Buying and maintaining the LT bonds part of the PP

Discussion of the Bond portion of the Permanent Portfolio

Moderator: Global Moderator

senecaaa
Associate Member
Associate Member
Posts: 42
Joined: Fri Nov 29, 2019 4:33 am

Buying and maintaining the LT bonds part of the PP

Post by senecaaa » Sat Dec 14, 2019 4:16 am

I live in the EU and am going to buy German "bunds" which are available (secondary market) through my broker.

I have a few questions:

1. The only bond with 30-year maturity is https://www.boerse-berlin.com/index.php ... 0001102481. It has a 0% coupon and trades at a discount. Does all that matter?

2. When in 10 years' time, I have to sell all the bonds and buy "fresh" ones, is there a risk that that might be a very bad period to sell? Or doesn't it work like that for bonds?

3. Why are people here talking about ladders? It will give you more to do I guess, but does it have any benefits?

Cheers!
User avatar
Kriegsspiel
Executive Member
Executive Member
Posts: 1904
Joined: Sun Sep 16, 2012 5:28 pm

Re: Buying and maintaining the LT bonds part of the PP

Post by Kriegsspiel » Sat Dec 14, 2019 6:30 am

senecaaa wrote:
Sat Dec 14, 2019 4:16 am
I live in the EU and am going to buy German "bunds" which are available (secondary market) through my broker.

I have a few questions:

1. The only bond with 30-year maturity is https://www.boerse-berlin.com/index.php ... 0001102481. It has a 0% coupon and trades at a discount. Does all that matter?
Personally, I wouldn't buy long term bonds with a 0% coupon. If the US ever gets that low I plan on buying whatever the longest duration is with a positive yield.
2. When in 10 years' time, I have to sell all the bonds and buy "fresh" ones, is there a risk that that might be a very bad period to sell? Or doesn't it work like that for bonds?
Yes, that could happen.
3. Why are people here talking about ladders? It will give you more to do I guess, but does it have any benefits?
The ladders we usually talk about are for cash: buying 1-3 year bills. Yields for cash have been really low for a long time. The original PP doesn't prescribe using ladders from what I remember.

Laddering long bonds happens naturally if you buy into the portfolio over the course of a few years.
There are several thousand nearly complete viral genomes integrated into the human genome, most now inert or missing a crucial gene. These account for 1.3% of the entire genome. That may not sound like much, but 'proper' genes account for only 3%. If you think being descended from apes is bad for your self-esteem, then get used to the idea that you are also descended from viruses.
Ridley, Genome
senecaaa
Associate Member
Associate Member
Posts: 42
Joined: Fri Nov 29, 2019 4:33 am

Re: Buying and maintaining the LT bonds part of the PP

Post by senecaaa » Sat Dec 14, 2019 11:23 am

Kriegsspiel wrote:
Sat Dec 14, 2019 6:30 am
Personally, I wouldn't buy long term bonds with a 0% coupon. If the US ever gets that low I plan on buying whatever the longest duration is with a positive yield.
The opinions on this seem divided here on this forum, but no one can really explain why this time is different. The coupon is not really an integral part of the PP strategy I think?
Yes, that could happen.
Hmmm, I don't like :)

Is there anything we can do to prevent that?

The ladders we usually talk about are for cash: buying 1-3 year bills. Yields for cash have been really low for a long time. The original PP doesn't prescribe using ladders from what I remember.

Laddering long bonds happens naturally if you buy into the portfolio over the course of a few years.
OK, understood! I'm thinking to use a fund for the short-term bills, too much hassle to keep that all up to date for me.

Thanks Kriegsspiel!
User avatar
mathjak107
Executive Member
Executive Member
Posts: 2386
Joined: Fri Jun 19, 2015 2:54 am
Location: bayside queens ny
Contact:

Re: Buying and maintaining the LT bonds part of the PP

Post by mathjak107 » Sat Dec 14, 2019 12:29 pm

zero coupon bonds can be far more volatile ... a 30 year zero coupon bond would be so volatile that it would out weigh everything else . a 10 year zero coupon bond can be as volatile as a 30 year conventional bond
senecaaa
Associate Member
Associate Member
Posts: 42
Joined: Fri Nov 29, 2019 4:33 am

Re: Buying and maintaining the LT bonds part of the PP

Post by senecaaa » Sat Dec 14, 2019 2:06 pm

mathjak107 wrote:
Sat Dec 14, 2019 12:29 pm
zero coupon bonds can be far more volatile ... a 30 year zero coupon bond would be so volatile that it would out weigh everything else . a 10 year zero coupon bond can be as volatile as a 30 year conventional bond
Yeah, I was thinking that as well, because of convexity right?

So how can I pick a bond with the right volatility for the PP? There is e.g. another bund with 28 years to maturity left with a 1.25% coupon, or one with 20 years to maturity with a 4.75% coupon etc. Of course, they are sold at a huge premium.
User avatar
jhogue
Executive Member
Executive Member
Posts: 400
Joined: Wed Jun 28, 2017 10:47 am

Re: Buying and maintaining the LT bonds part of the PP

Post by jhogue » Sat Dec 14, 2019 3:21 pm

Kriegsspiel wrote:
Sat Dec 14, 2019 6:30 am
senecaaa wrote:
Sat Dec 14, 2019 4:16 am
I live in the EU and am going to buy German "bunds" which are available (secondary market) through my broker.

I have a few questions:

1. The only bond with 30-year maturity is https://www.boerse-berlin.com/index.php ... 0001102481. It has a 0% coupon and trades at a discount. Does all that matter?
Personally, I wouldn't buy long term bonds with a 0% coupon. If the US ever gets that low I plan on buying whatever the longest duration is with a positive yield.
2. When in 10 years' time, I have to sell all the bonds and buy "fresh" ones, is there a risk that that might be a very bad period to sell? Or doesn't it work like that for bonds?
Yes, that could happen.
3. Why are people here talking about ladders? It will give you more to do I guess, but does it have any benefits?
The ladders we usually talk about are for cash: buying 1-3 year bills. Yields for cash have been really low for a long time. The original PP doesn't prescribe using ladders from what I remember.

Laddering long bonds happens naturally if you buy into the portfolio over the course of a few years.
If Trump's Secretary of the Treasury gets his way, the introduction of ultra-long 50 year T-bonds should take care of the problem of 0% long bonds in the HBPP.
“Groucho Marx wrote:
A stock trader asked him, "Groucho, where do you put all your money?" Groucho was said to have replied, "In Treasury bonds", and the trader said, "You can't make much money on those." Groucho said, "You can if you have enough of them!"
User avatar
mathjak107
Executive Member
Executive Member
Posts: 2386
Joined: Fri Jun 19, 2015 2:54 am
Location: bayside queens ny
Contact:

Re: Buying and maintaining the LT bonds part of the PP

Post by mathjak107 » Sat Dec 14, 2019 3:24 pm

senecaaa wrote:
Sat Dec 14, 2019 2:06 pm
mathjak107 wrote:
Sat Dec 14, 2019 12:29 pm
zero coupon bonds can be far more volatile ... a 30 year zero coupon bond would be so volatile that it would out weigh everything else . a 10 year zero coupon bond can be as volatile as a 30 year conventional bond
Yeah, I was thinking that as well, because of convexity right?

So how can I pick a bond with the right volatility for the PP? There is e.g. another bund with 28 years to maturity left with a 1.25% coupon, or one with 20 years to maturity with a 4.75% coupon etc. Of course, they are sold at a huge premium.
Tlt works just fine unless you have zombie apocalypse visions
senecaaa
Associate Member
Associate Member
Posts: 42
Joined: Fri Nov 29, 2019 4:33 am

Re: Buying and maintaining the LT bonds part of the PP

Post by senecaaa » Sat Dec 14, 2019 4:04 pm

Tlt works just fine unless you have zombie apocalypse visions
I'm looking at German bunds because I live in the EU. There are no suitable LT Euro gov bond funds/ETFs available here with a duration above 20 years
Pet Hog
Executive Member
Executive Member
Posts: 206
Joined: Tue May 28, 2013 4:08 pm

Re: Buying and maintaining the LT bonds part of the PP

Post by Pet Hog » Sat Dec 14, 2019 4:08 pm

senecaaa wrote:
Sat Dec 14, 2019 4:16 am
1. The only bond with 30-year maturity is https://www.boerse-berlin.com/index.php ... 0001102481. It has a 0% coupon and trades at a discount. Does all that matter?
I think in theory it doesn't matter what the coupon is -- positive, zero, or negative. All that matters is the volatility. That's what we're trying to benefit from with the PP strategy. But, in practice, there's something disconcerting about yields at zero and below. I guess banks and other big institutions are forced into buying them because there isn't enough paper currency around? If so, we can still benefit, but, like Kriegsspiel, I'm not sure I'd be buying. If -- like mathjak noted -- you're getting too much volatility, you can always buy less -- like 20% LTTs and 30% cash. The bond you linked to is selling at a 6+% discount, so there is always the option of profiting from it (ever so slightly) by holding to maturity.
senecaaa wrote:
Sat Dec 14, 2019 4:16 am
2. When in 10 years' time, I have to sell all the bonds and buy "fresh" ones, is there a risk that that might be a very bad period to sell? Or doesn't it work like that for bonds?
What constitutes a bad period for selling bonds? If interest rates go down from here or if they go up? If they go down, you'd sell for a profit (tax consequences?) and rebalance into the other assets; the fresh 30-year bond you'd buy would presumably have a higher yield than a contemporary 20-year bond (in absence of yield inversion). If they go up, you'd sell for a loss and buy (and rebalance into) a fresh 30-year that's earning positive interest -- and that would be better (more traditional, alleviate your current fears) going forward. So both situations have their plusses.
senecaaa wrote:
Sat Dec 14, 2019 4:16 am
3. Why are people here talking about ladders? It will give you more to do I guess, but does it have any benefits?
If you buy just one bond and wait 10 years, you begin that decade with the high volatility of a 30-year bond and end it with the lower volatility of a 20-year bond. Having a ladder keeps the volatility somewhere in the middle. With the PP strategy we're trying to take advantage of bond volatility (we don't necessarily hold them for yield or to maturity). Personally, I'm not waiting 10 years to sell. I hold a "step-ladder" of LTTs -- only two rungs, with maturities staggered about three years apart. So the average maturity is always around 27 years.
User avatar
mathjak107
Executive Member
Executive Member
Posts: 2386
Joined: Fri Jun 19, 2015 2:54 am
Location: bayside queens ny
Contact:

Re: Buying and maintaining the LT bonds part of the PP

Post by mathjak107 » Sat Dec 14, 2019 5:25 pm

The logic here is flawed about if rates go up ...selling a bond that lost value because rates went up and losing money is no different then selling a losing stock and buying something you think is better .... a loss is a loss and it does not come back ...you just. Hope what you buy next be it another bond or stock does better.

If I sell my Tlt at a loss it means it is because the yield on the fund is higher for new buyers ... if I sell at a loss or even have a loss and buy more Tlt yielding higher that loss stays put ....when you average down the percentage you are down changes but the dollars down stay the dollars down

Losses are never good ...because you buy more of something when it’s down does not make the loss go away .....we can only hope that what we buy or add that is new money goes up enough to offset some of the loss
senecaaa
Associate Member
Associate Member
Posts: 42
Joined: Fri Nov 29, 2019 4:33 am

Re: Buying and maintaining the LT bonds part of the PP

Post by senecaaa » Sun Dec 15, 2019 2:49 am

mathjak107 wrote:
Sat Dec 14, 2019 5:25 pm
The logic here is flawed about if rates go up ...selling a bond that lost value because rates went up and losing money is no different then selling a losing stock and buying something you think is better .... a loss is a loss and it does not come back ...you just. Hope what you buy next be it another bond or stock does better.

If I sell my Tlt at a loss it means it is because the yield on the fund is higher for new buyers ... if I sell at a loss or even have a loss and buy more Tlt yielding higher that loss stays put ....when you average down the percentage you are down changes but the dollars down stay the dollars down

Losses are never good ...because you buy more of something when it’s down does not make the loss go away .....we can only hope that what we buy or add that is new money goes up enough to offset some of the loss
The thing is that the managers of TLT also have to sell and buy to keep a steady duration. So they also need to sell at a loss sometimes. They just do it a bit at the time I guess instead of all of it after 10 years.
senecaaa
Associate Member
Associate Member
Posts: 42
Joined: Fri Nov 29, 2019 4:33 am

Re: Buying and maintaining the LT bonds part of the PP

Post by senecaaa » Sun Dec 15, 2019 3:01 am

Pet Hog wrote:
Sat Dec 14, 2019 4:08 pm
senecaaa wrote:
Sat Dec 14, 2019 4:16 am
1. The only bond with 30-year maturity is https://www.boerse-berlin.com/index.php ... 0001102481. It has a 0% coupon and trades at a discount. Does all that matter?
I think in theory it doesn't matter what the coupon is -- positive, zero, or negative. All that matters is the volatility. That's what we're trying to benefit from with the PP strategy. But, in practice, there's something disconcerting about yields at zero and below. I guess banks and other big institutions are forced into buying them because there isn't enough paper currency around? If so, we can still benefit, but, like Kriegsspiel, I'm not sure I'd be buying. If -- like mathjak noted -- you're getting too much volatility, you can always buy less -- like 20% LTTs and 30% cash. The bond you linked to is selling at a 6+% discount, so there is always the option of profiting from it (ever so slightly) by holding to maturity.
Clear, great advice!

BTW I think institutions maybe buy these bonds because interest rates are negative all over Europe?
Pet Hog wrote:
senecaaa wrote:
Sat Dec 14, 2019 4:16 am
2. When in 10 years' time, I have to sell all the bonds and buy "fresh" ones, is there a risk that that might be a very bad period to sell? Or doesn't it work like that for bonds?
What constitutes a bad period for selling bonds? If interest rates go down from here or if they go up? If they go down, you'd sell for a profit (tax consequences?) and rebalance into the other assets; the fresh 30-year bond you'd buy would presumably have a higher yield than a contemporary 20-year bond (in absence of yield inversion). If they go up, you'd sell for a loss and buy (and rebalance into) a fresh 30-year that's earning positive interest -- and that would be better (more traditional, alleviate your current fears) going forward. So both situations have their plusses.
I was thinking about the scenario where rates go up. In case of stocks going down you just hold on to them. But now you are forced to sell bonds because their duration becomes too short. Isn't that a huge risk?
Pet Hog wrote:
senecaaa wrote:
Sat Dec 14, 2019 4:16 am
3. Why are people here talking about ladders? It will give you more to do I guess, but does it have any benefits?
If you buy just one bond and wait 10 years, you begin that decade with the high volatility of a 30-year bond and end it with the lower volatility of a 20-year bond. Having a ladder keeps the volatility somewhere in the middle. With the PP strategy we're trying to take advantage of bond volatility (we don't necessarily hold them for yield or to maturity). Personally, I'm not waiting 10 years to sell. I hold a "step-ladder" of LTTs -- only two rungs, with maturities staggered about three years apart. So the average maturity is always around 27 years.
OK I got it. This might actually also protect against the scenario above. Better not get into a position where you are forced to sell all your bonds.

Thanks!
Post Reply