First 20% of bonds in long-term Treasuries

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jacksonm
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Re: First 20% of bonds in long-term Treasuries

Post by jacksonm » Thu Aug 08, 2019 5:36 pm

The entire amount of my bond allocation is in long term treasuries because that's what the Permanent Portfolio strategy calls for as deflation protection.

It hasn't always been smooth sailing but it's actually looking better than ever right now so I have no regrets.

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Re: First 20% of bonds in long-term Treasuries

Post by columbia » Thu Aug 08, 2019 5:37 pm

HEDGEFUNDIE wrote:
Thu Aug 08, 2019 5:30 pm
columbia wrote:
Thu Aug 08, 2019 5:20 pm
Presumably created to sell to institutions, pension funds, etc.
Vanguard has three flavors of the Extended Duration Treasury fund:

VEDIX, min purchase $100M
VEDTX, min purchase $5M
EDV, no min purchase

Guess which fund class has the most assets?
No idea what the first two are.

I thought we were talking about the 70s. 😀

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Re: First 20% of bonds in long-term Treasuries

Post by zonto » Thu Aug 08, 2019 5:38 pm

HawkeyePierce wrote:
Thu Aug 08, 2019 5:28 pm
. . . Is anyone aware of any good papers or books on this topic?
Vanguard published in June 2019 a white paper titled Commodities and short-term TIPS: how each combats unexpected inflation.

I believe what you are looking for is on page 3, which shows the correlation of various asset classes with both expected and unexpected inflation. If you want to effectively protect against unexpected inflation, looks like the best options were commodities and short-term TIPS, in that order, Vanguard argues, due to the higher beta of commodities (see Figure 3). Cash was the best protection against expected inflation. Barclays aggregate bond index and global bonds offered horrible protection against unexpected inflation, so I don't really place much weight in the arguments from folks who poo-poo long-term Treasuries for inflation risk concerns but then themselves use a total bond market index.
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Re: First 20% of bonds in long-term Treasuries

Post by HawkeyePierce » Thu Aug 08, 2019 5:45 pm

willthrill81 wrote:
Thu Aug 08, 2019 5:35 pm
HawkeyePierce wrote:
Thu Aug 08, 2019 5:28 pm
One thing that seems missing from a lot of discussions of inflation on this board is the precise meaning of "inflation" being discussed. Near term or long term? Expected or unexpected? A high or low spread of actual inflation compared to expected inflation? Different asset classes defends against those scenarios. Equities, nominal bonds, real bonds, even fixed rate mortgages and human capital all play a role in how an individual guards against inflation but we often discuss it in such a narrow view it's hard to make the advice truly actionable.
Unexpected inflation is the real enemy. Expected inflation is theoretically already priced into nominal bonds. TIPS and I bonds are the go-to means to deal with unexpected inflation. Over the long-term, arguably the best inflation hedges are investments that are likely to significantly outpace inflation, such as stocks and good rental properties.
Right, I agree. My understanding of TIPS Is if inflation is as-expected over the duration of the bond, they should essentially perform the same as an equivalent nominal Treasury (less an "insurance" premium for the inflation protection).

That's why real bonds like TIPS and I bonds fit nicely into the "unexpected near term" quadrant of my diagram. Equities usually serve in the "unexpected long term" quadrant. A fixed-rate mortgage also fits into that quadrant. While not an "investment" per se, a homeowner is essentially selling a 30 year callable nominal bond when they take on a mortgage.

Near-term expected would be any short-term bond, real or nominal. E.g., a rolling T-Bill ladder. Nominal long-term bonds should perform acceptably if long-term inflation is as-expected. Obviously a big "if".

My understanding (though I have not studied the data here) is that human capital, i.e. wages, should straddle both expected and unexpected inflation in the long term, but this can be highly dependent on an individual's career. ("Highly" might even be a severe understatement. "Entirely" may be more appropriate).

My concern is focusing on the effects of inflation against a single component of a portfolio rather than taking a holistic view. LTTs might be an appropriate bond allocation per vineviz's proposed rule of thumb for a young investor with a solid career path and fixed mortgage, because they could take advantage of LTTs historic diversification effect against equities while guarding against unexpected inflation through other means.

(I'm currently 50/50 LTT/TBM at 80/20 equities/bonds)

(edit:)

We should also consider the difference between inflation as measured by CPI and an individual's personal rate of inflation. Both are important. For instance, look at the incredible drop in the amount of working hours required to afford an air conditioner. In 1952, an average blue-collar worker needed to work 203 hours to afford AC but today it's only 5.5:

Image

Source: https://humanprogress.org/article.php?p=2050
zonto wrote:
Thu Aug 08, 2019 5:38 pm
HawkeyePierce wrote:
Thu Aug 08, 2019 5:28 pm
. . . Is anyone aware of any good papers or books on this topic?
Vanguard published in June 2019 a white paper titled Commodities and short-term TIPS: how each combats unexpected inflation.

I believe what you are looking for is on page 3, which shows the correlation of various asset classes with both expected and unexpected inflation. If you want to effectively protect against unexpected inflation, looks like the best options were commodities and short-term TIPS, in that order, Vanguard argues, due to the higher beta of commodities (see Figure 3). Cash was the best protection against expected inflation. Barclays aggregate bond index and global bonds offered horrible protection against unexpected inflation, so I don't really place much weight in the arguments from folks who poo-poo long-term Treasuries for inflation risk concerns but then themselves use a total bond market index.
Thank you, I'll read that today. As someone young with a very high savings rate, I've been considering moving from 50/50 LTT/TBM to 50/50 LTT/short term TIPS, but I need to give that a lot more thought. This paper will help.
Last edited by HawkeyePierce on Thu Aug 08, 2019 6:05 pm, edited 3 times in total.

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Re: First 20% of bonds in long-term Treasuries

Post by willthrill81 » Thu Aug 08, 2019 5:49 pm

SavageAmusement wrote:
Thu Aug 08, 2019 5:32 pm
vineviz wrote:
Thu Aug 08, 2019 5:13 pm
[quoted post removed by admin LadyGeek]

It's not as if long-term bonds are a heretical concept: I'm pretty sure that the first bond fund Jack Bogle created was Vanguard Long-Term Investment-Grade Fund (VWESX), launched in 1973 before he was fired from Wellington and before he founded Vanguard. The intermediate-term counterpart, VFICX, wasn't launched for another 20 years.

And Vanguard's first Treasury bond fund wasn't short-term or intermediate term: it was Vanguard Long-Term Treasury Fund Investor Shares (VUSTX) in 1986, a full five years before the shorter duration funds were launched.
I can’t say I follow any of your logic, including this post. In contrast, Garland’s reasoning is crystal clear.
There isn't much 'logic' to follow. Vineviz is merely stating that Bogle clearly found the need to establish a long-term bond fund decades before an intermediate-term bond fund, which clearly suggests that he thought that the long-term bond fund was more needed.
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Re: First 20% of bonds in long-term Treasuries

Post by BigJohn » Thu Aug 08, 2019 5:56 pm

garlandwhizzer wrote:
Thu Aug 08, 2019 2:30 pm
I remember those days quite well. We have not had substantial and ever increasing inflation in this country for 37 years. Due to a long multi-decade period of decreasing inflation backtesting results on LT Treasuries look great relative to other bond options--greater diversification to equity, greater long term risk adjusted yields. Hence a lot of current academic literature which is based on backtesting models supports the LTT approach as the dominant and sometimes only bond holding. Ever decreasing inflation and low long term inflation rates juice returns and lowers risk of LTT, there is no doubt about that. The thrust of this opinion comes from the fact that inflation has basically gone only one way, down, for longer than most investors and many young academics have any memory of.

The current yield on 30 year Treasuries is 2.25%. If we go into a multi-decade period of rising inflation which we did from the 1960s to the early 1980s, and your bond holdings are exclusively in LTT, you are toast, pure and simple. The long term average inflation rate in the US from 1913 through 2013 was 3.22%/yr. about a full percentage point higher than than the current 30 year T yield. If you buy that LTT bond now you're locking in for 3 decades the lowest yield that the 30 yr. Treasury has had in its 39 year history. The average yield of 30 year Treasuries during that 39 years is well over 6%, almost 3 times higher than the current yield. As long as inflation remains incredibly muted and rates keep going down for decades which will actually require a long period of persistent deflation as in Japan 1989 to the present, a high or total allocation to LTT will work. But to put it mildly predicting anything over 3 decades has huge margins of potential error and complete uncertainty. If you believe the last 3.8 decades will be replayed exactly for the next 3 decades it seems reasonable to load up on LTT. Certainly no one expects inflation to crank up again anytime in the foreseeable future. On the other hand no one expected the Great Recession or the Great Depression which is why they piled into stocks right up until stocks collapsed just like investors are now piling into LTT. No one in 1967 expected that inflation would reach 15%/yr. in 15 years. It seemed preposterous at the time and yet it happened. Personally I recommend having LT and IT/ST bonds, something like TBM or a barbell approach plus possibly TIPS depending on circumstances. Diversification balances risk rather than putting all eggs in the low inflation basket of LTT but that is a my personal decision and I don't think it applies to everyone.

I have in other bond posts argued against taking on excessive duration risk in fixed income especially when rates are historically low. You don't know if for when you will need money unexpectedly in the future. If you have to sell 30 year Treasuries that yield 2.25% during an episode when inflation is 3.5% which has happened frequently in the long term past, good luck. Furthermore some very knowledgeable, brilliant and experienced investors, Buffett and Bernstein to name a couple, strongly suggest exposure to short term Treasuries. They have been around long enough to have witnessed both sides of the inflation coin and also have observed over and over that whatever the herd is currently rushing after in the market, like LTT now, may turn out to be a rubber carrot in the end. Grok 87 also makes the valid point that TIPS now offer protection from unexpected inflation free of charge relative to LTT yields. In sum I do not believe that there is one approach such as LTT that all bond holders must follow regardless of their circumstances.

Garland Whizzer
I also remember it quite well. This is exactly why I would never put a significant portion of my bond allocation in LT Treasuries. If you really want to go LT, I think Grok87 is correct, do so with TIPS. However, I just don’t see a big enough difference in IT and LT to justify even that.

To some extent this is a lot like the discussions on factors. Believers use back testing and conclude they have the optimal portfolio solution. My personal opinion is that there is far too much uncertainty in the real world to make this claim. You can only know optimal in hindsight. These believers might be right but.... they could also be wrong. I prefer a middle ground that I’m perfectly content to admit will likely never be optimal in order to reduce the risk of the events like a return of 1970/80’s style inflation.

For those that go in this direction, good luck, I hope you don’t roll snake eyes sometime in the next 30 years.

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Re: First 20% of bonds in long-term Treasuries

Post by LadyGeek » Thu Aug 08, 2019 6:25 pm

I removed an off-topic post and several replies. As a reminder, see: General Etiquette
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Re: First 20% of bonds in long-term Treasuries

Post by HEDGEFUNDIE » Thu Aug 08, 2019 6:35 pm

columbia wrote:
Thu Aug 08, 2019 5:37 pm
HEDGEFUNDIE wrote:
Thu Aug 08, 2019 5:30 pm
columbia wrote:
Thu Aug 08, 2019 5:20 pm
Presumably created to sell to institutions, pension funds, etc.
Vanguard has three flavors of the Extended Duration Treasury fund:

VEDIX, min purchase $100M
VEDTX, min purchase $5M
EDV, no min purchase

Guess which fund class has the most assets?
No idea what the first two are.

I thought we were talking about the 70s. 😀
The point is, it's a myth that Long Term Treasuries are only, or primarily intended for institutional investors.

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Re: First 20% of bonds in long-term Treasuries

Post by HEDGEFUNDIE » Thu Aug 08, 2019 6:38 pm

9-5 Suited wrote:
Thu Aug 08, 2019 5:35 pm
This won’t be the most intellectual thing I’ll ever post, but it’s just hard to believe that I’ll reap much meaningful financial gain from locking into a bunch of 2% nominal long term treasuries as a 33 year old.
You could have said the same thing in January when long term rates were at 3%. If you had invested in EDV back then you'd be up over 20% today. Not to mention slept more soundly during all of this stock market turbulence because your wisely chosen bond position cushioned your short term paper losses as they happened.

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Re: First 20% of bonds in long-term Treasuries

Post by Bluce » Thu Aug 08, 2019 7:41 pm

HEDGEFUNDIE wrote:
Thu Aug 08, 2019 6:38 pm
9-5 Suited wrote:
Thu Aug 08, 2019 5:35 pm
This won’t be the most intellectual thing I’ll ever post, but it’s just hard to believe that I’ll reap much meaningful financial gain from locking into a bunch of 2% nominal long term treasuries as a 33 year old.
You could have said the same thing in January when long term rates were at 3%. If you had invested in EDV back then you'd be up over 20% today. Not to mention slept more soundly during all of this stock market turbulence because your wisely chosen bond position cushioned your short term paper losses as they happened.
Watching this thread and some of the comments, does anybody out there -- individuals or institutions -- buy individual 30 yr. Treasuries and expect to hold them to maturity? (especially at yields in recent years). I wouldn't think so.

I have a couple of Treasury ETFs (20 yr. max) but they are just to buffer my stock holdings.

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Re: First 20% of bonds in long-term Treasuries

Post by 9-5 Suited » Thu Aug 08, 2019 8:11 pm

HEDGEFUNDIE wrote:
Thu Aug 08, 2019 6:38 pm
9-5 Suited wrote:
Thu Aug 08, 2019 5:35 pm
This won’t be the most intellectual thing I’ll ever post, but it’s just hard to believe that I’ll reap much meaningful financial gain from locking into a bunch of 2% nominal long term treasuries as a 33 year old.
You could have said the same thing in January when long term rates were at 3%. If you had invested in EDV back then you'd be up over 20% today. Not to mention slept more soundly during all of this stock market turbulence because your wisely chosen bond position cushioned your short term paper losses as they happened.
Maybe I’m being too narrow on this topic, but it seems like inflation risk and rising interest rate risk are being treated too trivially here. Yes in this short-term period LTT were great (ITT were good also). But wouldn’t you worry that going too long in bonds could absolutely wreck the value of your investment decades from now? The historical rate trend for the last few decades looks like “\” but what if the next few decades look like “/“?

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Re: First 20% of bonds in long-term Treasuries

Post by HEDGEFUNDIE » Thu Aug 08, 2019 8:24 pm

9-5 Suited wrote:
Thu Aug 08, 2019 8:11 pm
HEDGEFUNDIE wrote:
Thu Aug 08, 2019 6:38 pm
9-5 Suited wrote:
Thu Aug 08, 2019 5:35 pm
This won’t be the most intellectual thing I’ll ever post, but it’s just hard to believe that I’ll reap much meaningful financial gain from locking into a bunch of 2% nominal long term treasuries as a 33 year old.
You could have said the same thing in January when long term rates were at 3%. If you had invested in EDV back then you'd be up over 20% today. Not to mention slept more soundly during all of this stock market turbulence because your wisely chosen bond position cushioned your short term paper losses as they happened.
Maybe I’m being too narrow on this topic, but it seems like inflation risk and rising interest rate risk are being treated too trivially here. Yes in this short-term period LTT were great (ITT were good also). But wouldn’t you worry that going too long in bonds could absolutely wreck the value of your investment decades from now? The historical rate trend for the last few decades looks like “\” but what if the next few decades look like “/“?
No, I don't have that worry.

viewtopic.php?f=10&t=278700

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Re: First 20% of bonds in long-term Treasuries

Post by willthrill81 » Thu Aug 08, 2019 8:25 pm

9-5 Suited wrote:
Thu Aug 08, 2019 8:11 pm
HEDGEFUNDIE wrote:
Thu Aug 08, 2019 6:38 pm
9-5 Suited wrote:
Thu Aug 08, 2019 5:35 pm
This won’t be the most intellectual thing I’ll ever post, but it’s just hard to believe that I’ll reap much meaningful financial gain from locking into a bunch of 2% nominal long term treasuries as a 33 year old.
You could have said the same thing in January when long term rates were at 3%. If you had invested in EDV back then you'd be up over 20% today. Not to mention slept more soundly during all of this stock market turbulence because your wisely chosen bond position cushioned your short term paper losses as they happened.
Maybe I’m being too narrow on this topic, but it seems like inflation risk and rising interest rate risk are being treated too trivially here. Yes in this short-term period LTT were great (ITT were good also). But wouldn’t you worry that going too long in bonds could absolutely wreck the value of your investment decades from now? The historical rate trend for the last few decades looks like “\” but what if the next few decades look like “/“?
I agree that LTT are greatly exposed to inflation risk, which is why I would prefer long-term TIPS. But interest rate risk should not be a concern for a long-term investor. Interest rate risk swings in both directions, as I reminded everyone here over a year ago when everyone thought that interest rates 'had nowhere to go but up'.

The real threat to bonds is unexpected inflation. And that's where TIPS shine.
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Re: First 20% of bonds in long-term Treasuries

Post by 9-5 Suited » Thu Aug 08, 2019 9:05 pm

willthrill81 wrote:
Thu Aug 08, 2019 8:25 pm
9-5 Suited wrote:
Thu Aug 08, 2019 8:11 pm
HEDGEFUNDIE wrote:
Thu Aug 08, 2019 6:38 pm
9-5 Suited wrote:
Thu Aug 08, 2019 5:35 pm
This won’t be the most intellectual thing I’ll ever post, but it’s just hard to believe that I’ll reap much meaningful financial gain from locking into a bunch of 2% nominal long term treasuries as a 33 year old.
You could have said the same thing in January when long term rates were at 3%. If you had invested in EDV back then you'd be up over 20% today. Not to mention slept more soundly during all of this stock market turbulence because your wisely chosen bond position cushioned your short term paper losses as they happened.
Maybe I’m being too narrow on this topic, but it seems like inflation risk and rising interest rate risk are being treated too trivially here. Yes in this short-term period LTT were great (ITT were good also). But wouldn’t you worry that going too long in bonds could absolutely wreck the value of your investment decades from now? The historical rate trend for the last few decades looks like “\” but what if the next few decades look like “/“?
I agree that LTT are greatly exposed to inflation risk, which is why I would prefer long-term TIPS. But interest rate risk should not be a concern for a long-term investor. Interest rate risk swings in both directions, as I reminded everyone here over a year ago when everyone thought that interest rates 'had nowhere to go but up'.

The real threat to bonds is unexpected inflation. And that's where TIPS shine.
True enough to the extent you are able to hold to maturity or close to it. A lot can happen between now and the maturity of a long term bond in one’s life, which is where interest rate risk remains a valid concern. Not trying to be chicken little about it, just saying it can’t be universally dismissed because someone is a “long term investor”.

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Re: First 20% of bonds in long-term Treasuries

Post by willthrill81 » Thu Aug 08, 2019 9:42 pm

9-5 Suited wrote:
Thu Aug 08, 2019 9:05 pm
willthrill81 wrote:
Thu Aug 08, 2019 8:25 pm
9-5 Suited wrote:
Thu Aug 08, 2019 8:11 pm
HEDGEFUNDIE wrote:
Thu Aug 08, 2019 6:38 pm
9-5 Suited wrote:
Thu Aug 08, 2019 5:35 pm
This won’t be the most intellectual thing I’ll ever post, but it’s just hard to believe that I’ll reap much meaningful financial gain from locking into a bunch of 2% nominal long term treasuries as a 33 year old.
You could have said the same thing in January when long term rates were at 3%. If you had invested in EDV back then you'd be up over 20% today. Not to mention slept more soundly during all of this stock market turbulence because your wisely chosen bond position cushioned your short term paper losses as they happened.
Maybe I’m being too narrow on this topic, but it seems like inflation risk and rising interest rate risk are being treated too trivially here. Yes in this short-term period LTT were great (ITT were good also). But wouldn’t you worry that going too long in bonds could absolutely wreck the value of your investment decades from now? The historical rate trend for the last few decades looks like “\” but what if the next few decades look like “/“?
I agree that LTT are greatly exposed to inflation risk, which is why I would prefer long-term TIPS. But interest rate risk should not be a concern for a long-term investor. Interest rate risk swings in both directions, as I reminded everyone here over a year ago when everyone thought that interest rates 'had nowhere to go but up'.

The real threat to bonds is unexpected inflation. And that's where TIPS shine.
True enough to the extent you are able to hold to maturity or close to it. A lot can happen between now and the maturity of a long term bond in one’s life, which is where interest rate risk remains a valid concern. Not trying to be chicken little about it, just saying it can’t be universally dismissed because someone is a “long term investor”.
Well, it is called interest rate risk for good reason. But it is a risk that the long-term investor is compensated for.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: First 20% of bonds in long-term Treasurie

Post by HawkeyePierce » Thu Aug 08, 2019 9:50 pm

zonto wrote:
Thu Aug 08, 2019 5:38 pm
HawkeyePierce wrote:
Thu Aug 08, 2019 5:28 pm
. . . Is anyone aware of any good papers or books on this topic?
Vanguard published in June 2019 a white paper titled Commodities and short-term TIPS: how each combats unexpected inflation.

I believe what you are looking for is on page 3, which shows the correlation of various asset classes with both expected and unexpected inflation. If you want to effectively protect against unexpected inflation, looks like the best options were commodities and short-term TIPS, in that order, Vanguard argues, due to the higher beta of commodities (see Figure 3). Cash was the best protection against expected inflation. Barclays aggregate bond index and global bonds offered horrible protection against unexpected inflation, so I don't really place much weight in the arguments from folks who poo-poo long-term Treasuries for inflation risk concerns but then themselves use a total bond market index.
I just finished reading that paper. Figure 7 shows the returns of various asset classes since 1900, a period which includes some severe bouts of inflation:

Image

As Vanguard states in that paper, equities tend to hold up against inflation in the long run.

In that light, I propose the following: A young accumulator can take advantage of the diversification effects of long term nominal Treasuries while accepting the risk that *in isolation* that asset class will do poorly under a regime of high unexpected inflation given this person’s three hedges against such inflation in the form of equities, human capital and possibly a fixed mortgage. Their investing time frame is long enough that they can wait for equities to catch up to unexpected inflation.

Yes, the portfolio would suffer in the short term but perhaps not the long term. In the event of a job loss this could hurt such a person’s ability to draw on the portfolio for living expenses but a young accumulator a) probably doesn’t have much to draw on anyways and b) would ideally have a cash emergency fund as their first line of defense.

Moving part of that emergency fund into I bonds would provide short term protection.

Ultimately this is just a restatement if vineviz’s thesis framed by age instead of asset allocation. I’m also trying to look beyond a single asset class or even the portfolio. I want to understand how inflation affects a person in total, not just the numbers on their brokerage statements.

What I gather from this is that perhaps the bond allocation after the first 20% shouldn’t go to TBM but instead TIPS.

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Re: First 20% of bonds in long-term Treasuries

Post by samsdad » Thu Aug 08, 2019 10:07 pm

Vineviz,

Perhaps you missed it upthread, but I was hoping to get your take on the idea posed there that there’s a (practical) ceiling on future long-term treasury returns even if interest rates drop (as opposed to the common worry that they’ll go up).

Your thoughts?

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Re: First 20% of bonds in long-term Treasuries

Post by vineviz » Thu Aug 08, 2019 10:44 pm

samsdad wrote:
Thu Aug 08, 2019 10:07 pm
Perhaps you missed it upthread, but I was hoping to get your take on the idea posed there that there’s a (practical) ceiling on future long-term treasury returns even if interest rates drop (as opposed to the common worry that they’ll go up).
If the idea is that bond returns over the next 30 years are likely to be lower than bond returns were over the past 30 year, I see nothing to disagree with there. 30 year Treasury bonds were yielding over 8% in 1989 versus around 2.5% now, so it certainly should follow that we should expect lower returns going forward than we see looking back.

That doesn't impact that calculus that long-term bonds are expected to have higher returns than intermediate-term bonds, or that an investor immunizes their bond portfolio against interest rate risk by matching bond duration as closely as possible to their investment horizon.
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Re: First 20% of bonds in long-term Treasuries

Post by Ferdinand2014 » Fri Aug 09, 2019 7:08 am

vineviz wrote:
Wed Aug 07, 2019 7:24 pm
From my observations, many Bogleheads do a reasonably good job of constructing the equity portion of their portfolio. A simple globally diversified mix of US and non-US total stock market funds accomplishes the majority of diversification benefits available to an equity investor.

However, it seems to me that precious few of these same Bogleheads are allocating their fixed income allocations in a manner congruent with modern financial knowledge. This is especially true for young accumulators, who seem just as prone as retirees to rely on milquetoast short- and intermediate-term bond funds when they should almost certainly be favoring long-term bonds instead.

Long-term bond funds not only offer superior diversification, but they also minimize interest rate risk for investors with long-term investment horizons (including virtually all investors who are currently accumulating retirement savings).

Leaving aside any question of what the stock/bond allocation should be for an investor, I propose a simple rule of thumb that gets the bond allocation in the right ballpark. This rule is designed specifically for retirement portfolios that are in their accumulation phase (i.e. pre-retirement), and while it may not be strictly optimal in every regard it is easy to remember and to codify into an IPS:

The first 20% of a portfolio allocated to bonds should be allocated to long-term US Treasury bonds.

If your portfolio is 90% stocks, then the other 10% should be long-term Treasuries.

If your portfolio is 80% stocks, then the other 20% should be long-term Treasuries.

If your portfolio is 70% stocks, then 20% should be long-term Treasuries and 10% in intermediate bonds (e.g. total bond market or intermediate-term Treasuries).

If your portfolio is 60% stocks, then 20% should be long-term Treasuries and 20% in intermediate bonds (e.g. total bond market or intermediate-term Treasuries).

And so on.


There are a number of low-cost ETFs and mutual funds that hold long-term Treasuries, including:
• SPDR Portfolio Long Term Treasury ETF (SPTL)
• Vanguard Long-Term Treasury ETF (VGLT)
• iShares 20+ Year Treasury Bond ETF (TLT)
• Vanguard Extended Duration Treasury ETF (EDV)
• Fidelity Long-Term Treasury Bond Index (FNBGX)
• Vanguard Long-Term Treasury Index (VLGSX)
• T. Rowe Price US Treasury Long-Term Index (PRUUX)

I know that few 401k and 403b plans include a decent long-term Treasury fund, and I would encourage people in those plans to simply choose a low-cost long-term or intermediate-term bond fund instead.
Your opinion of index fund versus direct purchase of LTT bond through auction?
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Re: First 20% of bonds in long-term Treasuries

Post by vineviz » Fri Aug 09, 2019 7:26 am

Ferdinand2014 wrote:
Fri Aug 09, 2019 7:08 am
vineviz wrote:
Wed Aug 07, 2019 7:24 pm
Leaving aside any question of what the stock/bond allocation should be for an investor, I propose a simple rule of thumb that gets the bond allocation in the right ballpark. This rule is designed specifically for retirement portfolios that are in their accumulation phase (i.e. pre-retirement), and while it may not be strictly optimal in every regard it is easy to remember and to codify into an IPS:

The first 20% of a portfolio allocated to bonds should be allocated to long-term US Treasury bonds.

Your opinion of index fund versus direct purchase of LTT bond through auction?
I think either is fine, and which is preferable probably depends on the investor more than anything else.

I'd probably suggest a bond fund for younger accumulators, primarily for the liquidity and flexibility. Someone with 20% or less in bonds, as you might be in your 30s or 40s, will probably prefer nominal bonds over TIPS and is likely to experience a stock market that will trigger a rebalance at some point. A low-cost bond fund like VGLT or EDV seems easier to manage in such a case.

Once an investor gets within 15 years of retirement (say, around age 50 or 55) they are probably in a better situation to project their retirement spending goals AND are likely to start gliding up their bond allocation, both of which put them in a position to start competently building a ladder of individual bonds. Additionally they are approaching a point, in general, in which the risk of unexpected inflation may start to grow so a transition from nominal bonds to TIPS might be warranted.

Although a bond fund might still be a reasonable choice, my view is that if such an investor is comfortable purchasing & owning individual bonds (either at auction or on the secondary market) then at least starting to build a ladder of individual bonds would be a smart move.
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Re: First 20% of bonds in long-term Treasuries

Post by welderwannabe » Fri Aug 09, 2019 7:29 am

Ferdinand2014 wrote:
Fri Aug 09, 2019 7:08 am
Your opinion of index fund versus direct purchase of LTT bond through auction?
Buy individual treasury bonds at auction. Its easy to do. Why pay a fee?
I am not an investment professional, but I did stay at a Holiday Inn Express last night.

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Re: First 20% of bonds in long-term Treasuries

Post by Day9 » Fri Aug 09, 2019 12:22 pm

Is this line of thinking "Planning for the last war"?

They say "generals always plan for the last war" which in this context means investors protect themselves from the last crises but leave themselves vulnerable to the next crisis. For example, in the 2000 tech bubble collapse, high-flying tech stocks were decimated but other risky assets were relatively okay. So some people took away the lesson to diversify among risky assets and not hold any safe bonds, but then lost a lot of money in 2008 when all risky assets fell together. (Some people misinterpret Swenson as having done this, but he did recommend an allocation to safe bonds)

In 2008 a large allocation to long term treasuries would have prevented large portfolio losses. In this thread and a few other popular ones people are suggesting a large allocation to long term treasuries. Is this "planning for the last war"?
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Re: First 20% of bonds in long-term Treasuries

Post by vineviz » Fri Aug 09, 2019 12:39 pm

Day9 wrote:
Fri Aug 09, 2019 12:22 pm
In 2008 a large allocation to long term treasuries would have prevented large portfolio losses. In this thread and a few other popular ones people are suggesting a large allocation to long term treasuries. Is this "planning for the last war"?
No, this is more akin to general readiness.

The diversification benefits provided by long-term bonds are as close to universal as it gets in investing.
"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: First 20% of bonds in long-term Treasuries

Post by willthrill81 » Fri Aug 09, 2019 12:40 pm

Day9 wrote:
Fri Aug 09, 2019 12:22 pm
Is this line of thinking "Planning for the last war"?

They say "generals always plan for the last war" which in this context means investors protect themselves from the last crises but leave themselves vulnerable to the next crisis. For example, in the 2000 tech bubble collapse, high-flying tech stocks were decimated but other risky assets were relatively okay. So some people took away the lesson to diversify among risky assets and not hold any safe bonds, but then lost a lot of money in 2008 when all risky assets fell together. (Some people misinterpret Swenson as having done this, but he did recommend an allocation to safe bonds)

In 2008 a large allocation to long term treasuries would have prevented large portfolio losses. In this thread and a few other popular ones people are suggesting a large allocation to long term treasuries. Is this "planning for the last war"?
I don't think so. Unless the Treasury renigs on their guarantee, it's hard for me to imagine a realistic scenario where Treasuries would falter apart from significant unexpected inflation. Due to this latter issue, I would prefer long-term TIPS.

If Treasuries falter, so would the entire bond market, probably the stock market as well, and very possibly global stocks and bonds. These things really are that inter-connected.
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Re: First 20% of bonds in long-term Treasuries

Post by Hector » Fri Aug 09, 2019 3:47 pm

30 year treasury yield is ~2.25% these days.
By allocating at least 20% in LTT, aren't we betting on yields to go lower? If not, how much difference is it going to make by holding long vs intermediate vs short term treasuries for portfolios with 70%+ stock?

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Re: First 20% of bonds in long-term Treasuries

Post by willthrill81 » Fri Aug 09, 2019 3:53 pm

Hector wrote:
Fri Aug 09, 2019 3:47 pm
30 year treasury yield is ~2.25% these days.
By allocating at least 20% in LTT, aren't we betting on yields to go lower?
No. Over the long-term, one should expect LTT to outperform shorter-term bonds due to interest rate risk. And even over a period of rising rates, LTT may still outperform. For instance, the effective Fed funds rate in January of 2009 was .15%, and as of June, 2019, was 2.38%. Over that same period, STT returned 1.28%, while LTT returned 4.82%.
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Re: First 20% of bonds in long-term Treasuries

Post by MotoTrojan » Fri Aug 09, 2019 5:32 pm

welderwannabe wrote:
Fri Aug 09, 2019 7:29 am
Ferdinand2014 wrote:
Fri Aug 09, 2019 7:08 am
Your opinion of index fund versus direct purchase of LTT bond through auction?
Buy individual treasury bonds at auction. Its easy to do. Why pay a fee?
Until you have enough $ to setup a ladder you will have a duration which is not constant. Also while saving on the ER, you are losing on reinvesting proceeds if your payments aren't large enough to buy new bonds.

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Re: First 20% of bonds in long-term Treasuries

Post by MotoTrojan » Fri Aug 09, 2019 5:34 pm

willthrill81 wrote:
Fri Aug 09, 2019 3:53 pm
Hector wrote:
Fri Aug 09, 2019 3:47 pm
30 year treasury yield is ~2.25% these days.
By allocating at least 20% in LTT, aren't we betting on yields to go lower?
No. Over the long-term, one should expect LTT to outperform shorter-term bonds due to interest rate risk. And even over a period of rising rates, LTT may still outperform. For instance, the effective Fed funds rate in January of 2009 was .15%, and as of June, 2019, was 2.38%. Over that same period, STT returned 1.28%, while LTT returned 4.82%.
Just because the Fed funds rate was rising doesn't mean long-bond rates were.

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Re: First 20% of bonds in long-term Treasuries

Post by welderwannabe » Fri Aug 09, 2019 6:00 pm

MotoTrojan wrote:
Fri Aug 09, 2019 5:32 pm
Until you have enough $ to setup a ladder you will have a duration which is not constant. Also while saving on the ER, you are losing on reinvesting proceeds if your payments aren't large enough to buy new bonds.
I do both. I do long term treasuries individually, and I invest the coupons in Vanguard's long term treasuries. lso, only takes $5K to setup a 5 year ladder giving you a duration of 27 years, pretty much the same as most long term treasury funds. Not really a complex approach.

You wanna pay the .07% ER at Vanguard go ahead...or I supposed you can go to Fidelity and pay only .03%.
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Re: First 20% of bonds in long-term Treasuries

Post by MotoTrojan » Fri Aug 09, 2019 6:10 pm

welderwannabe wrote:
Fri Aug 09, 2019 6:00 pm
MotoTrojan wrote:
Fri Aug 09, 2019 5:32 pm
Until you have enough $ to setup a ladder you will have a duration which is not constant. Also while saving on the ER, you are losing on reinvesting proceeds if your payments aren't large enough to buy new bonds.
I do both. I do long term treasuries individually, and I invest the coupons in Vanguard's long term treasuries. lso, only takes $5K to setup a 5 year ladder giving you a duration of 27 years, pretty much the same as most long term treasury funds. Not really a complex approach.

You wanna pay the .07% ER at Vanguard go ahead...or I supposed you can go to Fidelity and pay only .03%.
I'm sorry, how is the duration of 27 years (assuming 30 year bonds?) constant? It will progressively move towards 15, assuming you add a new bond every year, no? A 5 year ladder implies every 5 years it is replenished, which this is not, no? Or are you selling after 5 years and reinvesting to maintain your duration exposure?

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Re: First 20% of bonds in long-term Treasuries

Post by Hector » Fri Aug 09, 2019 6:14 pm

willthrill81 wrote:
Fri Aug 09, 2019 3:53 pm
Hector wrote:
Fri Aug 09, 2019 3:47 pm
30 year treasury yield is ~2.25% these days.
By allocating at least 20% in LTT, aren't we betting on yields to go lower?
No. Over the long-term, one should expect LTT to outperform shorter-term bonds due to interest rate risk. And even over a period of rising rates, LTT may still outperform. For instance, the effective Fed funds rate in January of 2009 was .15%, and as of June, 2019, was 2.38%. Over that same period, STT returned 1.28%, while LTT returned 4.82%.
It doesn't look like LTT rate were increasing for the period that you mentioned.
Image

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Re: First 20% of bonds in long-term Treasuries

Post by HEDGEFUNDIE » Fri Aug 09, 2019 6:59 pm

Hector wrote:
Fri Aug 09, 2019 6:14 pm
willthrill81 wrote:
Fri Aug 09, 2019 3:53 pm
Hector wrote:
Fri Aug 09, 2019 3:47 pm
30 year treasury yield is ~2.25% these days.
By allocating at least 20% in LTT, aren't we betting on yields to go lower?
No. Over the long-term, one should expect LTT to outperform shorter-term bonds due to interest rate risk. And even over a period of rising rates, LTT may still outperform. For instance, the effective Fed funds rate in January of 2009 was .15%, and as of June, 2019, was 2.38%. Over that same period, STT returned 1.28%, while LTT returned 4.82%.
It doesn't look like LTT rate were increasing for the period that you mentioned.
Image
Proof that the Fed raising rates has very little to do with how LTT rates perform.

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Re: First 20% of bonds in long-term Treasuries

Post by garlandwhizzer » Fri Aug 09, 2019 8:11 pm

Most believe that long term bond yields are not directly influenced by FED rate changes but rather by long term expectations for inflation and economic growth. Current 30 year Treasury and LT DM bond yields suggest that the global bond market fears deflation more than inflation and economic stagnation more than runaway growth. Perhaps it suspects that we may be on the road to Japan. Japan has has been struggling unsuccessfully with deflation for 30 years. The Nikkei Index was a lot higher 30 years ago than it is now. The bond market does not believe that any DM economy, even ours which is the best house in a so-so neighborhood, is due for robust inflation or robust economic growth in the foreseeable future. There is a sentiment gulf between the global bond market--lowest global yields in history, inversion of yield curve in US, both usually associated with current of near term trouble ahead for the economy--and global equity market sentiment. Both VTI and VT (global equity index) are within a few percentage points of their all time highs. They digest bad trade war news, geopolitical problems, Brexit, and the global economic slowdown without a burp. The equity market acts like the bull party in the US is just going to keep running. The bond market, however, is at the same time rushing to buy a nominal 2.25% guaranteed Treasury yield for 30 years which about 1 % lower than the long term average of real GDP growth in the US economy. Not to mention the fact that the S&P 500 dividend is almost the same at about 2%. There are some structural reasons for this dichotomy in sentiment--aggressive central banks trying to drive money from fixed income into risk assets, depreciate their currencies, and stimulate their economic growth. There is also a massive glut of savings in the developed world, highly concentrated in the investing class and most of it in older hands which have a natural fondness for low risk assets like bonds. There are also legions of foreign investors fleeing from 15 trillion dollars of negative yielding bonds to US Treasuries. So historically low yields and an inverted yield curves may not be telling us that a recession is in our foreseeable future. On the other hand historically when stock market sentiment and bond market sentiment differ so markedly about the economic future, it is usually the bond market that turns out to be right. Time will tell.

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Re: First 20% of bonds in long-term Treasuries

Post by willthrill81 » Fri Aug 09, 2019 10:26 pm

HEDGEFUNDIE wrote:
Fri Aug 09, 2019 6:59 pm
Hector wrote:
Fri Aug 09, 2019 6:14 pm
willthrill81 wrote:
Fri Aug 09, 2019 3:53 pm
Hector wrote:
Fri Aug 09, 2019 3:47 pm
30 year treasury yield is ~2.25% these days.
By allocating at least 20% in LTT, aren't we betting on yields to go lower?
No. Over the long-term, one should expect LTT to outperform shorter-term bonds due to interest rate risk. And even over a period of rising rates, LTT may still outperform. For instance, the effective Fed funds rate in January of 2009 was .15%, and as of June, 2019, was 2.38%. Over that same period, STT returned 1.28%, while LTT returned 4.82%.
It doesn't look like LTT rate were increasing for the period that you mentioned.
Image
Proof that the Fed raising rates has very little to do with how LTT rates perform.
Precisely.
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Re: First 20% of bonds in long-term Treasuries

Post by welderwannabe » Sat Aug 10, 2019 7:04 am

MotoTrojan wrote:
Fri Aug 09, 2019 6:10 pm
I'm sorry, how is the duration of 27 years (assuming 30 year bonds?) constant? It will progressively move towards 15, assuming you add a new bond every year, no? A 5 year ladder implies every 5 years it is replenished, which this is not, no? Or are you selling after 5 years and reinvesting to maintain your duration exposure?
You do the same thing the mutual funds do. You sell at 5 years and buy a new bond. In an environment where the yield curve is a little more 'normal' there is some arbitrage to be had with this approach too. Assuming steady interest rates, a 30 year bond with 25 years remaining should have a higher coupon than an equivalent 25 year new issue. You therefore can sell the 5 year old 30-year bond (with 25 years remaining) at a slight premium as compared to a brand new 25 year issue.
I am not an investment professional, but I did stay at a Holiday Inn Express last night.

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Re: First 20% of bonds in long-term Treasuries

Post by rlangford » Sat Aug 10, 2019 7:52 am

willthrill81 wrote:
Thu Aug 08, 2019 8:25 pm
9-5 Suited wrote:
Thu Aug 08, 2019 8:11 pm
HEDGEFUNDIE wrote:
Thu Aug 08, 2019 6:38 pm
9-5 Suited wrote:
Thu Aug 08, 2019 5:35 pm
This won’t be the most intellectual thing I’ll ever post, but it’s just hard to believe that I’ll reap much meaningful financial gain from locking into a bunch of 2% nominal long term treasuries as a 33 year old.
You could have said the same thing in January when long term rates were at 3%. If you had invested in EDV back then you'd be up over 20% today. Not to mention slept more soundly during all of this stock market turbulence because your wisely chosen bond position cushioned your short term paper losses as they happened.
Maybe I’m being too narrow on this topic, but it seems like inflation risk and rising interest rate risk are being treated too trivially here. Yes in this short-term period LTT were great (ITT were good also). But wouldn’t you worry that going too long in bonds could absolutely wreck the value of your investment decades from now? The historical rate trend for the last few decades looks like “\” but what if the next few decades look like “/“?
I agree that LTT are greatly exposed to inflation risk, which is why I would prefer long-term TIPS. But interest rate risk should not be a concern for a long-term investor. Interest rate risk swings in both directions, as I reminded everyone here over a year ago when everyone thought that interest rates 'had nowhere to go but up'.

The real threat to bonds is unexpected inflation. And that's where TIPS shine.
I agree with you. Right now long term TIPS are priced with a breakeven inflation rate of 1.6% compared to LTT. They are currently better bet than nominal Long Term Term treasuries IMO.

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Re: First 20% of bonds in long-term Treasuries

Post by lazyday » Sat Aug 10, 2019 9:14 am

Day9 wrote:
Fri Aug 09, 2019 12:22 pm
....In 2008 a large allocation to long term treasuries would have prevented large portfolio losses. In this thread and a few other popular ones people are suggesting a large allocation to long term treasuries. Is this "planning for the last war"?
It’s worth thinking about.

Here’s another way to frame it: The better an investment feels, and looks historically, the worse it’s likely to perform in the future.

In 1999, people had outrageous expectations for stock returns, because they were accustomed to such high returns. A backtest would have shown that we should own a high proportion of stocks in the portfolio.

Today, many people think they should own only US equities. Lots of posts show medium or long term backtests showing the superiority of US stocks. Yet they are now much more expensive than ex-US.

After a multi decade bond bull, long term Treasuries look fantastic in backtests. But at today’s rates they offer less upside and more downside. It seems much more likely that long rates will rise by 750 to 1500 bps than fall that much.

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Re: First 20% of bonds in long-term Treasuries

Post by willthrill81 » Sat Aug 10, 2019 10:04 am

lazyday wrote:
Sat Aug 10, 2019 9:14 am
After a multi decade bond bull, long term Treasuries look fantastic in backtests. But at today’s rates they offer less upside and more downside. It seems much more likely that long rates will rise by 750 to 1500 bps than fall that much.
That was what everyone has been saying since 2012, when the Fed funds rate was .15%. Despite that rate increasing over 2% since then, LTT have far outpaced shorter-term bonds. Bond yields do not follow the Fed funds rate in lock step, and predicting which direction interest rates will go is far more difficult than many believe.
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Re: First 20% of bonds in long-term Treasuries

Post by jeffyscott » Sat Aug 10, 2019 10:18 am

9-5 Suited wrote:
Thu Aug 08, 2019 5:35 pm
This won’t be the most intellectual thing I’ll ever post, but it’s just hard to believe that I’ll reap much meaningful financial gain from locking into a bunch of 2% nominal long term treasuries as a 33 year old.

Without using a backtest (because of the specific bond regime it will cover) what is the actual expected forward looking range of ending portfolio values for 20% ITT vs. 20% LTT? Maybe it’s a lot bigger difference than I’m giving credit?

And this isn’t a comment on the diversification of risk aspect, which I totally agree with.
My kids are around that age and if I were suggesting long term fixed income investments for them, I think I would first suggest maxing out I-bonds at 0.5% real, EE bonds at 3.5% (but maybe wait until they are 20 years from retirement on that one, depending on expected tax brackets), and buy long term TIPS, rather than long term nominals at 2.25%.
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Re: First 20% of bonds in long-term Treasuries

Post by willthrill81 » Sat Aug 10, 2019 10:24 am

jeffyscott wrote:
Sat Aug 10, 2019 10:18 am
9-5 Suited wrote:
Thu Aug 08, 2019 5:35 pm
This won’t be the most intellectual thing I’ll ever post, but it’s just hard to believe that I’ll reap much meaningful financial gain from locking into a bunch of 2% nominal long term treasuries as a 33 year old.

Without using a backtest (because of the specific bond regime it will cover) what is the actual expected forward looking range of ending portfolio values for 20% ITT vs. 20% LTT? Maybe it’s a lot bigger difference than I’m giving credit?

And this isn’t a comment on the diversification of risk aspect, which I totally agree with.
My kids are around that age and if I were suggesting long term fixed income investments for them, I think I would first suggest maxing out I-bonds at 0.5% real, EE bonds at 3.5% (but maybe wait until they are 20 years from retirement on that one, depending on expected tax brackets), and buy long term TIPS, rather than long term nominals at 2.25%.
The almost complete lack of liquidity of EE bonds (making them worthless for rebalancing), the required 20 year holding period, and their significant inflation risk makes them a non-starter IMHO. In comparison, TIPS and I Bonds appear to be a slam dunk. The 10 year break-even inflation rate is 1.6%, and the 30 year is 1.8%. There seems to be much more upside potential than downside risk at those levels to me.
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Re: First 20% of bonds in long-term Treasuries

Post by lazyday » Sat Aug 10, 2019 10:26 am

willthrill81 wrote:
Sat Aug 10, 2019 10:04 am
, and predicting which direction interest rates will go is far more difficult than many believe.
I’ll predict that in the next 30 years, 30yr T bond rates won’t go below -5% but they might go above 9.5%.

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Re: First 20% of bonds in long-term Treasuries

Post by stlutz » Sat Aug 10, 2019 10:55 am

To an extent, both the preferences for short-term bonds and long-term bonds are built on fighting a prior war. Taking a variety of 80/20 portfolios and which "won" over 20 year periods:

1941-1960: STT by .17%/yr.
1951-1970: STT by .42%/yr.
1961-1980: STT by .54%/yr.
1971-1990: STT by .09%/yr.
1981-2000: LTT by .54%/yr.
1991-2010: LTT by .67%/yr.
2001-2018: LTT by .87%/yr.

Because of two megatrends (one toward higher inflation and one toward lower inflation), we've had long periods where one option was clearly superior. On the other hand, it's hard to say that it made that much of a difference either way. These differences are no larger than deciding between 30% or 50% international, for example.

What is normal with regard to interest rates has changed in other ways through history. For example in the 19th century it was "normal" for the yield curve to be inverted. Nowadays people are looking at the prevalence of negative rates worldwide and are wondering whether it will continue to be "normal" to expect that lower-risk capital should expect a positive return. We may be entering a world where you have to pay people to keep your money safe for you. But of course given the amount of talk about such a scenario, there is a good chance that will be wrong.

And that is really the logic behind holding a total market bond fund. It's hard to figure out what the "right" portfolio duration really is. There is the "matching your investment horizon" approach, there is the "maximizing the Sharpe Ratio of your bonds" approach, as well as others that are perfectly legitimate. A total bond fund is never going to be the optimal choice in any environment; it's unlikely to be the completely wrong choice.

All of that said, I actually lean toward vineviz's suggestion in the OP. If one is an early-stage accumulator who is holding a relatively small amount of bonds, then bonds should be invested in with a long-term horizon just as stocks are. This investor is not buying all of their bonds at once. If rates go up, they will buy these new bonds at higher rates. Don't see what is so scary about that.

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Re: First 20% of bonds in long-term Treasuries

Post by jeffyscott » Sat Aug 10, 2019 11:06 am

willthrill81 wrote:
Sat Aug 10, 2019 10:24 am
The almost complete lack of liquidity of EE bonds (making them worthless for rebalancing), the required 20 year holding period, and their significant inflation risk makes them a non-starter IMHO.
But the compensation for that is currently about 1.5% per year, 3.5% vs. 2% on 20 year bond. The EEs also expand tax-deferred space. I'm not suggesting one put 100% of fixed income in them, but a portion of it for one who is 20 years or less from retirement seems like a pretty good option.
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Re: First 20% of bonds in long-term Treasuries

Post by willthrill81 » Sat Aug 10, 2019 2:19 pm

jeffyscott wrote:
Sat Aug 10, 2019 11:06 am
willthrill81 wrote:
Sat Aug 10, 2019 10:24 am
The almost complete lack of liquidity of EE bonds (making them worthless for rebalancing), the required 20 year holding period, and their significant inflation risk makes them a non-starter IMHO.
But the compensation for that is currently about 1.5% per year, 3.5% vs. 2% on 20 year bond. The EEs also expand tax-deferred space. I'm not suggesting one put 100% of fixed income in them, but a portion of it for one who is 20 years or less from retirement seems like a pretty good option.
I don't personally view the interest rate risk, inflation risk, and illiquidity to be worth 1.5%. But clearly some do.
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Re: First 20% of bonds in long-term Treasuries

Post by Doc » Sat Aug 10, 2019 2:38 pm

stlutz wrote:
Sat Aug 10, 2019 10:55 am
To an extent, both the preferences for short-term bonds and long-term bonds are built on fighting a prior war. Taking a variety of 80/20 portfolios and which "won" over 20 year periods:
I don't think the answer lies in a 20 years period. I think it lies in a twenty week or even a twenty day period. Long Treasuries are going to be inversely correlated to equities during a stock market crash. With an 80% equity position almost all of your long term gain is going to be from the equities. What the fixed income is made of is not going to mean much in the long run if you are a buy and hold forever type investor. What the FI is in the short run is a different consideration.

The original 20% long Treasuries makes sense. At some point as your equity position declines with age it may not make sense to maintain that 20% in long T's.

Personally our portfolio is 50:50 with maybe 35% of the total portfolio in Treasuries in actual bills/notes or as Treasury funds. But given our age I no longer use long Treasuries at all and given the current yield curve there is no longer even much intermediate term left.
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willthrill81
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Re: First 20% of bonds in long-term Treasuries

Post by willthrill81 » Sat Aug 10, 2019 2:43 pm

Doc wrote:
Sat Aug 10, 2019 2:38 pm
Long Treasuries are possibly going to be inversely correlated to equities during a stock market crash.
Fixed. :wink:
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Re: First 20% of bonds in long-term Treasuries

Post by welderwannabe » Sat Aug 10, 2019 3:40 pm

willthrill81 wrote:
Sat Aug 10, 2019 10:04 am
That was what everyone has been saying since 2012, when the Fed funds rate was .15%. Despite that rate increasing over 2% since then, LTT have far outpaced shorter-term bonds. Bond yields do not follow the Fed funds rate in lock step, and predicting which direction interest rates will go is far more difficult than many believe.
Exactly. Who is to say 0% is as low as they can go? Look at Europe.
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Re: First 20% of bonds in long-term Treasuries

Post by welderwannabe » Sat Aug 10, 2019 3:42 pm

Doc wrote:
Sat Aug 10, 2019 2:38 pm
Personally our portfolio is 50:50 with maybe 35% of the total portfolio in Treasuries in actual bills/notes or as Treasury funds. But given our age I no longer use long Treasuries at all and given the current yield curve there is no longer even much intermediate term left.
What the other 15% of your fixed income portfolio in?
I am not an investment professional, but I did stay at a Holiday Inn Express last night.

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Re: First 20% of bonds in long-term Treasuries

Post by willthrill81 » Sat Aug 10, 2019 3:47 pm

welderwannabe wrote:
Sat Aug 10, 2019 3:40 pm
willthrill81 wrote:
Sat Aug 10, 2019 10:04 am
That was what everyone has been saying since 2012, when the Fed funds rate was .15%. Despite that rate increasing over 2% since then, LTT have far outpaced shorter-term bonds. Bond yields do not follow the Fed funds rate in lock step, and predicting which direction interest rates will go is far more difficult than many believe.
Exactly. Who is to say 0% is as low as they can go? Look at Europe.
Or Japan. Its 10 year government bond yield dropped to about .5% before climbing back up to 2% only to then fall to 0% and then go slightly negative.

Image

I'm not saying that Japan's situation is a precursor to the U.S. But I do think that it should at least give fixed income investors pause to consider possibilities.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: First 20% of bonds in long-term Treasuries

Post by oldzey » Sat Aug 10, 2019 4:19 pm

Fortunately, I have access to TIAA Traditional, which I use for my entire fixed income allocation (20% of my portfolio).
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