Why ever buy & hold a LT treasury?

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ultraviolet
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Re: Why ever buy & hold a LT treasury?

Post by ultraviolet » Thu Nov 07, 2019 10:25 am

This whole conversation has me wondering about bonds too. I get it for shorter terms and for income later in life but why own them in the accumulation phase? It just seems like a drag.

dbr
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Re: Why ever buy & hold a LT treasury?

Post by dbr » Thu Nov 07, 2019 10:46 am

There is certainly a somewhat popular suggestion out there that financing retirement over a thirty year period holding individual 30 year TIPS might be a good idea. I don't think I read in the above replies that holding a nominal principal with a nominal income stream would not be a good idea in the face of inflation, but TIPS are used to remove that risk. Note holding a liquidating ladder is not the same as holding a single bond for thirty years, but the concept is the same. That would also address the amortized debt though it is living expenses and not a mortgage where this makes sense.

The point of the whole thing is certainty at the likely cost of more wealth.

retired@50
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Re: Why ever buy & hold a LT treasury?

Post by retired@50 » Thu Nov 07, 2019 10:55 am

UberGrub wrote:
Thu Nov 07, 2019 12:39 am
retired@50 wrote:
Thu Nov 07, 2019 12:36 am
UberGrub wrote:
Thu Nov 07, 2019 12:16 am

I can't think of a single liability I would have for that long period of time in nominal terms.

What about a fixed rate 30 year mortgage? From what I understand, they are pretty common.

Regards,
My mortgage is amortized how about yours?
I don't have a mortgage, but when I did it was amortized, but amortization is beside the point. In economics, "nominal" means a certain amount without making allowance for changes in real value over time. I don't know about you, but my mortgage payments were the same every month. (fixed rate)
Regards,
Last edited by retired@50 on Thu Nov 07, 2019 11:24 am, edited 1 time in total.

retired@50
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Re: Why ever buy & hold a LT treasury?

Post by retired@50 » Thu Nov 07, 2019 11:22 am

305pelusa wrote:
Thu Nov 07, 2019 12:46 am
retired@50 wrote:
Thu Nov 07, 2019 12:36 am
UberGrub wrote:
Thu Nov 07, 2019 12:16 am

I can't think of a single liability I would have for that long period of time in nominal terms.

What about a fixed rate 30 year mortgage? From what I understand, they are pretty common.

Regards,
Haha could you imagine?
"All right, I have a 4.5% mortgage with 200k outstanding balance and I have 200k in cash. How to deal with this liability umh? Oh I know, I will purchase a 30 year ladder of treasuries, with yields of 1-2%, to hedge my risk."
I didn't say this was necessarily a good idea, the author of the book mentioned in the first post is the one recommending 30yr bonds. I just wanted to point out a common 30 year liability with steady payments. Although, I might be able to imagine a time in history when it could have made sense... If someone had a mortgage in the early 1970s, before inflation got out of hand, then came into a windfall in the late 1970s, when the long term rates were high(er) it may have been possible to come out ahead... I guess some accurate historical data would be helpful...???
Regards,

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305pelusa
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Re: Why ever buy & hold a LT treasury?

Post by 305pelusa » Thu Nov 07, 2019 11:30 am

retired@50 wrote:
Thu Nov 07, 2019 10:55 am
UberGrub wrote:
Thu Nov 07, 2019 12:39 am
retired@50 wrote:
Thu Nov 07, 2019 12:36 am
UberGrub wrote:
Thu Nov 07, 2019 12:16 am

I can't think of a single liability I would have for that long period of time in nominal terms.

What about a fixed rate 30 year mortgage? From what I understand, they are pretty common.

Regards,
My mortgage is amortized how about yours?
I don't have a mortgage, but when I did it was amortized, but amortization is beside the point. In economics, "nominal" means a certain amount without making allowance for changes in real value over time. I don't know about you, but my mortgage payments were the same every month. (fixed rate)
Regards,
The mortgage isn't just accumulating interest and then you pay the whole thing in 30 years. THAT would be something a 30 year bond would hedge against.

It's amortized. You pay as you go. So buying and holding to maturity a 30 year bond is only hedging about 1/30th of your mortgage.

In conclusion: a mortgage is NOT a liability that a 30 year LT nominal bond hedges much at all. A little due to the coupons but not much

You could just PREPAY it. And that actually does perfectly hedge it. That's his point

retired@50
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Re: Why ever buy & hold a LT treasury?

Post by retired@50 » Thu Nov 07, 2019 1:24 pm

305pelusa wrote:
Thu Nov 07, 2019 11:30 am
retired@50 wrote:
Thu Nov 07, 2019 10:55 am
UberGrub wrote:
Thu Nov 07, 2019 12:39 am
retired@50 wrote:
Thu Nov 07, 2019 12:36 am
UberGrub wrote:
Thu Nov 07, 2019 12:16 am

I can't think of a single liability I would have for that long period of time in nominal terms.

What about a fixed rate 30 year mortgage? From what I understand, they are pretty common.

Regards,
My mortgage is amortized how about yours?
I don't have a mortgage, but when I did it was amortized, but amortization is beside the point. In economics, "nominal" means a certain amount without making allowance for changes in real value over time. I don't know about you, but my mortgage payments were the same every month. (fixed rate)
Regards,
The mortgage isn't just accumulating interest and then you pay the whole thing in 30 years. THAT would be something a 30 year bond would hedge against.

It's amortized. You pay as you go. So buying and holding to maturity a 30 year bond is only hedging about 1/30th of your mortgage.

In conclusion: a mortgage is NOT a liability that a 30 year LT nominal bond hedges much at all. A little due to the coupons but not much

You could just PREPAY it. And that actually does perfectly hedge it. That's his point
My understanding is that 30 year treasury bonds pay interest every 6 months, then return the face value after 30 years. The bond you describe is known as a zero coupon bond.
Regards,

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Phineas J. Whoopee
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Re: Why ever buy & hold a LT treasury?

Post by Phineas J. Whoopee » Thu Nov 07, 2019 2:48 pm

illumination wrote:
Thu Nov 07, 2019 12:27 am
Phineas J. Whoopee wrote:
Wed Nov 06, 2019 9:28 pm
illumination wrote:
Wed Nov 06, 2019 5:55 pm
...
But considering both are backed by the full faith and credit of the federal government, isn't the default risk is the same?

Obviously longer periods have greater risk from things like inflation, but I always shorthanded "risk free" to mean default risk, not risk from other factors that could erode the value.
No, of course the default risk isn't the same. We already saw brinksmanship with a threat to hold ourselves and the whole world hostage with default. Thirty years is fifteen congresses. Now that the subject has been broached it may come up again.

Four weeks is a much shorter period in which to suppose Congress won't intentionally shoot us all in the head.

There was a scene in the old movie Blazing Saddles that expressed the concept.

PJW
But if the 4 week period was during a political "brinkmanship" couldn't the same thing be said about those short-term instruments? That they have the same risk?

If the US government defaults on long term treasury bonds, something tells me the short term ones are also in jeopardy.
As far as I know there is no implemented way for the Treasury to default on some securities and not others, however last time around there was plenty of chest thumping about a default well before one could have occurred. Committed for four weeks one could take it into account and choose not to roll the bills. Committed for thirty years one couldn't.

It is always the case that starting today anything is more likely to happen if there's a longer timeline in which it could.

PJW
Last edited by Phineas J. Whoopee on Thu Nov 07, 2019 2:53 pm, edited 1 time in total.

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Phineas J. Whoopee
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Re: Why ever buy & hold a LT treasury?

Post by Phineas J. Whoopee » Thu Nov 07, 2019 2:51 pm

illumination wrote:
Thu Nov 07, 2019 12:48 am
...
I see treasury bonds being labeled "risk-free" all over the place, I remember being taught this in economics, is there a formal definition somewhere that has the exact time frame when you can no longer call it that?

I would also argue is a bad label anyway that is incorrect however its used.


I just did a little searching, I couldn't find any place that made the distinction.

"United States Treasury notes and United States Treasury bonds are often assumed to be risk-free bonds."
https://en.wikipedia.org/wiki/Risk-free_bond
The risk-free rate is an underlying number in Modern Portfolio Theory. We don't know what it is, but conventionally a T-bill yield, often the 13-week one, is used as a proxy. Nobody who knows what they're talking about claims there is no risk at all. It's just an estimated rate based on current bill yields.

PJW

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sometimesinvestor
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Re: Why ever buy & hold a LT treasury?

Post by sometimesinvestor » Thu Nov 07, 2019 3:07 pm

DECEPTIVE TITLE. Obviously it is right to buy and hold a 30 year treasury fora long term gain if by long term we mean afew years not 30.I am quite sure a 30 year treasury purchased in Aug 81 would have outperformed stocks through the period ending in Jan 88. Incidentally the person who suggested market timing in bonds is at least as hard as market timing stocks is almost surely wrong.THe next time I can get 9% yield on a 30 year treasury I will buy it and I am pretty confident I will out perform stocks over a period somewhere in the 2-5 year range.

Does anybody really think I am wrong about that investment?

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Phineas J. Whoopee
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Re: Why ever buy & hold a LT treasury?

Post by Phineas J. Whoopee » Thu Nov 07, 2019 3:22 pm

sometimesinvestor wrote:
Thu Nov 07, 2019 3:07 pm
DECEPTIVE TITLE. Obviously it is right to buy and hold a 30 year treasury fora long term gain if by long term we mean afew years not 30.I am quite sure a 30 year treasury purchased in Aug 81 would have outperformed stocks through the period ending in Jan 88. Incidentally the person who suggested market timing in bonds is at least as hard as market timing stocks is almost surely wrong.THe next time I can get 9% yield on a 30 year treasury I will buy it and I am pretty confident I will out perform stocks over a period somewhere in the 2-5 year range.

Does anybody really think I am wrong about that investment?
You're only wrong if you can't go back in time and invest in the past for a presently-known pre-maturity return.

It is not the case that the only possible investing objective is to outperform the stock market however defined, although that often seems to be an unstated assumption among posters here.

PJW

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FIREchief
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Re: Why ever buy & hold a LT treasury?

Post by FIREchief » Thu Nov 07, 2019 5:02 pm

UberGrub wrote:
Wed Nov 06, 2019 11:27 am
it seems that over a period of 30 years, stocks essentially always outperform bonds. So for an investor who will willingly wait for 30 years and not sell, stocks seem like a no-brainer.
"seems that essentially always" in no way guarantees what will happen over the next 30 years (or any other future time frame).
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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