Barbell vs. ITT's in a zero interest rate environment

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Kevin K.
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Barbell vs. ITT's in a zero interest rate environment

Post by Kevin K. » Wed Apr 15, 2020 12:23 pm

I hope I'm not guilty of bringing up a beaten-to-death topic here but I'm curious as to whether any other seasoned posters here have chosen to go with intermediate-term Treasuries rather than the 30 year/MM barbell for either their PP or GB.

Yes I know it's a fool's errand to try to forecast interest rates. If there is truly an "it's different this time" (and I'm not at all sure there is) it'd be the Fed lowering interest rates to zero and clearly planning on debasing the dollar to an unprecedented degree. Historic returns for a PP or GB with ITT's are as good or better than with the barbell. Exposure to potentially huge losses in the event of an interest rate spike are less, but conversely with the ITT's you miss out on big bumps like we've seen thus far (i.e. TLT up over 20% YTD vs. VGIT at under 7%) - and you also have to "fudge" some of the ITT allocation if you want to have any cash, whereas the barbell includes it.

Thoughts?
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Re: Barbell vs. ITT's in a zero interest rate environment

Post by Smith1776 » Wed Apr 15, 2020 12:52 pm

You know how some people prefer a big screen at a distance in their living room? But how some other people prefer getting all cozy and watching a small screen up close instead?

That's basically the difference between ITTs and the long/short barbell.

To be fair, ITTs are simpler, while the barbell allows some more flexibility. The long run difference in performance has been minimal though. Go with whatever you're most comfortable with.
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Re: Barbell vs. ITT's in a zero interest rate environment

Post by Kevin K. » Fri Apr 17, 2020 12:52 pm

Thought I'd put in a link to Vnatale's timely reposting of comments made by Craig R and MT in 2016 regarding what they'd do with long bonds in an ultra low interest rate environment.

viewtopic.php?f=3&t=6675&start=240
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Re: Barbell vs. ITT's in a zero interest rate environment

Post by PrimalToker » Fri Apr 17, 2020 7:18 pm

Aren't the LTT bought for deflation protection? This would make interest rates irrelevant. As long as LTT is above T-bills then its a buy and one would not even consider ITT. The fact some are considering interest rates shows an attempt at predicting the future does it not? Whereas the PP theory does not make predictions, it is the same in all economic climates.
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Re: Barbell vs. ITT's in a zero interest rate environment

Post by Kevin K. » Fri Apr 17, 2020 7:53 pm

PrimalToker wrote:
Fri Apr 17, 2020 7:18 pm
Aren't the LTT bought for deflation protection? This would make interest rates irrelevant. As long as LTT is above T-bills then its a buy and one would not even consider ITT. The fact some are considering interest rates shows an attempt at predicting the future does it not? Whereas the PP theory does not make predictions, it is the same in all economic climates.
Well there's Harry Browne's original explanation of the role of LTT's and then there's Tyler's updated one which I find more credible:

"An Alternative Explanation for the Permanent Portfolio

While it has been a little while since I read Harry's and Craig/MT's works, the traditional explanation for the four PP assets is pretty well-known and boils down to selecting assets that perform best in the four economic conditions:

Stocks: Prosperity
Cash: Recession (or "tight money")
Bonds: Deflation
Gold: Inflation

The more I study historical data for these assets (not just in the US but also in other countries) the more I appreciate Browne's insight and believe these four assets are indeed a great mix for diversification purposes. That said, I think our traditional explanation may be due for a revision. Here's how I'm starting to personally understand the assets:

Stocks: Economic Prosperity
Gold: Economic Uncertainty
Bonds: Falling rates
Cash: Rising rates

Basically, I think that maybe we should flip cash and gold in terms of what we assume they protect against. When you look at the data, interest rates are closely tied to inflation and properly invested cash really is an impressive inflation hedge (link). Also, gold is very clearly negatively correlated to stocks (link) and I'd argue that a rare event like hyperinflation where gold soars is really more of an economic chaos problem than a normal inflation problem.

Now maybe it's just semantics, but I suspect that this alternative explanation may also help with two common roadblocks that the PP faces with new investors -- an aversion to gold and cash. Lots of people get hung up on gold as an inflation hedge (rightfully so, IMHO, as gold price is affected by much more than inflation), but have an easier time understanding gold as a flight-to-safety asset. And lots of people don't see the point of cash, but perhaps if they understood how well it works in a rising-rate/rising-inflation environment (something the same people still fear) it would look a lot more appealing."

As Craig R and others have suggested you'd have to be a fool to not at least consider the implications of 1% or even sub-1% interest rates on 30 year Treasuries before investing in them. If the real purpose of LTT's is to protect against falling rates and rates have nowhere to fall then ??? That said, the barbell has done just what it's supposed to so far this year.
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Re: Barbell vs. ITT's in a zero interest rate environment

Post by WhiteElephant » Sat Apr 18, 2020 12:13 am

Lately I've been thinking about this issue as well. The Dutch 30Y treasury rate sits at zero and Germany has negative long term rates. The yield of most saving accounts is also around 0%.

My current allocation to LT bonds are individual Dutch LT's and I was thinking of maybe switching to a euro hedged global bond fund instead of LT's and a savings account. In the end I decided against it. I like the flexibility of having separate holdings for bonds and cash, and as a small investor you usually get a free lunch in the cash allocation. Government ensured savings accounts usually have a far better yield than other short-term fixed income options.

What I did decide to do was to lower my target duration of my LT bonds. I usually just buy the longest maturity bond I can buy, but that strategy currently gives me a duration of around 20 years. This feels a bit too explosive to me considering the higher volatility and bond convexity at these low rates. I'm aiming for a duration of 15 years now.
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Re: Barbell vs. ITT's in a zero interest rate environment

Post by mathjak107 » Sat Apr 18, 2020 3:31 am

there is a difference on volatile days between a barbell of long term and short term vs intermediate .

long term bonds trade like stocks based on fear, greed , and perception ... they move way more in the barbell than intermediate term does .

just like t-bills just did , longer term bonds can have negative rates so appreciation never stops .


entire countries need safe places to put huge sums of their money and the us treasuries are the chosen vehicle ..they don't mind paying a bit to have the protection outside their own country ... so negative rates on bonds can be unstoppable by the fed . ltt's will keep appreciating the more negative they go
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Re: Barbell vs. ITT's in a zero interest rate environment

Post by jhogue » Mon Apr 20, 2020 10:23 pm

I own 0% ITTs.

I have nothing against ITTs, I just like having a barbell with LTTs all in tax deferred and as much cash as possible in taxable. I like the greater volatility of LTTs and the greater optionality that comes with a nice pile of safe and liquid cash.
“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!"
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Re: Barbell vs. ITT's in a zero interest rate environment

Post by Kbg » Tue Apr 21, 2020 10:00 pm

https://www.portfoliovisualizer.com/bac ... tion4_3=50

This is a good 3 year snapshot...I did not realize STTs with LTTs did so poorly. However, cash LTTs vs. ITTs...yet another big, it really just does not matter.

This was the opposite of a zero interest environment and is the threat you have to worry about...if we stay here, it's a no brainer...do the barbell.
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Re: Barbell vs. ITT's in a zero interest rate environment

Post by jhogue » Wed Apr 22, 2020 7:34 am

1. Why the choice of 1978 - 1981 time period? I don't think it is very representative of short term interest rates. As I recall, this was the period when Paul Volcker jacked up short term interest rates in his campaign to crush inflation. My Dreyfus money market fund was returning something like a record 15-20% interest in some months.

2. Tax treatment really matter when thinking about real results. Portfolio Visualizer does not allow you to see its impacts when comparing returns for money market funds, STTs, CDs, and I-bonds.
“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!"
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Re: Barbell vs. ITT's in a zero interest rate environment

Post by Kbg » Wed Apr 22, 2020 3:15 pm

I'm answering the OP directly. The question was ITTs vs. a barbell not how do I optimize my shorter term interest bearing assets.

The period chosen was a period of extreme inflation and rapidly rising interest rates which is about the only time we would really even be interested in this question because rising interest rates are the biggest danger/cause large losses to LTTs.

If we stay where we are at currently then it is a good idea to maintain LTTs due to convexity and their ability to offset stock losses assuming flights to quality continues. Performance wise things will end up to being pretty close to each other. Let me illustrate using today's rates for high grade corporate bonds (I'm using these numbers because I have easy access to them, but the principle will be the same with government bonds of the same risk)

Rates
1-3yr 2.28
+15yrs 3.57

Simple math...(2.28+3.57)/2 = 2.925

Rates
5-7yr 2.72
7-10yr 3.11

It's not a coincidence that the simple math number lands in between the two latter interest rates

The actual computation is different, but the point is illustrated. All things equal, a bond returns it's interest rate and duration is duration whether implemented via a single bond in the middle or two bonds at each end of a time frame.
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