Holding LT Treasury bonds in high equity portfolio with flat yield curve

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spdoublebass
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Holding LT Treasury bonds in high equity portfolio with flat yield curve

Post by spdoublebass » Wed Apr 10, 2019 11:12 am

I have read many post over the last few years regarding a school of thought that if you have a high equity allocation (say 80/20 or 90/10), it could be beneficial to hold LT Treasury instead of say TBM.

I am not here to debate if this is true or not. My question is for people who do use (or people who are knowledgeable about the topic) LT treasury in high equity portfolio, do you have any concern about this strategy now that the yield curve is more flat? Does the yield curve change your position in any way?

discloser: I I do not do this with my portfolio. I was just thinking about it and wanted to know. Thanks.
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ralph124cf
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Re: Holding LT Treasury bonds in high equity portfolio with flat yield curve

Post by ralph124cf » Wed Apr 10, 2019 11:26 am

Due to the low and flat yield curve I choose to keep all fixed income investments short term.

Ralph

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Re: Holding LT Treasury bonds in high equity portfolio with flat yield curve

Post by HEDGEFUNDIE » Wed Apr 10, 2019 11:29 am

I don’t hold LTT for the yield.

I hold them for the uncorrelation with stocks: viewtopic.php?f=10&t=276568&p=4452080&h ... x#p4452080

So no change for me.

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Re: Holding LT Treasury bonds in high equity portfolio with flat yield curve

Post by spdoublebass » Wed Apr 10, 2019 11:47 am

HEDGEFUNDIE wrote:
Wed Apr 10, 2019 11:29 am
I don’t hold LTT for the yield.

I hold them for the uncorrelation with stocks: viewtopic.php?f=10&t=276568&p=4452080&h ... x#p4452080

So no change for me.
Hedgefundie I follow your other thread.

I know what you mean about yield. But if interest rates rise, the LT treasuries would drop. If the value is less, does that lessen the advantage of correlation?

I know that’s a bunch of “If’s”, also you are very knowledgeable in its and I’m speaking in basic terms because I’m not as well versed. Just curious.
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Re: Holding LT Treasury bonds in high equity portfolio with flat yield curve

Post by vineviz » Wed Apr 10, 2019 11:54 am

spdoublebass wrote:
Wed Apr 10, 2019 11:12 am
My question is for people who do use (or people who are knowledgeable about the topic) LT treasury in high equity portfolio, do you have any concern about this strategy now that the yield curve is more flat? Does the yield curve change your position in any way?
No.

Interest rates will do what they do, and regardless of what they do a bond portfolio with a duration that matches your investment horizon will have the highest expected return PLUS an equity-heavy portfolio will have have higher expected returns and lower expected volatility with long-term bonds than the same portfolio would have with intermediate or short-term bonds.

In other words, the current yield structure is essentially irrelevant.
"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: Holding LT Treasury bonds in high equity portfolio with flat yield curve

Post by MotoTrojan » Wed Apr 10, 2019 12:00 pm

spdoublebass wrote:
Wed Apr 10, 2019 11:47 am
HEDGEFUNDIE wrote:
Wed Apr 10, 2019 11:29 am
I don’t hold LTT for the yield.

I hold them for the uncorrelation with stocks: viewtopic.php?f=10&t=276568&p=4452080&h ... x#p4452080

So no change for me.
Hedgefundie I follow your other thread.

I know what you mean about yield. But if interest rates rise, the LT treasuries would drop. If the value is less, does that lessen the advantage of correlation?

I know that’s a bunch of “If’s”, also you are very knowledgeable in its and I’m speaking in basic terms because I’m not as well versed. Just curious.
Hedge is betting that yields will drop due to a flight-to-safety, should equities head south. If you know rates will rise, LT treasuries are a terrible choice, but nobody knows that.

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Re: Holding LT Treasury bonds in high equity portfolio with flat yield curve

Post by vineviz » Wed Apr 10, 2019 12:24 pm

MotoTrojan wrote:
Wed Apr 10, 2019 12:00 pm
If you know rates will rise, LT treasuries are a terrible choice, but nobody knows that.
In my mind, you'd not only need to know THAT rates will rise but also WHEN they will rise and when they will STOP rising.

For instance, the yield on the 10-year Treasury rose from 1.37% in July 2016 to 3.24% in October 2018. The full year CAGR of long-term Treasuries during this period (i.e. Jan 2016 to Dec 2018) was 2.82% versus just 1.27% for intermediate-term Treasuries.

In other words, betting again long-term treasuries is like betting against the stock market: it's not enough to be right. You have to be REALLY, REALLY right.
"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: Holding LT Treasury bonds in high equity portfolio with flat yield curve

Post by cheezit » Wed Apr 10, 2019 1:03 pm

MotoTrojan wrote:
Wed Apr 10, 2019 12:00 pm
If you know rates will rise, LT treasuries are a terrible choice, but nobody knows that.
It depends on your investment horizon in comparison to the duration of your LT treasuries, and also the "shape" of the rate increase.

For a rate increase that is a step change (so "d_rate/d_t" is a Dirac delta function at t=0), the breakeven point is the duration of the bond fund. For a rate increase that is a continuous ramp function (so "d_rate/d_t" is a straight line with a positive nonzero value), the breakeven point is twice the duration of the bond fund.

The math is a little more complex for rate changes that occur in more complex "shapes", and even for periods less than the breakeven duration other factors may be more important. Here is an illustrative example: during the period from June 2012 through March 2019, the 10-year T-note yield increased from about 1.6% to about 2.4%, while the federal funds rate increased from 0.16% to 2.4% and the 30-year treasury yield increased from about 2.75% to about 2.875%. Despite this, long treasuries outperformed intermediate- and short-term treasuries over that period in isolation, and the familiar 60/40 portfolio did better if the bond component was made up of long-term treasuries than intermediate- or short-term treasuries.

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Re: Holding LT Treasury bonds in high equity portfolio with flat yield curve

Post by Nickel & Dime » Thu Apr 11, 2019 9:08 pm

I have 90% VT Total world and 10% EDV for my core portfolio and have no concern, business as usual. I am still in the accumulation phase, so I just keep adding new money when I can. I’m no expert though, but for me this portfolio feels right.

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Re: Holding LT Treasury bonds in high equity portfolio with flat yield curve

Post by toisvu » Thu Apr 11, 2019 11:57 pm

Nickel & Dime wrote:
Thu Apr 11, 2019 9:08 pm
I have 90% VT Total world and 10% EDV for my core portfolio and have no concern, business as usual. I am still in the accumulation phase, so I just keep adding new money when I can. I’m no expert though, but for me this portfolio feels right.
My portfolio is very similar: 80% VT (total world), 10% EDV, 10% I-Bonds :sharebeer

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Re: Holding LT Treasury bonds in high equity portfolio with flat yield curve

Post by MotoTrojan » Fri Apr 12, 2019 12:59 am

Nickel & Dime wrote:
Thu Apr 11, 2019 9:08 pm
I have 90% VT Total world and 10% EDV for my core portfolio and have no concern, business as usual. I am still in the accumulation phase, so I just keep adding new money when I can. I’m no expert though, but for me this portfolio feels right.
Where do you hold the EDV? Do you rebalance with contributions only or often need to sell EDV? What’s your non core?

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Re: Holding LT Treasury bonds in high equity portfolio with flat yield curve

Post by aristotelian » Fri Apr 12, 2019 8:24 am

If I were to buy bonds now seeking low risk, I would buy short. The yield of LTT relative to the duration risk is not compelling.

If I were looking for a long term holding with the best chance of going up when stocks go down, I would stick with LTT.

At some point, interest rates will rise, and LTT will experience pain. The bet is that this would be most likely when the market is still on its way up.

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Re: Holding LT Treasury bonds in high equity portfolio with flat yield curve

Post by garlandwhizzer » Fri Apr 12, 2019 1:08 pm

If you are in the accumulation phase and you are certain that you will not have to sell assets in order to handle living expenses or unexpected emergencies, a high equity/LT Treasury portfolio makes sense. Long duration is a better diversifier to the equity volatility than short duration and it is also likely to produce higher long term returns. The problems with LT bonds are two fold. First, principal volatility, in a rising inflation/rising rate environment, principal value suffers in direct relation to duration. If you have to sell the bonds at the wrong time, your principal losses are greater than with ST bonds. If LT bonds are purchased when the yield curve is basically flat like now, you do not get reimbursed for this increased duration risk with significantly higher yields. The yield difference will not make up for principal losses if you're forced to sell at the wrong time. Second, if the economy goes into a multi-decade increasing inflationary pattern as it did from 1940 to 1982, LT bonds get killed. If held to maturity they will return your initial principal but after 20 or 30 years of inflation the amount of money that originally bought an automobile now buys a bicycle. ST bonds mature sooner and hence can be rolled over and re-invested at ever higher yields in such a persistently rising inflation environment. The extra diversification LT bonds provide to an equity portfolio in short does not come free and in some circumstances it can backfire.

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Re: Holding LT Treasury bonds in high equity portfolio with flat yield curve

Post by jdilla1107 » Fri Apr 12, 2019 2:10 pm

Funny, I thought the exact opposite. With a flat yield curve, I thought I should go longer so I don't end up holding bonds paying paltry rates in a couple years when rates fall again. Realize half the people in the market see it one way and half the people see it the other way for prices to be where they are right now. Of course, I don't pay any attention to what I think is going to happen in the world economy, because that's silly.

5-6 years ago, this forum was ABUZZ with: "Why would anyone buy long term bonds with rates to surely rise?". Rates DID eventually rise and long bonds have still won.

5 year returns for:

Vanguard Long-Term Treasury 5.40%
Vanguard Short-Term Treasury 1.57%

The lesson here is stop paying attention to what you think is going to happen and pick a strategy that will last the rest of your life.
Last edited by jdilla1107 on Fri Apr 12, 2019 6:36 pm, edited 1 time in total.

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Re: Holding LT Treasury bonds in high equity portfolio with flat yield curve

Post by HEDGEFUNDIE » Fri Apr 12, 2019 2:18 pm

jdilla1107 wrote:
Fri Apr 12, 2019 2:10 pm
Funny, I thought the exact opposite. With a flat yield curve, I thought I should go longer so I don't end up holding bonds paying paltry rates in a couple years when rates fall again. Realize half the people in the market see it one way and half the people see it the other way for prices to be where they are right now. Of course, I don't pay any attention to what I think is going to happen in the world economy, because that's silly.

5-6 years ago, this forum was ABUZZ with: "Why would anyone buy long term bonds with rates to surely rise?". Rates DID rise and long bonds have still won.

5 year returns for:

Vanguard Long-Term Treasury 5.40%
Vanguard Short-Term Treasury 1.57%

The lesson here is stop paying attention to what you think is going to happen and pick a strategy that will last the rest of your life.
+1

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Re: Holding LT Treasury bonds in high equity portfolio with flat yield curve

Post by Dialectical Investor » Fri Apr 12, 2019 6:19 pm

cheezit wrote:
Wed Apr 10, 2019 1:03 pm

The math is a little more complex for rate changes that occur in more complex "shapes", and even for periods less than the breakeven duration other factors may be more important. Here is an illustrative example: during the period from June 2012 through March 2019, the 10-year T-note yield increased from about 1.6% to about 2.4%, while the federal funds rate increased from 0.16% to 2.4% and the 30-year treasury yield increased from about 2.75% to about 2.875%. Despite this, long treasuries outperformed intermediate- and short-term treasuries over that period in isolation, and the familiar 60/40 portfolio did better if the bond component was made up of long-term treasuries than intermediate- or short-term treasuries.

It's not despite the changes in the yield curve, but rather because of them. Long-term yields essentially did not change, while short-term and intermediate-term rates changed significantly, in comparison. The performance should be expected given the data.

I couldn't tolerate holding long-term nominal bonds. While I think the chances of us having a sustained period of high inflation are low, the consequence of it occuring would be too high.

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Re: Holding LT Treasury bonds in high equity portfolio with flat yield curve

Post by Nickel & Dime » Sat Apr 13, 2019 10:33 am

MotoTrojan wrote:
Fri Apr 12, 2019 12:59 am
Nickel & Dime wrote:
Thu Apr 11, 2019 9:08 pm
I have 90% VT Total world and 10% EDV for my core portfolio and have no concern, business as usual. I am still in the accumulation phase, so I just keep adding new money when I can. I’m no expert though, but for me this portfolio feels right.
Where do you hold the EDV? Do you rebalance with contributions only or often need to sell EDV? What’s your non core?
Oops, I was misleading :oops: ! I hold the 90/10 in my Roth and Traditional IRA. I am doing a small Hedgfundie sort of thing in another Roth, and I have a taxable account which works out to be around a 75% stock allocation for my total portfolio.
I put the max contribution in per year to one of those IRA accounts, and don’t rebalance too often.

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Re: Holding LT Treasury bonds in high equity portfolio with flat yield curve

Post by Nickel & Dime » Sat Apr 13, 2019 10:59 am

HEDGEFUNDIE wrote:
Fri Apr 12, 2019 2:18 pm
jdilla1107 wrote:
Fri Apr 12, 2019 2:10 pm
Funny, I thought the exact opposite. With a flat yield curve, I thought I should go longer so I don't end up holding bonds paying paltry rates in a couple years when rates fall again. Realize half the people in the market see it one way and half the people see it the other way for prices to be where they are right now. Of course, I don't pay any attention to what I think is going to happen in the world economy, because that's silly.

5-6 years ago, this forum was ABUZZ with: "Why would anyone buy long term bonds with rates to surely rise?". Rates DID rise and long bonds have still won.

5 year returns for:

Vanguard Long-Term Treasury 5.40%
Vanguard Short-Term Treasury 1.57%

The lesson here is stop paying attention to what you think is going to happen and pick a strategy that will last the rest of your life.
+1
+1
What if interest rates were going up, yet your still contributing or dollar cost averaging into these long term bonds for 20 or more years before retirement? You still have maybe another 20 to 30 years to live after that. Also you have all those stocks to go along with it!

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Re: Holding LT Treasury bonds in high equity portfolio with flat yield curve

Post by privatefarmer » Sat Apr 13, 2019 7:05 pm

MotoTrojan wrote:
Wed Apr 10, 2019 12:00 pm
spdoublebass wrote:
Wed Apr 10, 2019 11:47 am
HEDGEFUNDIE wrote:
Wed Apr 10, 2019 11:29 am
I don’t hold LTT for the yield.

I hold them for the uncorrelation with stocks: viewtopic.php?f=10&t=276568&p=4452080&h ... x#p4452080

So no change for me.
Hedgefundie I follow your other thread.

I know what you mean about yield. But if interest rates rise, the LT treasuries would drop. If the value is less, does that lessen the advantage of correlation?

I know that’s a bunch of “If’s”, also you are very knowledgeable in its and I’m speaking in basic terms because I’m not as well versed. Just curious.
Hedge is betting that yields will drop due to a flight-to-safety, should equities head south. If you know rates will rise, LT treasuries are a terrible choice, but nobody knows that.
this was actually debunked in Dr. Qian's book "risk parity fundamentals". he basically shows several periods where rates were going up and LTTs actually did fine. The reason being is that the forward-looking rates (the yield curve) should already anticipate rate increases. it's already priced in. obviously, unexpected rate increases can occur. but even if we knew with certainty that rates were going to go up in the near future, the forward-looking LTT rates would already reflect that and thus they'd CURRENTLY have a higher yield so that when rates do actually go up they wouldn't have to adjust. that's my very limited understanding of his explanation.

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Re: Holding LT Treasury bonds in high equity portfolio with flat yield curve

Post by Dialectical Investor » Sat Apr 13, 2019 7:17 pm

privatefarmer wrote:
Sat Apr 13, 2019 7:05 pm

obviously, unexpected rate increases can occur.
Herein lies the issue. Few investment stragies fail when things go as expected, assuming the math is done correctly. The whole game is about the robustness of the strategy when things don't go as expected.

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Re: Holding LT Treasury bonds in high equity portfolio with flat yield curve

Post by MotoTrojan » Sat Apr 13, 2019 10:43 pm

privatefarmer wrote:
Sat Apr 13, 2019 7:05 pm
MotoTrojan wrote:
Wed Apr 10, 2019 12:00 pm
spdoublebass wrote:
Wed Apr 10, 2019 11:47 am
HEDGEFUNDIE wrote:
Wed Apr 10, 2019 11:29 am
I don’t hold LTT for the yield.

I hold them for the uncorrelation with stocks: viewtopic.php?f=10&t=276568&p=4452080&h ... x#p4452080

So no change for me.
Hedgefundie I follow your other thread.

I know what you mean about yield. But if interest rates rise, the LT treasuries would drop. If the value is less, does that lessen the advantage of correlation?

I know that’s a bunch of “If’s”, also you are very knowledgeable in its and I’m speaking in basic terms because I’m not as well versed. Just curious.
Hedge is betting that yields will drop due to a flight-to-safety, should equities head south. If you know rates will rise, LT treasuries are a terrible choice, but nobody knows that.
this was actually debunked in Dr. Qian's book "risk parity fundamentals". he basically shows several periods where rates were going up and LTTs actually did fine. The reason being is that the forward-looking rates (the yield curve) should already anticipate rate increases. it's already priced in. obviously, unexpected rate increases can occur. but even if we knew with certainty that rates were going to go up in the near future, the forward-looking LTT rates would already reflect that and thus they'd CURRENTLY have a higher yield so that when rates do actually go up they wouldn't have to adjust. that's my very limited understanding of his explanation.
I didn’t say anything about the Fed fund rate, I’m speaking directly to LTT yields.

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Re: Holding LT Treasury bonds in high equity portfolio with flat yield curve

Post by HawkeyePierce » Sat Apr 13, 2019 11:24 pm

I wonder if it would make sense to split one's fixed income holdings equally between long-term nominal Treasuries and long-term TIPS? You could use PIMCO's long-term TIPS fund (LTPZ) combined with Vanguard's long-term nominal Treasury fund (VLGSX).

I'm not an expert, I'm just wondering if that provides some of the diversity away from equity volatility of long-term bonds while still hedging against inflation.

In periods of moderate inflation, the equities and TIPS would make up for the decline of LTT. In periods of deflation, the LTT make up for the decline of TIPS. Not sure it's enough to counter the impacts of severe inflation. I haven't run any numbers on this, I'm not smart enough for that. :)

80% Vanguard Total World, 10% Vanguard Long-Term Treasuries, 10% PIMCO Long-Term TIPS could make for a very simple and cheap three-fund portfolio for someone early in the accumulation phase. I've been considering that AA myself (28 y/o) but currently just hold Vanguard's total bond fund for my fixed-income allocation.

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Re: Holding LT Treasury bonds in high equity portfolio with flat yield curve

Post by vineviz » Sun Apr 14, 2019 7:47 am

HawkeyePierce wrote:
Sat Apr 13, 2019 11:24 pm
I'm not an expert, I'm just wondering if that provides some of the diversity away from equity volatility of long-term bonds while still hedging against inflation.
Long term TIPS may indeed lower your inflation exposure relative to long term nominal bonds. The question is whether this is reduction is actually beneficial or not.

Someone in their 30s, with a long career of saving ahead of them and a high equity allocation, doesn’t really face much inflation risk to begin with. Adding TIPS may make sense as you get within 10 years of retirement age, but I don’t see a strong case for doing it earlier.
"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: Holding LT Treasury bonds in high equity portfolio with flat yield curve

Post by vineviz » Sun Apr 14, 2019 7:50 am

MotoTrojan wrote:
Sat Apr 13, 2019 10:43 pm
privatefarmer wrote:
Sat Apr 13, 2019 7:05 pm
MotoTrojan wrote:
Wed Apr 10, 2019 12:00 pm
spdoublebass wrote:
Wed Apr 10, 2019 11:47 am
HEDGEFUNDIE wrote:
Wed Apr 10, 2019 11:29 am
I don’t hold LTT for the yield.

I hold them for the uncorrelation with stocks: viewtopic.php?f=10&t=276568&p=4452080&h ... x#p4452080

So no change for me.
Hedgefundie I follow your other thread.

I know what you mean about yield. But if interest rates rise, the LT treasuries would drop. If the value is less, does that lessen the advantage of correlation?

I know that’s a bunch of “If’s”, also you are very knowledgeable in its and I’m speaking in basic terms because I’m not as well versed. Just curious.
Hedge is betting that yields will drop due to a flight-to-safety, should equities head south. If you know rates will rise, LT treasuries are a terrible choice, but nobody knows that.
this was actually debunked in Dr. Qian's book "risk parity fundamentals". he basically shows several periods where rates were going up and LTTs actually did fine. The reason being is that the forward-looking rates (the yield curve) should already anticipate rate increases. it's already priced in. obviously, unexpected rate increases can occur. but even if we knew with certainty that rates were going to go up in the near future, the forward-looking LTT rates would already reflect that and thus they'd CURRENTLY have a higher yield so that when rates do actually go up they wouldn't have to adjust. that's my very limited understanding of his explanation.
I didn’t say anything about the Fed fund rate, I’m speaking directly to LTT yields.
Fine, but the answer is still the same: long term bonds typically outperform short term bonds even with rising yields over the holding period of the bonds.
"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: Holding LT Treasury bonds in high equity portfolio with flat yield curve

Post by MotoTrojan » Sun Apr 14, 2019 4:35 pm

vineviz wrote:
Sun Apr 14, 2019 7:50 am
MotoTrojan wrote:
Sat Apr 13, 2019 10:43 pm
privatefarmer wrote:
Sat Apr 13, 2019 7:05 pm
MotoTrojan wrote:
Wed Apr 10, 2019 12:00 pm
spdoublebass wrote:
Wed Apr 10, 2019 11:47 am


Hedgefundie I follow your other thread.

I know what you mean about yield. But if interest rates rise, the LT treasuries would drop. If the value is less, does that lessen the advantage of correlation?

I know that’s a bunch of “If’s”, also you are very knowledgeable in its and I’m speaking in basic terms because I’m not as well versed. Just curious.
Hedge is betting that yields will drop due to a flight-to-safety, should equities head south. If you know rates will rise, LT treasuries are a terrible choice, but nobody knows that.
this was actually debunked in Dr. Qian's book "risk parity fundamentals". he basically shows several periods where rates were going up and LTTs actually did fine. The reason being is that the forward-looking rates (the yield curve) should already anticipate rate increases. it's already priced in. obviously, unexpected rate increases can occur. but even if we knew with certainty that rates were going to go up in the near future, the forward-looking LTT rates would already reflect that and thus they'd CURRENTLY have a higher yield so that when rates do actually go up they wouldn't have to adjust. that's my very limited understanding of his explanation.
I didn’t say anything about the Fed fund rate, I’m speaking directly to LTT yields.
Fine, but the answer is still the same: long term bonds typically outperform short term bonds even with rising yields over the holding period of the bonds.
Fully agree. I think we are in violent agreement. I was speaking more to the fallacy of market timing. Just like if you knew there was a crash in equities coming, you would likely want to temporarily get out of long bonds if you knew rates would rise. Of course we don’t know this.

I fully expect that EDV or a similar long bond fund will makes its way into my overall AA in 3 years when my IPS/AA is due to be updated.

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Re: Holding LT Treasury bonds in high equity portfolio with flat yield curve

Post by klaus14 » Sun Apr 14, 2019 4:50 pm

vineviz wrote:
Sun Apr 14, 2019 7:50 am
Fine, but the answer is still the same: long term bonds typically outperform short term bonds even with rising yields over the holding period of the bonds.
i don't understand this.
If whole (flat) curve goes up by 2 percent points (slowly) in the next decade, clearly short term bonds will do better (since they will get reinvested in higher yields). For LT to perform better than ST, yield curve should become downwards. That is: ST rate goes up more than LT, which explains 2016-2018 LT outperformance that you mentioned.

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Re: Holding LT Treasury bonds in high equity portfolio with flat yield curve

Post by pdavi21 » Sun Apr 14, 2019 5:02 pm

Looking back as far as I can to good data, there is not much of a correlation between the "flat"ness of yield curve and the returns of long term bonds.

A flat yield curve in the secular bond bull run since 1980, has actually led to higher short term returns for long term treasuries. It's because a flat yield curve means investors are forecasting rate declines.

If they are right (generally more than 50% of the time in aggregate during the secular bond bull market), you profit.

EDIT: Some confusion above. Note the example that short term interest rates rise 2% one year then fall 2% the next year. Long term bond yields probably did not rise much, as investors sniffed out the situation in advance and/or were reluctant to unwind their bets.

Long term yields are incredibly stable, and if they can truly be forced up by 2% or more (happens somewhat often), new issues purchased by the fund end up with phenomenal returns over the 20-30 year holding period whether rates remain high or drop back. If rates continue to rise for 20-30 years, 20-30 year bonds can perform terribly.

Your return is essentially locked in to your duration (ignoring credit risk), so over 30 years, if 3 year bonds range from 0-5%, but LTT were 2-5%, LTT earned a much higher return over those 30 years.
"We spend a great deal of time studying history, which, let's face it, is mostly the history of stupidity." -Stephen Hawking

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Re: Holding LT Treasury bonds in high equity portfolio with flat yield curve

Post by DonIce » Sun Apr 14, 2019 5:16 pm

I wish there were 50 and 100 year treasuries!

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Re: Holding LT Treasury bonds in high equity portfolio with flat yield curve

Post by pascalwager » Sun Apr 14, 2019 6:56 pm

At some point in retirement, do you begin reducing the duration of your LTT strategy?

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Re: Holding LT Treasury bonds in high equity portfolio with flat yield curve

Post by spdoublebass » Sun Apr 14, 2019 7:06 pm

pascalwager wrote:
Sun Apr 14, 2019 6:56 pm
At some point in retirement, do you begin reducing the duration of your LTT strategy?
I have enjoyed reading this read.

I am not as advanced as the others who have been responding to my OP, but to answer your question I'd think you'd have some options.

First off, as in the OP I was talking about an equity heavy portfolio.

If I were to do this, I would probably hold a portion of LT treasury and then Add a ST treasury or Stable Value fund to shorten the duration as I lowered my equity position.
I'm trying to think, but nothing happens

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Re: Holding LT Treasury bonds in high equity portfolio with flat yield curve

Post by pdavi21 » Sun Apr 14, 2019 7:12 pm

DonIce wrote:
Sun Apr 14, 2019 5:16 pm
I wish there were 50 and 100 year treasuries!
Most would be satisfied by 50-100 year governments...but I wouldn't be opposed to owning 50-100 year globally diversified bonds if I was going to live for another 50-100 years.
"We spend a great deal of time studying history, which, let's face it, is mostly the history of stupidity." -Stephen Hawking

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Re: Holding LT Treasury bonds in high equity portfolio with flat yield curve

Post by pascalwager » Sun Apr 14, 2019 8:03 pm

spdoublebass wrote:
Sun Apr 14, 2019 7:06 pm
pascalwager wrote:
Sun Apr 14, 2019 6:56 pm
At some point in retirement, do you begin reducing the duration of your LTT strategy?
I have enjoyed reading this read.

I am not as advanced as the others who have been responding to my OP, but to answer your question I'd think you'd have some options.

First off, as in the OP I was talking about an equity heavy portfolio.

If I were to do this, I would probably hold a portion of LT treasury and then Add a ST treasury or Stable Value fund to shorten the duration as I lowered my equity position.
Note: If you had a fixed AA in accumulation, the Estrada studies showed that you could maintain the same AA in retirement with good results and low failures. With a rising equity glidepath in accumulation, then, yes, the retirement glidepath should be a declining equity glidepath according to Estrada. (The rising equity accumulation glidepath, according to Estrada, was superior to the declining equity glidepath which Vanguard and other fund companies use. But the accumulation declining equity glidepath does satisfy investor's preconceptions and sense of rightness.)

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Re: Holding LT Treasury bonds in high equity portfolio with flat yield curve

Post by Dialectical Investor » Sun Apr 14, 2019 8:51 pm

pascalwager wrote:
Sun Apr 14, 2019 8:03 pm

Note: If you had a fixed AA in accumulation, the Estrada studies showed that you could maintain the same AA in retirement with good results and low failures. With a rising equity glidepath in accumulation, then, yes, the retirement glidepath should be a declining equity glidepath according to Estrada. (The rising equity accumulation glidepath, according to Estrada, was superior to the declining equity glidepath which Vanguard and other fund companies use. But the accumulation declining equity glidepath does satisfy investor's preconceptions and sense of rightness.)
Since this thread is about LT Treasury bonds with a high equity portfolio, it seems relevant to ask: Can you describe the reasoning behind an increasing equity glidepath? I could see a constant allocation. I could see a decrease followed by an increase. Increasing the equity allocation during accumulation...not as intuitive.

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Re: Holding LT Treasury bonds in high equity portfolio with flat yield curve

Post by pascalwager » Sun Apr 14, 2019 10:23 pm

Dialectical Investor wrote:
Sun Apr 14, 2019 8:51 pm
pascalwager wrote:
Sun Apr 14, 2019 8:03 pm

Note: If you had a fixed AA in accumulation, the Estrada studies showed that you could maintain the same AA in retirement with good results and low failures. With a rising equity glidepath in accumulation, then, yes, the retirement glidepath should be a declining equity glidepath according to Estrada. (The rising equity accumulation glidepath, according to Estrada, was superior to the declining equity glidepath which Vanguard and other fund companies use. But the accumulation declining equity glidepath does satisfy investor's preconceptions and sense of rightness.)
Since this thread is about LT Treasury bonds with a high equity portfolio, it seems relevant to ask: Can you describe the reasoning behind an increasing equity glidepath? I could see a constant allocation. I could see a decrease followed by an increase. Increasing the equity allocation during accumulation...not as intuitive.
From what I recall, Estrada reasoned that the equity portion could grow more effectively when it was the largest portion (following decades of contributions), and Arnott, in another study, came to the same conclusion. Now the OP stated that one might be using a 90/10 or 80/20 fixed AA for accumulation and a DE glidepath for retirement, but Estrada showed that these two fixed AA's are fine for the entirety of an investing career. So, I'm commenting on some of the conditions laid out in the OP. (Also, I get a little frustrated when I consider the Vanguard TDR income fund because Estrada showed that a 30/70 AA had a fairly high failure rate and 40/60, e.g., did not.)

So you might start out at 20/80 at age 25 and end up at 80/20 at age 65. But to expand a bit on the OP, I wondered if LTT would be suitable for the high bond portion of such a RE portfolio.

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Re: Holding LT Treasury bonds in high equity portfolio with flat yield curve

Post by Dialectical Investor » Sun Apr 14, 2019 10:37 pm

pascalwager wrote:
Sun Apr 14, 2019 10:23 pm

From what I recall, Estrada reasoned that the equity portion could grow more effectively when it was the largest portion (following decades of contributions), and Arnott, in another study, came to the same conclusion. Now the OP stated that one might be using a 90/10 or 80/20 fixed AA for accumulation and a DE glidepath for retirement, but Estrada showed that these two fixed AA's are fine for the entirety of an investing career. So, I'm commenting on some of the conditions laid out in the OP. (Also, I get a little frustrated when I consider the Vanguard TDR income fund because Estrada showed that a 30/70 AA had a fairly high failure rate and 40/60, e.g., did not.)

So you might start out at 20/80 at age 25 and end up at 80/20 at age 65. But to expand a bit on the OP, I wondered if LTT would be suitable for the high bond portion of such a RE portfolio.
Interesting take, though, I don't see why that strategy would preclude one from holding a high equity percentage when younger as well. (I don't see the benefit of a low equity allocation when young.) An 80% allocation to long-term nominal bonds seems risky to me, unless they're TIPS. Can't say I'd do it myself even in that case.

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Re: Holding LT Treasury bonds in high equity portfolio with flat yield curve

Post by pascalwager » Mon Apr 15, 2019 1:05 am

Dialectical Investor wrote:
Sun Apr 14, 2019 10:37 pm
pascalwager wrote:
Sun Apr 14, 2019 10:23 pm

From what I recall, Estrada reasoned that the equity portion could grow more effectively when it was the largest portion (following decades of contributions), and Arnott, in another study, came to the same conclusion. Now the OP stated that one might be using a 90/10 or 80/20 fixed AA for accumulation and a DE glidepath for retirement, but Estrada showed that these two fixed AA's are fine for the entirety of an investing career. So, I'm commenting on some of the conditions laid out in the OP. (Also, I get a little frustrated when I consider the Vanguard TDR income fund because Estrada showed that a 30/70 AA had a fairly high failure rate and 40/60, e.g., did not.)

So you might start out at 20/80 at age 25 and end up at 80/20 at age 65. But to expand a bit on the OP, I wondered if LTT would be suitable for the high bond portion of such a RE portfolio.
Interesting take, though, I don't see why that strategy would preclude one from holding a high equity percentage when younger as well. (I don't see the benefit of a low equity allocation when young.) An 80% allocation to long-term nominal bonds seems risky to me, unless they're TIPS. Can't say I'd do it myself even in that case.
Wouldn't it be easier to hold a high-bond, well-ballasted, very stable portfolio when young and inexperienced and only gradually be introduced to the rough-and-tumble of equities? (In my case, I did a kind of step-function version: fifteen years of accumulating T-bills and then a lump sum into a high equity portfolio.)

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Re: Holding LT Treasury bonds in high equity portfolio with flat yield curve

Post by Dialectical Investor » Mon Apr 15, 2019 1:44 am

pascalwager wrote:
Mon Apr 15, 2019 1:05 am
Dialectical Investor wrote:
Sun Apr 14, 2019 10:37 pm
pascalwager wrote:
Sun Apr 14, 2019 10:23 pm

From what I recall, Estrada reasoned that the equity portion could grow more effectively when it was the largest portion (following decades of contributions), and Arnott, in another study, came to the same conclusion. Now the OP stated that one might be using a 90/10 or 80/20 fixed AA for accumulation and a DE glidepath for retirement, but Estrada showed that these two fixed AA's are fine for the entirety of an investing career. So, I'm commenting on some of the conditions laid out in the OP. (Also, I get a little frustrated when I consider the Vanguard TDR income fund because Estrada showed that a 30/70 AA had a fairly high failure rate and 40/60, e.g., did not.)

So you might start out at 20/80 at age 25 and end up at 80/20 at age 65. But to expand a bit on the OP, I wondered if LTT would be suitable for the high bond portion of such a RE portfolio.
Interesting take, though, I don't see why that strategy would preclude one from holding a high equity percentage when younger as well. (I don't see the benefit of a low equity allocation when young.) An 80% allocation to long-term nominal bonds seems risky to me, unless they're TIPS. Can't say I'd do it myself even in that case.
Wouldn't it be easier to hold a high-bond, well-ballasted, very stable portfolio when young and inexperienced and only gradually be introduced to the rough-and-tumble of equities? (In my case, I did a kind of step-function version: fifteen years of accumulating T-bills and then a lump sum into a high equity portfolio.)
I can see that perspective, but I think it's better to be immunized when young. You could argue a large mistake when young has more time to affect the outcome, but a large mistake when older provides less time to recover. Ideally the immunization process would be well-controlled, but of course that's not possible. A bad case may be a ramping up in a time without a major epidemic, then all of a sudden, just when you thought you knew yourself and the system in which you were playing, disaster strikes. But the more time you are exposed, the stronger you may be to withstand the perils in old age. Yours is an interesting progression.

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