Should LT bonds be considered a separate asset class from stocks and bonds?

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fatFIRE
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Should LT bonds be considered a separate asset class from stocks and bonds?

Post by fatFIRE » Wed Mar 25, 2020 12:55 am

It seems evident that in both recessions of 2008 and 2020 bonds did not "work" as much as we hoped, in the sense that it went down with equity, albeit not as much. Here, I refer to total bond market, or any bond excluding LT bonds (TREASURIES ONLY).

Yet LT bonds is the only asset class in the 2020 crisis that has positive returns vs everything else that is negative (even Gold).

The Permanent Portfolio that was so in the rage on the forums here back around 2010, also specifically called out LT bonds as one of the 4 asset classes to hold (the other being stocks, golds and cash), and I would argue cash is really a proxy of bonds in that context.

So... should LT bonds be considered as a separate asset class that does not fit the behavior of "normal" total bond funds? It has:
- Much higher volatility than total bond funds
- Higher returns than total bond funds, and in some cases approaches that of equity returns
- Seems to be less correlated to total bond funds and stocks.

EDIT: Clarified I am referring to LT treasuries only.
Last edited by fatFIRE on Wed Mar 25, 2020 5:11 pm, edited 1 time in total.

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Re: Should LT bonds be considered a separate asset class from stocks and bonds?

Post by Day9 » Wed Mar 25, 2020 1:23 am

"The purity of noncallable, long-term, default-free Treasury bonds provides the most powerful diversification to investor portfolios." -David Swenson, Unconventional Success
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ChrisBenn
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Re: Should LT bonds be considered a separate asset class from stocks and bonds?

Post by ChrisBenn » Wed Mar 25, 2020 1:57 am

fatFIRE wrote:
Wed Mar 25, 2020 12:55 am
It seems evident that in both recessions of 2008 and 2020 bonds did not "work" as much as we hoped, in the sense that it went down with equity, albeit not as much. Here, I refer to total bond market, or any bond excluding LT bonds.
(...)
I think term is the wrong property to look at here; isn't what you are observing just treasuries vs corporate bond? LT corps tanked with the market, treasuries were fine

https://stockcharts.com/h-perf/ui?s=VGI ... 4725451966
Image

vgit: intermediate treas
tyd: 3x int treas
tlt: lt treas
vclt: lt corp

annu
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Re: Should LT bonds be considered a separate asset class from stocks and bonds?

Post by annu » Wed Mar 25, 2020 2:16 am

I have held long term bonds, happen to be Muni, not in the positive the least bit, vwlux, so probably only long term treasuries?

Uncorrelated
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Re: Should LT bonds be considered a separate asset class from stocks and bonds?

Post by Uncorrelated » Wed Mar 25, 2020 3:46 am

The term asset class is poorly defined and useless. Rather than worrying about asset classes, worry about correlations and volatility.

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nisiprius
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Re: Should LT bonds be considered a separate asset class from stocks and bonds?

Post by nisiprius » Wed Mar 25, 2020 6:01 am

Source

Image

What do you see in this chart? How many fundamentally different patterns of behavior do you see? Would you classify them into two groups, or three? This chart contains:

Two long-term bond funds, both actively managed; one broad mix, one Treasury-only.
Three intermediate-term bond funds; one index, two active.
Three stock funds: one index, two active.

How quickly can you spot the long-term bond funds and separate them from the rest by eye?

Why do you care if they are "considered" a separate asset class? How is that going to change how you invest?

As far as I'm concerned, there are three asset classes--stocks, bonds, and cash. Or, if you're hifalutin, equities, fixed income, and short-term reserves. Members of each behave similarly enough to each other, and differently enough from members of other classes, to be meaningful. The use of the phrase "asset classes" and lists of a dozen or so, as in the "Callan periodic table," is spin in support of the overhyped idea of "multi-asset-class investing," possibly due to Roger Gibson.

Again, as far as I'm concerned, an "asset class" is defined by something pretty easy to see and fundamental to its very nature--not some pragmatic observation of patterns of past price movements. Roughly, gold is a metal that's widely regarded as valuable, but it is not a debt that somebody has contracted to pay you and it is not a business that earns profits. That makes it a distinct asset class from stocks or bonds. An apartment building someone owns, and collects rent from tenants, is obviously not a precious metal--so, different from gold. And it is obviously not an SEC-registered security, so not a stock.

Certainly there are grey and in-between areas where you can argue about category boundaries.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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nisiprius
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Re: Should LT bonds be considered a separate asset class from stocks and bonds?

Post by nisiprius » Wed Mar 25, 2020 6:09 am

For key to the chart in my post above, try "ctrl-A" or "select all" or drag mouse

from here vvvvvvvvvvvvvvvvvvvv

Long-term bond funds: Orange (VUSTX), red (PLRIX)
Intermediate-term bond funds: Green (VBTLX), yellow (FBNDX), purple (PTTRX)
Stocks: Blue (VTI), light blue (FCNTX), grey (SFLNX)

VUSTX: Vanguard Long-Term Treasury
PLRIX: PIMCO Long Duration Total Return

VBTLX: Vanguard Total Bond Market Index
FBNDX: Fidelity Investment Grade Bond Fund
PTTRX: PIMCO Total Return

VTI: Vanguard Total Stock Market Index
FCNTX: Fidelity Contrafund
SFLNX: Schwab Fundamental US Large Company

to here ^^^^^^^^^^^^^^^^^^^
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Re: Should LT bonds be considered a separate asset class from stocks and bonds?

Post by fredflinstone » Wed Mar 25, 2020 6:19 am

I think the great pandemic of 2020 has reminded us that Vanguard's Total Bond Market Index Fund (BND; VBMFX; VBTLX) contains corporate bonds as well as treasuries. Specifically it is 63.3% government bonds (presumably treasuries) and 36.7% corporate bonds. Corporate bonds, as we have seen, are more stock-like than are treasuries. That is to say, the correlation between corporate bonds and stocks is higher than the correlation between treasuries and stocks. This is why, during the past two weeks, we have seen BND and long-term treasury funds such as TLT move in opposite directions on days when the stock market rises or falls sharply.

The same is true of municipal bonds, which on some days have moved sharply in the same direction as stocks rather than treasuries.

For investors who hold stocks, I think it is clear that treasuries -- particularly long-term treasuries -- provide better diversification than either municipal bonds or corporate bonds.

On a side note, I learned (to my chagrin) that gold mining stocks have behaved much more like stocks than like gold.

Harry Browne described four distinct asset classes -- stocks, long-term treasuries (not corporate bonds, not municipal bonds), gold (not gold mining stocks), and cash -- and I think the last few weeks have shown that he was right. It has been a learning experience.

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Re: Should LT bonds be considered a separate asset class from stocks and bonds?

Post by watchnerd » Wed Mar 25, 2020 6:24 am

I look at it this way:

My stock / bond allocation:

70/30 (15% LTT / 15% short TIPS + MM)

My risky / risk free allocation

85% (stocks + LTT) / 15% short TIPS + MM
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

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Re: Should LT bonds be considered a separate asset class from stocks and bonds?

Post by marky2kk » Wed Mar 25, 2020 9:01 am

All this against the backdrop of 40 years of declining interest rates. Some have repeatedly said that long-term yields could not fall further, and they did. I am sure this time they can fall further as well (see Germany).

However, there is a lower bound (it's not zero). I am wondering how much diversification LTTs can add once they hit the lower bound. It would be interesting to look at a portfolio of stocks and German long-term bunds and see how that portfolio has performed over the last decade. The Euro has of course not exactly the safe-haven qualities of the dollar, but it may give an indication.

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Re: Should LT bonds be considered a separate asset class from stocks and bonds?

Post by bgf » Wed Mar 25, 2020 9:12 am

how can anyone attempt to optimize long term bonds (20+ years) when interest rates are impossible to predict over that period? looking back 30 years doesnt seem to make sense because rates were so much higher. where do you look? there is logic in matching duration to expected withdrawals. i can see that, but its difficult to see much argument beyond that.

if stocks were trading at a PE of 5 30 years ago and are now at a PE of 50, would you assume theyd behave the same over the next 30 years?
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fatFIRE
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Re: Should LT bonds be considered a separate asset class from stocks and bonds?

Post by fatFIRE » Wed Mar 25, 2020 5:09 pm

nisiprius wrote:
Wed Mar 25, 2020 6:01 am
Source

Image

What do you see in this chart? How many fundamentally different patterns of behavior do you see? Would you classify them into two groups, or three? This chart contains:

Two long-term bond funds, both actively managed; one broad mix, one Treasury-only.
Three intermediate-term bond funds; one index, two active.
Three stock funds: one index, two active.

How quickly can you spot the long-term bond funds and separate them from the rest by eye?

Why do you care if they are "considered" a separate asset class? How is that going to change how you invest?

As far as I'm concerned, there are three asset classes--stocks, bonds, and cash. Or, if you're hifalutin, equities, fixed income, and short-term reserves. Members of each behave similarly enough to each other, and differently enough from members of other classes, to be meaningful. The use of the phrase "asset classes" and lists of a dozen or so, as in the "Callan periodic table," is spin in support of the overhyped idea of "multi-asset-class investing," possibly due to Roger Gibson.

Again, as far as I'm concerned, an "asset class" is defined by something pretty easy to see and fundamental to its very nature--not some pragmatic observation of patterns of past price movements. Roughly, gold is a metal that's widely regarded as valuable, but it is not a debt that somebody has contracted to pay you and it is not a business that earns profits. That makes it a distinct asset class from stocks or bonds. An apartment building someone owns, and collects rent from tenants, is obviously not a precious metal--so, different from gold. And it is obviously not an SEC-registered security, so not a stock.

Certainly there are grey and in-between areas where you can argue about category boundaries.
Asset class is important because that's how I split things up. Now I have 90/10 stock/bond. Should I do 80/10/10 stock/LT-bond/bond?

I didn't look up the symbols, but I see 3 asset class.
- The blue and green lines are one class. They went up the most then crashed
- The orange and pink lines are another class (especially the orange). It keeps going up even when blue and green crashed.
- The brown and yellow lines are another class. This one is mostly flat, but it also goes down with blue and green.

How am I doing?

It looks like orange is LT treasuries and LT treasuries+corporate. And I did single out the orange curve. So yes, LT treasuries are sticking out like a sore thumb. At least from this data, I would single out LT treasuries as an asset class that is not stock or bonds (in the traditional non-LT sense).
Last edited by fatFIRE on Wed Mar 25, 2020 5:19 pm, edited 2 times in total.

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fatFIRE
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Re: Should LT bonds be considered a separate asset class from stocks and bonds?

Post by fatFIRE » Wed Mar 25, 2020 5:14 pm

marky2kk wrote:
Wed Mar 25, 2020 9:01 am
All this against the backdrop of 40 years of declining interest rates. Some have repeatedly said that long-term yields could not fall further, and they did. I am sure this time they can fall further as well (see Germany).

However, there is a lower bound (it's not zero). I am wondering how much diversification LTTs can add once they hit the lower bound. It would be interesting to look at a portfolio of stocks and German long-term bunds and see how that portfolio has performed over the last decade. The Euro has of course not exactly the safe-haven qualities of the dollar, but it may give an indication.
Yes, that's true. LT treasuries was on my radar even back in 2010. I was going to split my bond half to LT treasuries but never did that. One, for pragmatic reasons... I had "too much" existing bonds including i-Bonds and TIAA Trad. The other was interest rates are low, and I was waiting for it to rise. Fast forward, a decade later I havent bought any LT treasuries and coronavirus hit.

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Re: Should LT bonds be considered a separate asset class from stocks and bonds?

Post by Elysium » Wed Mar 25, 2020 5:28 pm

LT Treasury bonds are great diversifiers in times of flight to safety. We discover this every 10 years or so when a truly bad selling spree erupts when everything including Total Bond funds decline. The trouble is that we have short memories, and there is a cost to this insurance, which is really what it is as you are paying a premium by locking up your money at ultra low yields for 20-30 years. In return you get this once every decade or so troubled market condition where LTT props up the portfolio.

When market returns to normal volatility, with mini-crashes that we usually experience like 2018, 2015, or 2011, almost no one cares about LTT, just regular investment grade or Total Bond will do, and we just like the lower interest rate sensitivity of Intermediate or Short term.

If we were to use LTT as a permanent place in the portfolio then we have also accept them in normal times, not just times like this, that requires a lot of patience as there will be calls of rising rates, rising inflation, etc that are really problems for holding LTT. In other words we will be tested in 9 out of 10 years for holding LTT, where as we get tested 1 year out of every 10 for holding Total Bond. This is the reason most people go for simplicity of Total Bond. I am not saying it is right or wrong, just pointing out it takes more discipline and conviction to hold LTT as a permanent part of portfolio.
Last edited by Elysium on Wed Mar 25, 2020 5:33 pm, edited 1 time in total.

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Re: Should LT bonds be considered a separate asset class from stocks and bonds?

Post by watchnerd » Wed Mar 25, 2020 5:31 pm

Elysium wrote:
Wed Mar 25, 2020 5:28 pm
LT Treasury bonds are great diversifiers in times of flight to safety. We discover this every 10 years or so when a truly bad selling spree erupts when everything including Total Bond funds decline. The trouble is that we have short memories, and there is a cost to this insurance, which is really what it is as you are paying a premium by locking up your money at ultra low yields for 20-30 years. In return you get this once every decade or so troubled market condition where LTT props up the portfolio.

When market returns to normal volatility, with mini-crashes that we usually experience like 2018, 2015, or 2011, almost no one cares about LTT, just regular investment grade or Total Bond will do, and we just like the lower interest rate sensitivity of Intermediate or Short term.
I might even go a step further and say that in normal markets, people sniff at even ITT, complaining that the yields are too low.
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

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fatFIRE
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Re: Should LT bonds be considered a separate asset class from stocks and bonds?

Post by fatFIRE » Wed Mar 25, 2020 7:06 pm

I did some backtesting:

https://www.portfoliovisualizer.com/bac ... ation4_2=0

Compared:
1) 60/40 US stock / IT-treasury
2) 60/20/20 US stock / IT-treasury / LT-treasury
3) 60/40 US stock / LT-treasury

Earliest 1978 to date 2020. Observations:
1) CAGR actually increased from portfolio 1 to 2 to 3, as we increased the LT component from 10.1% to 10.9%
2) Stdev did increase as we increased the LT component from 9.5% to 10.2%
3) BUT paradoxically, Best Year AND Worst Year improved with LT component. Best year went from 29.5% to 33.7%, worst year went from -18.9% to -15.7%
4) I was careful to use IT treasuries instead of total bond. So the effect we are getting is definitely from LT treasuries (and not a treasury vs corporate bond issue)

It seems that LT treasuries makes the ride more choppy during regular times, but the extreme situations are less pronounced. Thoughts?

Primarily my interest in LT bonds is for it to go the opposite direction in extreme crisis like now and 2008. I made a mistake in hindsight, and from 2010 I went 5% commodities in both diversified commodity funds and gold, and while it worked back in 2008, it doesn't work now. You could argue gold is down only -5%, so it's sort of working, but still... it seems only LT bonds have bucked the trend in both 2008 and 2020 crisis.

Of course this is backtesting. I admit I have insufficient knowledge from a fundamentals perspective of how LT treasury will survive in the current and expected future interest rate environment. Will LT treasuries continue to serve the same function if interest rates remain under 2% forever? What about if interest rates go up? What about inflation? Deflation? Or will LT treasuries be the next sucker that fails to work in the future 203x crisis?

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Re: Should LT bonds be considered a separate asset class from stocks and bonds?

Post by watchnerd » Wed Mar 25, 2020 7:13 pm

fatFIRE wrote:
Wed Mar 25, 2020 7:06 pm
I did some backtesting:

https://www.portfoliovisualizer.com/bac ... ation4_2=0

Compared:
1) 60/40 US stock / IT-treasury
2) 60/20/20 US stock / IT-treasury / LT-treasury
3) 60/40 US stock / LT-treasury

Earliest 1978 to date 2020. Observations:
1) CAGR actually increased from portfolio 1 to 2 to 3, as we increased the LT component from 10.1% to 10.9%
2) Stdev did increase as we increased the LT component from 9.5% to 10.2%
3) BUT paradoxically, Best Year AND Worst Year improved with LT component. Best year went from 29.5% to 33.7%, worst year went from -18.9% to -15.7%

It seems that LT treasuries makes the ride more choppy, but the extreme situations are less pronounced. Thoughts?

Primarily my interest in LT bonds is for it to go the opposite direction in extreme crisis like now and 2008. I made a mistake in hindsight, and from 2010 I went 5% commodities in both diversified commodity funds and gold, and while it worked back in 2008, it doesn't work now. You could argue gold is down only -5%, so it's sort of working, but still... it seems only LT bonds have bucked the trend in both 2008 and 2020 crisis.

Of course this is backtesting. I admit I have insufficient knowledge from a fundamentals perspective of how LT treasury will survive in the current and expected future interest rate environment. Will LT treasuries continue to serve the same function if interest rates remain under 2% forever? What about if interest rates go up? What about inflation? Deflation? Or will LT treasuries be the next sucker that fails to work in the future 203x crisis?
Most of your questions have been addressed in the prior threads about Long Treasuries.

You might want to check those out using the search tool.
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

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Re: Should LT bonds be considered a separate asset class from stocks and bonds?

Post by Uncorrelated » Thu Mar 26, 2020 3:20 am

fatFIRE wrote:
Wed Mar 25, 2020 7:06 pm
I did some backtesting:

https://www.portfoliovisualizer.com/bac ... ation4_2=0


You can't really use portfoliovisualize to perform any worthwhile analysis with bonds. It just doesn't go back far enough in history. Between 1900 and 1970, long term bonds returned approximately nothing. Between 1970 and 1980, bonds only went down. Since 1980, bonds have only been going up. This is extremely unlikely to be repeated.

Use simba's backtesting spreadsheet for longer backtests: https://www.bogleheads.org/wiki/Simba%2 ... preadsheet. Or better yet, don't trust on backtests.

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