Buying and maintaining the LT bonds part of the PP

[senecaaa]

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!

[Kriegsspiel]

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.

[senecaaa]

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!

[mathjak107]

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]

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.

[jhogue]

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.

[mathjak107]

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]

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]

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.

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.

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.

[mathjak107]

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]

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]

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?

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?

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!

[mathjak107]

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.

all you care about is the total return , not how the fund makes the sausage as they say . if that fund performs it's function in the model how the managers do it is up to them .

if rates rise you will see the same losses in a bond ladder as the fund .

after a while perfect becomes the enemy of "good " as you try to encompass every vision of some doom or catastrophe in your head . the end result is the plan gets to complex and to hard to deal with ...

a spouse who has no knowledge at all should be able to take the reins over without worrying about how to form bond ladders or when and how to buy bonds . even having gold stored off shore can be an obstacle to a spouse dealing with things ..


nothing beats simplicity and the more twists and turns and work required the greater the odds perfection will screw up good .

i don't think harry considered a spouse who has to take things over easily in a lot of his "perfection " ideas as he tried to cover all the doom and gloom he could think of . especially in those days when many assets were hard to deal with for someone with no clue .

[senecaaa]

all you care about is the total return , not how the fund makes the sausage as they say . if that fund performs it's function in the model how the managers do it is up to them .

if rates rise you will see the same losses in a bond ladder as the fund .

after a while perfect becomes the enemy of "good " as you try to encompass every vision of some doom or catastrophe in your head . the end result is the plan gets to complex and to hard to deal with ...

a spouse who has no knowledge at all should be able to take the reins over without worrying about how to form bond ladders or when and how to buy bonds . even having gold stored off shore can be an obstacle to a spouse dealing with things ..


nothing beats simplicity and the more twists and turns and work required the greater the odds perfection will screw up good .

Yes, I agree with that. If I lived in the US I'd go with TLT

This is what comes closest in the EU: https://www.ishares.com/uk/individual/e ... -ucits-etf but has just a duration of 19 years.

[Tyler]

Yes, I agree with that. If I lived in the US I'd go with TLT

This is what comes closest in the EU: https://www.ishares.com/uk/individual/e ... -ucits-etf but has just a duration of 19 years.

I think you might be confusing maturity and duration. E20Y has an average maturity of 25 years and a duration of 19 years. TLT has an average maturity of 25 years and a duration of 18 years. IMO, they're not just close. They're virtually identical funds for different markets.

[senecaaa]

Yes, I agree with that. If I lived in the US I'd go with TLT

This is what comes closest in the EU: https://www.ishares.com/uk/individual/e ... -ucits-etf but has just a duration of 19 years.

I think you might be confusing maturity and duration. E20Y has an average maturity of 25 years and a duration of 19 years. TLT has an average maturity of 25 years and a duration of 18 years. IMO, they're not just close. They're virtually identical funds for different markets.

Ah yes, you're right. For some reason, I thought TLT had a longer duration.

[Pet Hog]

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.

With TLT you don't ever need to sell at a loss when running a PP. You would just rebalance/buy into the ETF. What I was talking about was the PP investor who holds LTTs directly and the maturity goes under 20 years. You might have to sell them at a loss and rebalance/buy new 30-years. I don't think it's flawed logic -- it's the philosophy of the PP!

[mathjak107]

a loss is a loss ... sold or not it is what it is .. at any given point in time that is your value whether you choose to care or notis another story . we just hope by not selling that it's value may change but that is all it's worth . ..there is no such thing as a loss only on paper .

whether you are down and choose to stay in the same investment or sell and choose to let the money ride in a different investment is irrelevant , a loss in value is a loss in value

[vnatale]

a loss is a loss ... sold or not it is what it is .. at any given point in time that is your value whether you choose to care or notis another story . we just hope by not selling that it's value may change but that is all it's worth . ..there is no such thing as a loss only on paper .

whether you are down and choose to stay in the same investment or sell and choose to let the money ride in a different investment is irrelevant , a loss in value is a loss in value

I have believed the same as you for over 25 years. Do you agree that each day that if you don't sell you are implicitly deciding to buy what you still own from the prior day?

The only practical difference between sold or not is any consequent tax ramifications from selling.

Vinny

[mathjak107]

a loss is a loss ... sold or not it is what it is .. at any given point in time that is your value whether you choose to care or notis another story . we just hope by not selling that it's value may change but that is all it's worth . ..there is no such thing as a loss only on paper .

whether you are down and choose to stay in the same investment or sell and choose to let the money ride in a different investment is irrelevant , a loss in value is a loss in value

I have believed the same as you for over 25 years. Do you agree that each day that if you don't sell you are implicitly deciding to buy what you still own from the prior day?

The only practical difference between sold or not is any consequent tax ramifications from selling.

Vinny

ABSOLUTELY . each day whether we are leaving the money in play overnight or selling out and buying in each morning , it is a new investment day going forward and it is all your money invested either way .

people make poor decisions because they think it is somehow different if they sell vs not sell .

no , except for taxes whether you attempt to ride the same investment back up or sell and ride another one back up is irrelevant except if taxes are involved. in both cases we hope our existing value goes up .