8:43 pm
vineviz wrote:
Fri Aug 03, 2018 8:34 pm

By the time I hit age 70, I expect long-term bonds will be down to 25% of my bond allocation.
Will you just glide down to 25%? Or will you not reinvest dividends? I'm just curious and trying to follow.
A lot depends on market returns I guess, and it feels a long way off for me. But my expectation is that at the beginning of retirement I'll be selling a little bit of the long-term bonds each year to provide income so that the intermediate bonds can glide up in percentage terms and I can slowly lower my average duration. I also expect that I will need to rebalance from equities to bonds to keep the stock/bond ratio at my target, and most of that rebalancing will probably go into the intermediate/short portion
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

gmaynardkrebs
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Re: Treasury Bonds are the Only Bonds You Need

Post by gmaynardkrebs » Fri Aug 03, 2018 9:14 pm

jalbert wrote:
Fri Aug 03, 2018 7:12 pm
But only do that if you think you are one of a small handful of investors who have made the shocking discovery that the Fed is raising rates. Otherwise, match your duration to your liabilities.
An essential part of matching bonds to liabilities is matching the value of the bonds to the cost of the liabilities. Many investors hold bond portfolios to mitigate risk in other assets held and do not hold an asset value in bonds corresponding to the present value of liabilities.

Such a bond portfolio is thus not a liability-matching portfolio, and thus matching its duration to the duration of liabilities may not be optimal. I would consider such a bond portfolio to be a risk management bond portfolio, and corrrlations with riskier assets and modern portfolio theory concepts are more important in choosing the bond subclasses held and their duration(s).
Good point, although I was responding to an ill-advised strategy to shorten duration when interest rates are rising, which is nonsense. Turning to your point, I can imagine situations where getting to the efficient frontier might justify risk free bonds for reasons other than liability matching. However, staying short is not risk-free, nor is it even less risky on balance. There is a huge fallacy on this board, repeated through many ill-informed posts, that staying short is the optimal strategy when rates are rising, As I said, this is utter nonsense.

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Re: Treasury Bonds are the Only Bonds You Need

Post by Chaconne » Fri Aug 03, 2018 9:30 pm

A late learner trying to absorb all of this. I wonder if I could get some thoughts on this scenario:

I'll be retiring within months and will have to start taking RMDs in about two years. Within an appropriate stock/bond allocation, would it make sense to have my bond allocation made up of (roughly) 50% intermediate index (probably Treasuries) and 50% short-term index?

I'm thinking the shorter duration of the ST bonds would make it appropriate for taking RMDs, while the longer duration of the intermediates would help see me through the longer term (God willing!) Does this make any sense? THANKS.

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Re: Treasury Bonds are the Only Bonds You Need

Post by AerialWombat » Fri Aug 03, 2018 9:42 pm

whodidntante wrote:
Fri Aug 03, 2018 1:00 am
AerialWombat wrote:
Thu Aug 02, 2018 11:33 pm
whodidntante wrote:
Wed Aug 01, 2018 1:33 am
TBM is heavy on bonds that have a declared or assumed federal backing, so I wouldn't lift a mouse button to get into a Treasury only fund.
Sorry, but I don’t understand this. Could you elaborate on “assumed federal backing”? Thanks!
Bonds issued by federal agencies could default, but most investors assume the federal government won't allow that to happen. For one thing, it would cost federal agencies more to borrow in the future because investors would have to bear credit risk. Also, mortgage backed securities often have assumed federal backing because they are guaranteed by Fannie, Freddie, or Ginnie Mae. Of those, only Ginnie Mae is properly a government agency, however.
Ahhh, gotcha. Thank you for elaborating!

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Re: Treasury Bonds are the Only Bonds You Need

Post by AerialWombat » Fri Aug 03, 2018 9:45 pm

Portfolio7 wrote:
Fri Aug 03, 2018 12:09 pm
AerialWombat wrote:
Thu Aug 02, 2018 11:38 pm
Portfolio7 wrote:
Thu Aug 02, 2018 1:56 pm
vineviz wrote:
Thu Aug 02, 2018 11:42 am
As a rule, the duration of your bonds should match your investment horizon. If you are more 10 years from retirement, the bulk of your bonds should be intermediate or long-term bonds, not a cash-like pseudo-insurance product like a GIC.
I thought that guidance was meant primarily to prevent investment in bonds with a duration longer than your horizon, not so much the other way around? It works both ways, but when you aren't getting paid for the extra duration risk, why take it on? I'm not a disinterested observer btw, my Fixed Income is largely in a Stable Value fund earning about 3% as well. If I get paid for the duration, I like Intermediate Treasuries, and a skoosh of TIPS. However, I'm not going to claim any bond expertise, I've been slowly trying to build a framework to understand these trade-offs so this is an interesting discussion for me.
You’re in a SVF at 3%? May I ask which one? Thanks!
For context, my employer 401K is managed by Vanguard, but the portal through which I decide on allocations and get statements is Fidelity. The Fund itself is managed by 8 separate firms, but the largest chunk is managed by PIMCO. There are 6 Insurance wrap providors. As of the beginning of the year, the avg effective duration of the underlying bonds was 3.94 years, avg wtd coupon 2.97%, blended yield 2.68%. I don't know what those numbers really mean in context, I just track the quarterly return, and for the past year or two the quarterly returns have been averaging just over 3%. It used to be called Stable Value, now it's called Interest Income, but the structure of the fund didn't change.
I see, it’s a special institutional thing or some such, not a retail offering. Darn, I was getting all excited. :)

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Re: Treasury Bonds are the Only Bonds You Need

Post by jalbert » Fri Aug 03, 2018 11:20 pm

Interesting graph of credit spreads and equity returns. In the last 20 years, credit spreads have peaked at just the point stocks hit bottom in bear markets, meaning corporate bonds bottomed out at the same time as stocks, a less than ideal correlation. Image referenced from dqydj.com

Image
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patrick013
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Re: Treasury Bonds are the Only Bonds You Need

Post by patrick013 » Sat Aug 04, 2018 10:32 am

jalbert wrote:
Fri Aug 03, 2018 11:20 pm
Interesting graph of credit spreads and equity returns.
Image
Nice chart, I'm always in the market for a few Aaa corp bonds.

Here's my fav cheatsheet. Wish I could get an email alert when
spreads are over 2% or under 1%. :)
Image
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Kevin M
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Re: Treasury Bonds are the Only Bonds You Need

Post by Kevin M » Sun Aug 05, 2018 3:38 pm

fsh71 wrote:
Thu Aug 02, 2018 7:26 pm
Kevin M wrote:
Thu Aug 02, 2018 6:51 pm
vineviz wrote:
Thu Aug 02, 2018 5:16 pm
Noobvestor wrote:
Thu Aug 02, 2018 4:50 pm
vineviz wrote:
Thu Aug 02, 2018 2:50 pm

Picking a duration that is significantly shorter or longer than your investment horizon is an ACTIVE decision to make a bet on the direction of future interest rates (and in a complicated way that view investors understand).
I mean on this logic, any long-term investor should be entirely in long-term bonds, but there is a lot of literature from Boglehead authors suggesting intermediate is better - are you in fact arguing that a younger investor should be in ultra-long (say, 30-year) bonds?
If we're talking about retirement savings, then yes: I'm definitely arguing that younger investors, to the extent they own ANY bonds, should definitely hold long-term bond funds either primarily or exclusively.

For retirement investors in their 20s, Ibbotson recommends that 80% of bond holdings be long-term, and I think that's reasonable. I'd probably recommend a fund like Vanguard Long-Term Treasury ETF (VGLT) or iShares 20+ Year Treasury Bond ETF (TLT) to a young investor with moderate or conservative risk tolerance, and something like Vanguard Extended Duration Trs ETF (EDV) or PIMCO 25+ Year Zero Coupon US Trs ETF (ZROZ) to a young investor with aggressive risk tolerance.

In fact, I'd say that investors under the age of 55 or so should probably have at least half of their retirement bond allocation in long-term bonds or bond funds.
Horrible advice. Way too much inflation risk. If you want to match long term real liabilities with minimal risk, use long term TIPS.

Kevin
So I officially don't know what to think. I'm a mid-30s investor, 80/20 allocation, 25-30 year horizon, 67% tax-advantaged / 33% taxable. Currently in TBM. Given the aforementioned, should I tilt more / all towards intermediate-term treasuries? TBM is 65% treasuries already if I'm not mistaken.

I hold 20% of my taxable in intermediate-term corporate bonds currently, and if I could reduce correlation and preserve principle in this chunk of my taxable account during a market downturn, I'd certainly prefer that, as this would be where I'd draw from in the event of a emergency / crisis after exhausting my emergency fund.
I think the majority of Bogleheads are fine with something like TBM. Those of us who debate the finer points in threads like this probably are in the minority.

Personally I'm not wild about TBM for myself, but I'm perfectly fine with my adult children holding it as their 20% fixed-income holding in their 401k plans, either as an individual fund or as part of a Vanguard Target Retirement fund, if they are lucky enough to have those as options. However, if they have access to a good stable value fund with a decent yield, I'd prefer that.

Treasuries have demonstrated negative correlation to equities during some big stock downturns, but not all. Nominal Treasury values went up as stocks went down in late 2008, and the longer the term, the more pronounced the effect. So if you think it's likely that something like this will happen again, and you're mainly looking for the negative correlation in a flight-to-safety scenario, then long-term Treasuries might be an option for you. Personally, I think the term risk and inflation risk is too large, and the negative correlation is not certain, so I'm not doing this.

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Re: Treasury Bonds are the Only Bonds You Need

Post by Doc » Sun Aug 05, 2018 3:51 pm

Kevin M wrote:
Sun Aug 05, 2018 3:38 pm
Treasuries have demonstrated negative correlation to equities during some big stock downturns, but not all. Nominal Treasury values went up as stocks went down in late 2008, and the longer the term, the more pronounced the effect. So if you think it's likely that something like this will happen again, and you're mainly looking for the negative correlation in a flight-to-safety scenario, then long-term Treasuries might be an option for you. Personally, I think the term risk and inflation risk is too large, and the negative correlation is not certain, so I'm not doing this.
OK, so give up some of the negative correlation (maybe) and use short and/or intermediate Treasuries to avoid the term/inflation risk?

And you don't have to completely give up on the TBM idea completely. Use say a 1-10 Treasury fund plus a 1-10 corporate fund and just forego the MBS and long bonds.
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Re: Treasury Bonds are the Only Bonds You Need

Post by spdoublebass » Sun Aug 05, 2018 4:11 pm

I'm not trying to derail this thread. I do have a question that I did not want to start a new thread for.

I recently discovered Treasury Direct and CD's. My experience has only been with rates as they are currently. I went to TD and looked at previous treasury rates. In 2012 were one year treasury rates really .11%? or am I looking in the completely wrong place?

https://www.treasury.gov/resource-cente ... &year=2012
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Re: Treasury Bonds are the Only Bonds You Need

Post by gmaynardkrebs » Sun Aug 05, 2018 4:28 pm

spdoublebass wrote:
Sun Aug 05, 2018 4:11 pm
I'm not trying to derail this thread. I do have a question that I did not want to start a new thread for.

I recently discovered Treasury Direct and CD's. My experience has only been with rates as they are currently. I went to TD and looked at previous treasury rates. In 2012 were one year treasury rates really .11%? or am I looking in the completely wrong place?

https://www.treasury.gov/resource-cente ... &year=2012
Unfortunately not. Google "financial repression " and another term I shall refrain from mentioning. It will lead you to insights that every investor should be aware of.

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Re: Treasury Bonds are the Only Bonds You Need

Post by Sasquatch » Sun Aug 05, 2018 4:41 pm

Kevin M wrote:
Sun Aug 05, 2018 3:38 pm
However, if they have access to a good stable value fund with a decent yield, I'd prefer that.
Kevin
I’m at 40% TBM & 10% capital preservation portfolio (roughly 2 yrs expenses). Are you suggesting more CPP would be better? Only other bond fund available to me is PIMIX.I am retiring very soon.

http://www3.troweprice.com/rws/rps/publ ... fs/CPP.pdf
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Re: Treasury Bonds are the Only Bonds You Need

Post by Doc » Sun Aug 05, 2018 4:47 pm

spdoublebass wrote:
Sun Aug 05, 2018 4:11 pm
I'm not trying to derail this thread. I do have a question that I did not want to start a new thread for.

I recently discovered Treasury Direct and CD's. My experience has only been with rates as they are currently. I went to TD and looked at previous treasury rates. In 2012 were one year treasury rates really .11%? or am I looking in the completely wrong place?

https://www.treasury.gov/resource-cente ... &year=2012
Go here: https://www.treasury.gov/resource-cente ... ation.aspx

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Re: Treasury Bonds are the Only Bonds You Need

Post by Kevin M » Sun Aug 05, 2018 5:29 pm

Sasquatch wrote:
Sun Aug 05, 2018 4:41 pm
Kevin M wrote:
Sun Aug 05, 2018 3:38 pm
However, if they have access to a good stable value fund with a decent yield, I'd prefer that.
Kevin
I’m at 40% TBM & 10% capital preservation portfolio (roughly 2 yrs expenses). Are you suggesting more CPP would be better? Only other bond fund available to me is PIMIX.I am retiring very soon.

http://www3.troweprice.com/rws/rps/publ ... fs/CPP.pdf
Looks like the rate on the CPP is 2.17%, based on the YTD return of 0.54% for the first quarter, and the 1-year and 3-year returns of 2.17%, but it's good to verify the latest rate if you can.

Given that Prime money market SEC yield now is 2.06%, I would not consider this a great rate, but it's not horrible either.

TBM SEC yield is 3.03% - 3.14%, depending on which share class you have access to. Average duration is 6.1 years and average maturity is 8.4 years.

So it depends how much term risk you want to take, and whether you're more concerned about term risk or reinvestment risk. You're getting about 100 basis points of extra yield for taking the extra term risk in TBM. Even though you're retiring soon, you're investment horizon still could be two or three decades, unless you expect a shorter than average lifetime or are older than typical retirement age (or it could be longer if you are much younger than typical retirement age).

So the duration of TBM is not excessive considering your likely investment horizon, and it's very unlikely to return less than 2% (nominal) over the next 10 years, based on historical 10-year returns compared to initial SEC yield. So unless you're very concerned about rising rates, which no one can really predict for sure, what you have now seems OK if those are your only choices.

If the CPP rate was closer to 3%, personally I'd prefer that to TBM at the current yield.

Despite what a number of posters are saying here, matching the duration of nominal fixed income to your investment horizon doesn't make sense from a lifecycle investing perspective. This is because your investment horizon probably is related to paying for expenses in retirement, and those expenses will increase (or decrease) with inflation. So proponents of a lifecycle investing approach would recommend TIPS for the safe portion of your portfolio, as TIPS with duration matched to the duration of your (real) liabilities is the closest thing to a risk-free investment you can get.

However, if most of your retirement portfolio is locked up in a 401k with the choices you mentioned, you don't have access to TIPS, although at retirement you might want to consider rolling the 401k into an IRA so you have more flexibility in what you can invest in.

Again, the majority of Bogleheads probably are going to stick with their simple portfolios of one or two stock funds and a nominal bond fund or two, and not worry about trying to match assets to liabilities, but we do have some very vocal forum members who strongly advocate for more of a lifecycle investing or liability matching approach (although none of them have chimed in on this thread yet).

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Re: Treasury Bonds are the Only Bonds You Need

Post by gmaynardkrebs » Sun Aug 05, 2018 6:22 pm

Kevin M wrote:
Sun Aug 05, 2018 5:29 pm
Despite what a number of posters are saying here, matching the duration of nominal fixed income to your investment horizon doesn't make sense from a lifecycle investing perspective. This is because your investment horizon probably is related to paying for expenses in retirement, and those expenses will increase (or decrease) with inflation. So proponents of a lifecycle investing approach would recommend TIPS for the safe portion of your portfolio, as TIPS with duration matched to the duration of your (real) liabilities is the closest thing to a risk-free investment you can get.
Minor (I think) quibble: While I totally agree that TIPS make more sense, if you are going to use nominals, they should match your investment horizon(s). However, now that we have TIPS, why anybody would use nominals rather than TIPS for lifecycle investing is beyond me.

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Re: Treasury Bonds are the Only Bonds You Need

Post by Kevin M » Sun Aug 05, 2018 9:33 pm

gmaynardkrebs wrote:
Sun Aug 05, 2018 6:22 pm
Minor (I think) quibble: While I totally agree that TIPS make more sense, if you are going to use nominals, they should match your investment horizon(s). However, now that we have TIPS, why anybody would use nominals rather than TIPS for lifecycle investing is beyond me.
I actually think the quibble is fairly major.

First, please explain what is at the end of the investment horizon. If it is a nominal liability, which certainly is a possibility, then it makes perfect sense to hold a nominal Treasury that matures when the nominal liability is to be paid for. But what is the rationale for matching the duration or maturity of a nominal asset to the duration or maturity of a real liability? Most future liabilities, such as expenses in retirement, are going to be real, not nominal.

Much of this discussion revolves around the definition of the riskless asset. The riskless asset depends on two things: the holding period (aka, investment horizon) and the unit of exchange. If the unit of exchange is (nominal) dollars, then a nominal Treasury that matures at the end of the holding period is the closest thing to a riskless asset. If the unit of exchange is purchasing power, then the the closest thing to a riskless asset is a TIPS that matures at the end of the holding period.

In the absence of TIPS, shorter-term Treasuries are a better approximation of a riskless asset in real terms than longer-term Treasuries, as nominal yields typically tend to respond to inflation, and shorter-term Treasuries allow one to roll to the higher yields more quickly in the even of unexpected inflation. For example, the yield of the 10-year Treasury at the beginning of 1972 was about 6%, but 1-month Treasury Bills returned about 7.8% for the 10-year period from 1972-1981 inclusive. Both lost to inflation, but the 10-year nominal Treasury matched to the 10-year investment horizon lost more.

The exceptions have been periods when short-term rates were capped by the federal government, such as in the 1940s and from 2009-2015, during which short-term nominal rates were not allowed to respond to inflation.

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Re: Treasury Bonds are the Only Bonds You Need

Post by dcabler » Mon Aug 06, 2018 7:15 am

vineviz wrote:
Fri Aug 03, 2018 11:01 am

I happen to agree with the conclusion (treasuries are the only bonds you need) because investors can easily replicate the 2nd, 3rd, and 4th components by just holding the stocks themselves.
Pretty much where I landed for the reasons stated above. These discussions are always interesting as there is usually a divide in thinking of "long term returns" vs. "shorter term volatility" when discussing reasons for holding bond funds in the first place. :D

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Re: Treasury Bonds are the Only Bonds You Need

Post by gmaynardkrebs » Mon Aug 06, 2018 7:23 am

Kevin M wrote:
Sun Aug 05, 2018 9:33 pm
gmaynardkrebs wrote:
Sun Aug 05, 2018 6:22 pm
Minor (I think) quibble: While I totally agree that TIPS make more sense, if you are going to use nominals, they should match your investment horizon(s). However, now that we have TIPS, why anybody would use nominals rather than TIPS for lifecycle investing is beyond me.
I actually think the quibble is fairly major.

First, please explain what is at the end of the investment horizon. If it is a nominal liability, which certainly is a possibility, then it makes perfect sense to hold a nominal Treasury that matures when the nominal liability is to be paid for. But what is the rationale for matching the duration or maturity of a nominal asset to the duration or maturity of a real liability? Most future liabilities, such as expenses in retirement, are going to be real, not nominal.

Much of this discussion revolves around the definition of the riskless asset. The riskless asset depends on two things: the holding period (aka, investment horizon) and the unit of exchange. If the unit of exchange is (nominal) dollars, then a nominal Treasury that matures at the end of the holding period is the closest thing to a riskless asset. If the unit of exchange is purchasing power, then the the closest thing to a riskless asset is a TIPS that matures at the end of the holding period.

In the absence of TIPS, shorter-term Treasuries are a better approximation of a riskless asset in real terms than longer-term Treasuries, as nominal yields typically tend to respond to inflation, and shorter-term Treasuries allow one to roll to the higher yields more quickly in the even of unexpected inflation. For example, the yield of the 10-year Treasury at the beginning of 1972 was about 6%, but 1-month Treasury Bills returned about 7.8% for the 10-year period from 1972-1981 inclusive. Both lost to inflation, but the 10-year nominal Treasury matched to the 10-year investment horizon lost more.

The exceptions have been periods when short-term rates were capped by the federal government, such as in the 1940s and from 2009-2015, during which short-term nominal rates were not allowed to respond to inflation.

Kevin
Kevin: Thanks, a thoughtful response from you, as always, and much appreciated.

Perhaps instead of "minor," I should have said our difference is "academic," since I completely agree that TIPS are the way to go, and that long term Treasuries are not riskless with respect to purchasing power. However, I don't think your analysis adequately addresses the indisputable fact that the expected returns from nominal bonds are exactly the same as TIPS, with an added premium that exactly matches the expected risk of inflation. That is certainly a strong theoretical point in favor of nominals.

On a more practical level, TIPS are not riskless with regard to deflation in the interim until maturity, even though they do mature at par. Such interim reductions in cash flow could become a serious problem to fixed income retirees, especially given TIPS' low coupons. Now, I happen to agree with what I believe is your tacit assumption that the likelihood of severe deflation is far less than the risks of severe inflation, but even that is open to question: I have little doubt that central banks have the tools to stop inflation in its tracks if they want to; the same cannot be said of stopping deflation at or near the zero bound.

As for short term bills, they are clearly the best proxy for TIPS in normal times, but as you note, there have been long periods of "abnormal" times, when short term bills have been capped by the central bank, a policy tool otherwise known as "financial repression." A legitimate concern is that the "abnormal" is likely to become the new normal, as financial repression becomes the standard policy tool of central banks; that will guarantee a negative real yield for short term bills for years to come. Even with recent rate increases, short bills have only barely escaped negative real rates, and we are not out of the woods yet by any means. Thus, for the investor retiring in 30 years, I don't see short bills as a good proxy for TIPS, and I think they are on balance, riskier than a ladder of 30 year nominals for both real and nominal future liabilities. However, as I said, an academic point, now that we have TIPS.

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Re: Treasury Bonds are the Only Bonds You Need

Post by Artsdoctor » Mon Aug 06, 2018 9:27 am

CULater wrote:
Tue Jul 31, 2018 6:29 pm
Article argues that you should probably use Treasuries as your bond allocation and forget about aggregate bond index funds, for the two reasons below. I recall that Larry Swedroe made the same point about bonds. This has always been my approach since reading Larry, and I'm glad to see supporting evidence for it.
Treasury bonds perform nearly as well as investment-grade bonds over the long-term.
It is logical that the long-term performance difference of the two indices would be approximately the same, but it isn’t…not even close. Despite the Treasury index yielding 0.78% less, it performed just 0.15% annualized less over the full period.

Credit bonds work against you when you need them most
Consider performance between the two indices during large stock market losses. During the 10 largest S&P 500 drawdowns in the period since the index began, Treasury bonds have outperformed the AGG index in eight of those 10.
https://www.advisorperspectives.com/art ... s-you-need
You're always going to want to ask yourself who is writing the article and what are the motivations.

Advisor Perspectives, from what I understand, is geared towards advisors, not towards investors.

The article discussed investment-grade bonds but didn't mention municipal bonds, so there's that. The article also didn't address where the money is being held (taxable versus tax-advantaged).

If I were an advisor, I would most likely get paid on the total return of the portfolio--before taxes are paid.

If an advisor were investing my money in a taxable account and chose treasuries as the fixed income component, nearly 40% of the income from treasuries would be lost to federal taxes. That's a pretty bitter pill to swallow. Frankly, I'd fire him/her.

If you're going to be investing in treasuries within your tax-deferred account, fine. I would have no problem with that as long you realize that you're going to pay state income tax on the dividends when withdrawn (which were originally exempt from state income tax).

Addendum: As Triceratop notes below, the article does try to stay relatively narrow in its scope despite its title--comparing treasuries to the AGG. Municipals were specifically left out of the equation and I should have ignored the title altogether (clearly, the article did not claim that "treasury bonds are the ONLY bonds you need").
Last edited by Artsdoctor on Mon Aug 06, 2018 4:35 pm, edited 1 time in total.

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Re: Treasury Bonds are the Only Bonds You Need

Post by triceratop » Mon Aug 06, 2018 9:33 am

Artsdoctor wrote:
Mon Aug 06, 2018 9:27 am
CULater wrote:
Tue Jul 31, 2018 6:29 pm
Article argues that you should probably use Treasuries as your bond allocation and forget about aggregate bond index funds, for the two reasons below. I recall that Larry Swedroe made the same point about bonds. This has always been my approach since reading Larry, and I'm glad to see supporting evidence for it.
Treasury bonds perform nearly as well as investment-grade bonds over the long-term.
It is logical that the long-term performance difference of the two indices would be approximately the same, but it isn’t…not even close. Despite the Treasury index yielding 0.78% less, it performed just 0.15% annualized less over the full period.

Credit bonds work against you when you need them most
Consider performance between the two indices during large stock market losses. During the 10 largest S&P 500 drawdowns in the period since the index began, Treasury bonds have outperformed the AGG index in eight of those 10.
https://www.advisorperspectives.com/art ... s-you-need
You're always going to want to ask yourself who is writing the article and what are the motivations.

Advisor Perspectives, from what I understand, is geared towards advisors, not towards investors.

The article discussed investment-grade bonds but didn't mention municipal bonds, so there's that. The article also didn't address where the money is being held (taxable versus tax-advantaged).

If I were an advisor, I would most likely get paid on the total return of the portfolio--before taxes are paid.

If an advisor were investing my money in a taxable account and chose treasuries as the fixed income component, nearly 40% of the income from treasuries would be lost to federal taxes. That's a pretty bitter pill to swallow. Frankly, I'd fire him/her.

If you're going to be investing in treasuries within your tax-deferred account, fine. I would have no problem with that as long you realize that you're going to pay state income tax on the dividends when withdrawn (which were originally exempt from state income tax).
I know you realize this but in the article's defense, municipal bond funds are not included in the aggregate bond indices. If you're looking at what sub-classes of bonds in an aggregate bond index fund to include then treasuries might make most sense. I agree that municipal bonds are appropriate in many situations, I'm just not sure contextually that the article is malicious.
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Re: Treasury Bonds are the Only Bonds You Need

Post by aj76er » Mon Aug 06, 2018 10:11 am

Concerning the subject of this thread, the following may be a worthwhile read:

viewtopic.php?f=10&t=2409

Within that thread, the OP's own conclusion is as follows:
Robert T wrote:
Thu May 10, 2007 1:07 pm
The answer seems to be closer to intermediate treasuries than to long-term treasuries.

At one stage I seriously considered using long-term treasuries but for a number of reasons settled for intermediate term - including that:

- Long-term treasuries are more volatile [not sure I could handle seeing so much volatility in what’s supposed to be a stable part of my portfolio –despite the superior protection in financial crises]

- Intermediate treasuries on average didn’t lag long-term treasuries that much as in the above examples so still provide some protection in financial crises and in a few market declines LT treasuries did not out-perform

- On a mean variance basis intermediate treasuries outperformed in a portfolio setting [as illustrated in an earlier post][/list]

So in the end, for better or worse, I decided on a middle road.

Robert
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Re: Treasury Bonds are the Only Bonds You Need

Post by UpperNwGuy » Mon Aug 06, 2018 10:16 am

corn18 wrote:
Fri Aug 03, 2018 7:42 am
Threads like these make my head hurt. Whenever I get cornfused, I run back to TSM, TBM and TISM. 60/40 all day long baby!
+1

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Re: Treasury Bonds are the Only Bonds You Need

Post by patrick013 » Mon Aug 06, 2018 11:56 am

gmaynardkrebs wrote:
Sun Aug 05, 2018 6:22 pm
While I totally agree that TIPS make more sense, if you are going to use nominals, they should match your investment horizon(s).
You're recommending IT or LT bonds when rates haven't peaked ?

Longer term TRSY's are not paying 6-7-8% like they did in decades
past.

A longer investment horizon looks like a lower yield would occur.
Unless you know more than anybody else does. That's what they
always tell me. :D
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Re: Treasury Bonds are the Only Bonds You Need

Post by vineviz » Mon Aug 06, 2018 11:59 am

patrick013 wrote:
Mon Aug 06, 2018 11:56 am
gmaynardkrebs wrote:
Sun Aug 05, 2018 6:22 pm
While I totally agree that TIPS make more sense, if you are going to use nominals, they should match your investment horizon(s).
You're recommending IT or LT bonds when rates haven't peaked ?

Longer term TRSY's are not paying 6-7-8% like they did in decades
past.

A longer investment horizon looks like a lower yield would occur.
Unless you know more than anybody else does. That's what they
always tell me. :D
They told you wrong.
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Re: Treasury Bonds are the Only Bonds You Need

Post by welderwannabe » Mon Aug 06, 2018 11:59 am

Grt2bOutdoors wrote:
Tue Jul 31, 2018 8:01 pm
401k doesn’t offer Treasury only, total bond market index is next best choice. The other bond funds are too expensive and corporate credit only.
BND is around 65% Treasury/GSE anyways, so it is almost a Treasury fund anyways! :)
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Re: Treasury Bonds are the Only Bonds You Need

Post by gmaynardkrebs » Mon Aug 06, 2018 1:06 pm

patrick013 wrote:
Mon Aug 06, 2018 11:56 am
gmaynardkrebs wrote:
Sun Aug 05, 2018 6:22 pm
While I totally agree that TIPS make more sense, if you are going to use nominals, they should match your investment horizon(s).
You're recommending IT or LT bonds when rates haven't peaked ?

Longer term TRSY's are not paying 6-7-8% like they did in decades
past.

A longer investment horizon looks like a lower yield would occur.
Unless you know more than anybody else does. That's what they
always tell me. :D
No, I'm suggesting (not recommending) TIPS (for liability matching), and no, I don't know more than the market (aka, "everybody else.") Intermediates are a good choice, however, as is Total Bond Market. I believe you should stay short only if you believe that the market has underestimated future interest rates. Many here apparently believe that is the case, and they could be right. But I can't recall seeing a good explanation of why they think the market has got it wrong. Just knowing that rates are rising is not a good explanation, because the market has already priced the expected rate increase in, as well as the likely probability of them departing from the expected rate path. Are you going to improve upon that? Be my guest. Never worked for me.

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Re: Treasury Bonds are the Only Bonds You Need

Post by acegolfer » Mon Aug 06, 2018 1:32 pm

Practical question. Currently, I invest $1k in TBM per month using Vanguard automatic investment. How do I auto-invest $1k per month in Treasury?

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Re: Treasury Bonds are the Only Bonds You Need

Post by jalbert » Mon Aug 06, 2018 2:33 pm

You're recommending IT or LT bonds when rates haven't peaked ?
Let us know when they ring the bell indicating intermediate and/or long rates hit their peaks.
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Re: Treasury Bonds are the Only Bonds You Need

Post by ThrustVectoring » Mon Aug 06, 2018 2:37 pm

Noobvestor wrote:
Thu Aug 02, 2018 4:50 pm
vineviz wrote:
Thu Aug 02, 2018 2:50 pm

Picking a duration that is significantly shorter or longer than your investment horizon is an ACTIVE decision to make a bet on the direction of future interest rates (and in a complicated way that view investors understand).
I mean on this logic, any long-term investor should be entirely in long-term bonds, but there is a lot of literature from Boglehead authors suggesting intermediate is better - are you in fact arguing that a younger investor should be in ultra-long (say, 30-year) bonds?
There's structural and theoretic reasons for long-term bonds to underperform going forward. Nominal liability matching from institutional investors (insurance companies, etc) means that there's a ton of money buying long-term bonds regardless of price. Also, people who have liquidity limits and want a lot of exposure to duration will buy long-term bonds to get the most risk per dollar - this is the "Bet Against Beta" factor, high volatility stocks are overbought for the same reason.

Combined this means that long-term bond holders are not being fairly compensated for the duration risk they're taking. Long term bonds are trash, and you should be shorting them if your investment strategy allows it. I haven't done a full analysis of treasury futures vs 30-year mortgage, but both choices are likely good. The mortgage has you paying more in carry costs but has valuable embedded options, the treasury future is highly liquid and has better funding constraints (you'd get a zero to short duration portfolio by going long shorter-term treasury futures - this has the added advantage of getting margin credited to you for taking offsetting risk).
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Re: Treasury Bonds are the Only Bonds You Need

Post by gmaynardkrebs » Mon Aug 06, 2018 3:06 pm

ThrustVectoring wrote:
Mon Aug 06, 2018 2:37 pm
Noobvestor wrote:
Thu Aug 02, 2018 4:50 pm
vineviz wrote:
Thu Aug 02, 2018 2:50 pm

Picking a duration that is significantly shorter or longer than your investment horizon is an ACTIVE decision to make a bet on the direction of future interest rates (and in a complicated way that view investors understand).
I mean on this logic, any long-term investor should be entirely in long-term bonds, but there is a lot of literature from Boglehead authors suggesting intermediate is better - are you in fact arguing that a younger investor should be in ultra-long (say, 30-year) bonds?
There's structural and theoretic reasons for long-term bonds to underperform going forward. Nominal liability matching from institutional investors (insurance companies, etc) means that there's a ton of money buying long-term bonds regardless of price. Also, people who have liquidity limits and want a lot of exposure to duration will buy long-term bonds to get the most risk per dollar - this is the "Bet Against Beta" factor, high volatility stocks are overbought for the same reason.

Combined this means that long-term bond holders are not being fairly compensated for the duration risk they're taking. Long term bonds are trash, and you should be shorting them if your investment strategy allows it. I haven't done a full analysis of treasury futures vs 30-year mortgage, but both choices are likely good. The mortgage has you paying more in carry costs but has valuable embedded options, the treasury future is highly liquid and has better funding constraints (you'd get a zero to short duration portfolio by going long shorter-term treasury futures - this has the added advantage of getting margin credited to you for taking offsetting risk).
Markets usually are made up of buyers with differing elasticities of demand, including highly inelastic buyers. Even relatively small, localized markets have been proven to price efficiently under such circumstances. You're arguing that the deepest, most liquid, most widely traded, and most efficient market in the world can't do the same?

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vineviz
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Re: Treasury Bonds are the Only Bonds You Need

Post by vineviz » Mon Aug 06, 2018 3:12 pm

gmaynardkrebs wrote:
Mon Aug 06, 2018 3:06 pm
ThrustVectoring wrote:
Mon Aug 06, 2018 2:37 pm
Noobvestor wrote:
Thu Aug 02, 2018 4:50 pm
vineviz wrote:
Thu Aug 02, 2018 2:50 pm

Picking a duration that is significantly shorter or longer than your investment horizon is an ACTIVE decision to make a bet on the direction of future interest rates (and in a complicated way that view investors understand).
I mean on this logic, any long-term investor should be entirely in long-term bonds, but there is a lot of literature from Boglehead authors suggesting intermediate is better - are you in fact arguing that a younger investor should be in ultra-long (say, 30-year) bonds?
There's structural and theoretic reasons for long-term bonds to underperform going forward. Nominal liability matching from institutional investors (insurance companies, etc) means that there's a ton of money buying long-term bonds regardless of price. Also, people who have liquidity limits and want a lot of exposure to duration will buy long-term bonds to get the most risk per dollar - this is the "Bet Against Beta" factor, high volatility stocks are overbought for the same reason.

Combined this means that long-term bond holders are not being fairly compensated for the duration risk they're taking. Long term bonds are trash, and you should be shorting them if your investment strategy allows it. I haven't done a full analysis of treasury futures vs 30-year mortgage, but both choices are likely good. The mortgage has you paying more in carry costs but has valuable embedded options, the treasury future is highly liquid and has better funding constraints (you'd get a zero to short duration portfolio by going long shorter-term treasury futures - this has the added advantage of getting margin credited to you for taking offsetting risk).
Markets usually are made up of buyers with differing elasticities of demand, including highly inelastic buyers. Even relatively small, localized markets have been proven to price efficiently under such circumstances. You're arguing that the deepest, most liquid, most widely traded, and most efficient market in the world can't do the same?
Exactly.

Price is set by the marginal buyer, so the notion that the long-term treasury holders are not being "properly" compensated for their risk is laughable. Also laughable is the idea that all markets are efficient EXCEPT this one.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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