Bonds and the PP -- still make sense?

[ahhrunforthehills]

If LTTs are such a bad deal, why do they get snapped up?

Kevin, your last link is interesting, and it basically says that bonds may not outperform cash, and historically they often don't. Well, I have cash on the other half of my barbell.

It also says that we should expect an annualized return over the next 10 years of around 2-3% on our LTTs. Is that really bad enough to drop a leg from the PP?

I'm not saying you're wrong. I really don't know. This discussion is invaluable.

I'm staying with TLT for 15% of my total funds. If they were to equal 17% I plan to trim them back to 15%. But it hard to think I would have 35% in LTTs and sleep at night. I remember Paul Volker and Long rates above 15% in 80's. But this is a recent decision. I have been happy for the ride to 1.4% but see more risk than reward. Please don't follow me as I'm often wrong.

Out of curiosity, where are you keeping the rest of the TLT money? In cash or spread out among everything else?

[Kbg]

If LTTs are such a bad deal, why do they get snapped up?

Presumably because one of the entities snapping them up (or planning to) is the Fed, and they are doing so not because it’s a good deal for them, but because it helps keep long-term rates low for government borrowing.

https://www.reuters.com/article/us-usa- ... SKBN25R0GY

They've already publicly stated they are going to "manage the curve." Normally this impacts 0-10 year bonds as traditionally that is where it is most effectively done...but hey, they are pretty much willing to buy anything so it's definitely a strong possibility they are buying LTTs as well.

[mathjak107]

I cut Tlt down a lot ...way to much risk with the feds only means of really boosting things being via spending ....I may put it back in the insight income model ......made nice gains but I think they may be headed for a nasty time coming up

[modeljc]

If LTTs are such a bad deal, why do they get snapped up?

Kevin, your last link is interesting, and it basically says that bonds may not outperform cash, and historically they often don't. Well, I have cash on the other half of my barbell.

It also says that we should expect an annualized return over the next 10 years of around 2-3% on our LTTs. Is that really bad enough to drop a leg from the PP?

I'm not saying you're wrong. I really don't know. This discussion is invaluable.

I'm staying with TLT for 15% of my total funds. If they were to equal 17% I plan to trim them back to 15%. But it hard to think I would have 35% in LTTs and sleep at night. I remember Paul Volker and Long rates above 15% in 80's. But this is a recent decision. I have been happy for the ride to 1.4% but see more risk than reward. Please don't follow me as I'm often wrong.

Out of curiosity, where are you keeping the rest of the TLT money? In cash or spread out among everything else?

spread out some. overweight stocks cash and gold.

[Matthew19]

I hate LTT, but you’ve gotta go all in on the PP for it to work.

What I’ve done is to take the other side, creating a variable portfolio with some extra silver/gold in it. The PP is untouched.

[Smith1776]

Question for those dumping long-term bonds.

What is the portfolio policy or plan for when you’d get back into them?

I am reminded of this very relevant quote from John Bogle.

It is quite difficult enough to make even one timing decision correctly. But you have to be right twice, for the act of, say, getting out of the market implies the act of getting in later, and at a more favorable level. But when, pray? You’ll have to tell me. And if the odds of making the right decision are, because of costs, even less than 50/50, the odds of making two right decisions are even less than one out of four. And the odds of making, say a dozen correct decisions over, say three years, hardly excessive for a strategy that is based on market timing, seems doomed to failure—one out of 4,096, even when we exclude the negative impact of the portfolio transaction costs entailed in the implementation of all those decisions.

[Kevin K.]

Question for those dumping long-term bonds.

What is the portfolio policy or plan for when you’d get back into them?

I am reminded of this very relevant quote from John Bogle.

It is quite difficult enough to make even one timing decision correctly. But you have to be right twice, for the act of, say, getting out of the market implies the act of getting in later, and at a more favorable level. But when, pray? You’ll have to tell me. And if the odds of making the right decision are, because of costs, even less than 50/50, the odds of making two right decisions are even less than one out of four. And the odds of making, say a dozen correct decisions over, say three years, hardly excessive for a strategy that is based on market timing, seems doomed to failure—one out of 4,096, even when we exclude the negative impact of the portfolio transaction costs entailed in the implementation of all those decisions.

It's a great Bogle quote that has exactly nothing to do with the bond market (and Bogle preferred Total Bond Market to Treasuries and would've had nothing but contempt for the PP anyway).

Of course what he says, which is about trying to time the stock market, makes sense. As for bonds, the obvious answer to your question is you get back into longer maturities when you are rewarded for doing so. And it clearly doesn't have to be a black and white situation. Xan's strategy of paring back the LTT's to 15% or so and moving the rest into T-bills or STT's is another way of acknowledging that LTT's are volatile as nitroglycerin now and deserve to be treated accordingly. 30 year Treasuries paying 1.43% are not something I can see dedicating 25% of my nest egg to - and not something I think Harry Browne would have invested in at all.

[Xan]

I can't take any credit for that plan; that was somebody else's. My theory was that it might make sense if you believe LTTs are range-bound to frequently do a "mini-rebalance" between cash and LTTs. It was demonstrated that doing so was of limited value.

[Smith1776]

Yeah I'm not convinced that the LTT trade is as simple or as valuation-based as some are making it out to be. Nor do I think it's a lead pipe cinch.

My impression is that many of these plans being suggested are quite a bit more about capricious than is being let on. It's not like high LTT valuations are happening in isolation either. Stocks are near all time highs, gold is near all time highs, and cash yields even less than LTTs. Given that background I still think that staying the course with pure the PP presents are perfectly practical path.

[Xan]

Yeah I'm not convinced that the LTT trade is as simple or as valuation-based as some are making it out to be. Nor do I think it's a lead pipe cinch.

My impression is that many of these plans being suggested are quite a bit more about capricious than is being let on. It's not like high LTT valuations are happening in isolation either. Stocks are near all time highs, gold is near all time highs, and cash yields even less than LTTs. Given that background I still think that staying the course with pure the PP presents are perfectly practical path.

I'm holding course for now as well with the normal LTT allocation. So far, anyway!

[Tortoise]

I'm holding course for now as well with the normal LTT allocation. So far, anyway!

Ditto.

[Kriegsspiel]

I'm planning on rebalancing my PP when it's time, even with LTTs. My relatively short time allocating assets has taught me I can't predict the future for shit.

[Smith1776]

Interesting to hear that others are sticking with the canonical 25% LTT allocation as well. I am as aware as anyone of groupthink, so hopefully we do not descend into that kind of Knuckleheadism here.

Be that as it may, my overall impression of tactical shifts and modifications based on "surefire" prevailing sentiment usually ends up being a mirage. My overall experience and readings of capital markets history lead me to believe that when everyone "knows" something is going to happen, it somehow doesn't. Like trying to grasp and make a fist around water, it's highly elusive.

Tactical shifts also make one vulnerable to behavioural mistakes as one abandons a mechanistic approach. "Crap, my LTT valuation for buying back in bought at a new top. Better double down. I know this is a surefire bet." It's a slippery slope that starts to sound a lot like the gambler at the casino doubling down to get back to even before telling himself he'll quit.

Yes, I agree LTTs look super expensive, but my investment instinct is leading me to think that tinkering is not likely to lead to a good long-term outcome.

There's a reason why recently dead people ended up being the highest performing investment clients in that Fidelity study. By being dead you're guaranteed to not tinker and make bets.

[ahhrunforthehills]

When I try to think all this through...

Can LTT go down? Yes, but there is likely a floor that is VERY close. Once near 0% interest, people will transition to gold. Gold is basically a zero coupon treasury without the counter-party risk.
Can LTT go up? Not likely since it will put downward pressure on the markets

Can STT go down? Not enough to care.
Can STT go up? Not enough to care.

Can Stocks go down? The fed is sitting on a huge pile of money ready to inject at a moment's notice into the market. Not likely.
Can Stocks go up? Didn't the fed recently sell back some of their positions when the market went to high. Sure does seem like they are keeping markets in a set range.

Can Gold go down? Of course. But ask yourself what else is happening if it does. If gold goes down, that means confidence has been restored. That means that stocks are up. If stocks are up, then the fed will want to use the opportunity to raise rates to give itself some breathing room (which will kill long term treasuries).
Can Gold go up? Of Course.

LTT is a dog long-term. The United States will not allow serious deflation to occur. With no gold standard, they can simply helicopter money the deflation away. Debased currency is bullish for stocks and gold.

I agree that the principles behind the PP appear broken at super low interest rates. I think a 10%-15% allocation in LTT is not a bad idea for those in a traditional PP.

Personally, I think that LTT still have some juice left in them. However, I don't think anyone on this forum is going to beat the big boys to the trade. By the time the retail investors start to move it will probably be too late.

The pig gets fat and the hog gets slaughtered.

[Tortoise]

Can LTT go down? Yes, but there is likely a floor that is VERY close. Once near 0% interest, people will transition to gold.

Is that what has happened in countries that have even lower long-term interest rates than those in the U.S.? They've largely transitioned to gold?

[ahhrunforthehills]

Can LTT go down? Yes, but there is likely a floor that is VERY close. Once near 0% interest, people will transition to gold.

Is that what has happened in countries that have even lower long-term interest rates than those in the U.S.? They've largely transitioned to gold?

Other countries do not have world reserve status with the ability to export inflation.

The rest of the world flees to US Treasuries for safety when they lack options in their own country, no? Where will people go when their Treasury life-boat springs a leak? Typically gold AFAIK.

[Tortoise]

I think we might be conflating the ideas of yield-seeking and flight to safety.

For example, a person might switch from one country's LTT to another country's LTT because the latter offers a higher yield. That would be yield-seeking.

Alternatively, a person might switch from a given country's LTT to another country's LTT -- or gold -- because he wants greater safety (i.e., lower risk of losing his principal via default or inflation). That would be flight to safety.

In your previous post, you said that if U.S. LTT yields approach zero, holders of those LTTs will likely transition to gold. I assume you didn't mean such people would be motivated primarily by yield-chasing since gold doesn't pay interest. That implies you must have been referring to a flight to safety.

If so, what is it about LTTs yielding close to zero that would imply lower safety (such as higher risk of default or inflation)?

[Kevin K.]

It seems to me that some of us (yours truly included) take it as gospel that LTT's or Treasuries in general always offer substantial protection during flights to safety since they did so spectacularly during the 2008 crisis (after which the PP gained a lot of adherents). But historically this hasn't been the case, as this article (which I posted earlier in this thread) points out (see "Bonds go up when stocks go down):

https://movement.capital/the-bond-offer-you-can-refuse/

At less than 1.5% LTT's would have to go to 0% or even negative to offer another big bump to the PP as they did during the first quarter of this year. Could it happen? Sure - and I can see leaving 10-15% in them to take advantage of that kind of last hurrah scenario, but personally I think replacing most of the LTT's with iBonds, 6-12 month CD's paying ~.80% and T-bills makes sense. It's probably a somewhat easier pill to swallow for me because I'm running a modified version of the Golden Butterfly so the bond + cash allocation is only 40%; I know the idea of putting most or all of the PP's 50% bond and cash allocation into safe cash with a negative real return is going to be a no-go for most (as is monkeying with the PP at all, of course).

[ahhrunforthehills]

If so, what is it about LTTs yielding close to zero that would imply lower safety (such as higher risk of default or inflation)?

LTT getting closer to zero increases the risk of future inflation. Why would it not?

Just to clarify, I think default of LTT bonds is obviously EXTREMELY unlikely. However, with that said, it is important to still keep in mind that gold has absolutely zero counterparty risk. It might seem like a minor point... but even HB was a stickler for Treasuries over Bank Account, Physical instead of paper. That extra layer clearly mattered.

Furthermore, once LTTs drop below zero, they essentially become an investment put. Another HB no-no.

Aside from the HB koolaid...

I do not view this as a “risk” matter. I do view it as a yield matter. Going negative on rates basically fines the banks for not loaning money. The banks simply pass those costs onto its customers. From my understanding, that is a large reason why governments view this approach as destructive instead of helpful. There is also the negative impact it has on pensions, savers, and the elderly. Again, not very helpful.

Keep in mind that, again, the countries that have negative rates have had different objectives than we would. USD exports are only like 12% of GDP, so trying to have a more competitive exchange rate would have a lot less of an impact than it would for those other countries (not to mention it didn’t even appear to really help them that much).

Again, I’m just not seeing it.

The US can implement YCC, but isn’t that inflationary?

I am not trying to rain on anybody’s parade and certainly not trying to convince anyone here what to do.

However, after months of searching I haven’t found a single convincing reason that made me think holding LTTs could be profitable over the long term. I don’t see the limited gains that could still be juiced from it being worth the risk.

[mathjak107]

If so, what is it about LTTs yielding close to zero that would imply lower safety (such as higher risk of default or inflation)?

LTT getting closer to zero increases the risk of future inflation. Why would it not?

Just to clarify, I think default of LTT bonds is obviously EXTREMELY unlikely. However, with that said, it is important to still keep in mind that gold has absolutely zero counterparty risk. It might seem like a minor point... but even HB was a stickler for Treasuries over Bank Account, Physical instead of paper. That extra layer clearly mattered.

Furthermore, once LTTs drop below zero, they essentially become an investment put. Another HB no-no.

Aside from the HB koolaid...

I do not view this as a “risk” matter. I do view it as a yield matter. Going negative on rates basically fines the banks for not loaning money. The banks simply pass those costs onto its customers. From my understanding, that is a large reason why governments view this approach as destructive instead of helpful. There is also the negative impact it has on pensions, savers, and the elderly. Again, not very helpful.

Keep in mind that, again, the countries that have negative rates have had different objectives than we would. USD exports are only like 12% of GDP, so trying to have a more competitive exchange rate would have a lot less of an impact than it would for those other countries (not to mention it didn’t even appear to really help them that much).

Again, I’m just not seeing it.

The US can implement YCC, but isn’t that inflationary?

I am not trying to rain on anybody’s parade and certainly not trying to convince anyone here what to do.

However, after months of searching I haven’t found a single convincing reason that made me think holding LTTs could be profitable over the long term. I don’t see the limited gains that could still be juiced from it being worth the risk.

pretty much my exact feeling at this point ... i doubt hb would have taken the risk ... it has turned in to pure speculation on rates and inflation because of the weight and volatility long term bonds have. this is not just a case of rates falling .. it is rates falling in to negative , something that may have bad ramifications .

[Kriegsspiel]

My thought is even if bonds get devastated, the other assets should make up for it. If nobody wants to buy bonds, they'll probably want to buy gold or stocks.

[mathjak107]

My thought is even if bonds get devastated, the other assets should make up for it. If nobody wants to buy bonds, they'll probably want to buy gold or stocks.

at this point that could be more a speculation then anything else, stagflation if it happens is not good for any assets .. i am very skeptical of long term bonds going forward ... we are all basically guessing at the outcome and hoping .... but sometimes i think discretion is the better part of valor and far less interest rate sensitive bond types may be a safer choice .

[Tortoise]

LTT getting closer to zero increases the risk of future inflation. Why would it not?

Not exactly. HB’s explanation of the PP was that LTT yields tend to go lower when the market expects deflation in the future, and higher when the market expects inflation in the future. So if LTT yields approach zero, that would suggest the market has deflationary expectations.

Will inflation come eventually? Almost certainly. I just have no confidence in my ability to predict when it will arrive, so I choose to remain fully invested in all four PP assets at all times. Makes my life a lot simpler and more worry-free.

Like Kriegs said, if LTTs take a hit, one or more of the other three assets will probably dampen the blow eventually. The PP is a single diversified portfolio, not a collection of four separate portfolios.

[Smith1776]

A bit of a Canadian wrinkle in this discussion.

I can understand the appeal of following Ray Dalio's advice and diversifying the PP away from nominal bonds into TIPS. However, inflation linked bonds are not as enticing as a diversifier here in the north. Canada's version of TIPS are called Real Return Bonds (RRBs).

The problem with RRBs is that they don't have the deflation floor that TIPS have. You can lose arbitrarily large amounts of principal and coupon payments during a deflationary spiral. As such, perhaps the temptation to diversify into inflation linked bonds is generally less tempting for me than for others. Consequently, that may colour my perspective in this discussion.

TIPS are actually quite a phenomenal instrument, as far as paper goes. RRBs aren't as great of a deal.

[mathjak107]

LTT getting closer to zero increases the risk of future inflation. Why would it not?

Not exactly. HB’s explanation of the PP was that LTT yields tend to go lower when the market expects deflation in the future, and higher when the market expects inflation in the future. So if LTT yields approach zero, that would suggest the market has deflationary expectations.

Will inflation come eventually? Almost certainly. I just have no confidence in my ability to predict when it will arrive, so I choose to remain fully invested in all four PP assets at all times. Makes my life a lot simpler and more worry-free.

Like Kriegs said, if LTTs take a hit, one or more of the other three assets will probably dampen the blow eventually. The PP is a single diversified portfolio, not a collection of four separate portfolios.

he only problem is while the pp is one overall portfolio , when two or more of those powerful movers happen to move in the same direction as a trend the portfolio can move as much as 80-100% equities .

we have so much more effecting bonds and gold then just economic outcomes ...
like we saw in march , margin calls and lack of liquidity killed bonds and gold as stocks plunged ....you have machines doing 80% of all trades in a day with no regard for much other then their own software