Treasurey to sell $3 Trillion in Bonds by July

[pmward]

No empirical evidence to support this. But I suspect at least part of what we are seeing in the stock market is the smart money on Wall Street figuring out that however volatile stocks can be, and however bad the near term may look; long term stocks are a better bet than bonds with interest rates having been depressed by massive government intervention for decades and the Fed basically monetizing the entire bond market. However necessary this may be to prevent an economic crisis from turning into The Great Depression Part II, in the long run it is not sustainable. Once the current emergency starts to fade one of two things will happen. The first possibility is that the Fed will start to withdraw its QE to infinity program, in which case interest rates will start to rise. With yields already at or damn close to zero even a modest uptick in rates is going to crush the holders of bonds being issued right now. The second possibility is that the Fed, grasping how precarious the global debt situation is, especially the US Government's sovereign debt, will opt to continue propping up the bond market indefinitely, in which case we will get inflation. And again, bond holders will get killed as inflation adjusted returns effectively go negative across the yield curve.

So yeah. IMHO bonds have become exactly what they are not supposed to be... very high risk and very low return. Long term it's hard not to see equities as the better bet.

Option 3, and what is most likely, is they implement yield curve control just like Japan does, and not all that dissimilar to what we did in the WWII era. Has this created inflation in Japan? No. Can it create inflation? Maybe, but at the moment there is no evidence of this. But proof is that it certainly does not have to. I think inflation will of course come back some day. But I think we are at least 2-3 years out from it being a legitimate threat to worry about.

[Kevin K.]

Jonathan Clements certainly agrees with you:

https://humbledollar.com/2020/05/no-alternative/

But maybe you can shed more light on this from a PP perspective. Per Tyler's comments on the real function of the various assets, stocks and cash do well in times of inflation, gold is a wild card asset that tends to soar in flights to safety/market panics and also during periods of currency debasement/money printing like we're seeing now. Long bonds are for deflation, which seems to be more likely at the moment than at any time in the past 100 or more years. Yet as you point out, the potential losses for LTT's paying ~1.30% in the event of an interest rate spike are simply devastating.

What I'm unclear on in this unprecedented environment is what the right approach is with the cash and bond allocations within the PP. Increase cash but still hold 15-10% LTT's for deflation insurance? Go to all cash for that 50% of the portfolio until there's a vaccine or a return to interest-rate semi-normalcy? Split the difference and hold all or mostly ITT's?

And now I see the Fed adding to the festivities by buying corporate bonds:

https://www.marketwatch.com/story/the-f ... cle_inline

The quote that really got me from that article is this one:

“How we got here is ten years of successive liquidity pumped into the market, forcing money into risk assets, building up the economy through financial asset inflation because the real side of the economy didn’t come along to the same extent. The Fed created this monster so it has to be on the other side of it now.”

[pmward]

Jonathan Clements certainly agrees with you:

https://humbledollar.com/2020/05/no-alternative/

But maybe you can shed more light on this from a PP perspective. Per Tyler's comments on the real function of the various assets, stocks and cash do well in times of inflation, gold is a wild card asset that tends to soar in flights to safety/market panics and also during periods of currency debasement/money printing like we're seeing now. Long bonds are for deflation, which seems to be more likely at the moment than at any time in the past 100 or more years. Yet as you point out, the potential losses for LTT's paying ~1.30% in the event of an interest rate spike are simply devastating.

What I'm unclear on in this unprecedented environment is what the right approach is with the cash and bond allocations within the PP. Increase cash but still hold 15-10% LTT's for deflation insurance? Go to all cash for that 50% of the portfolio until there's a vaccine or a return to interest-rate semi-normalcy? Split the difference and hold all or mostly ITT's?

And now I see the Fed adding to the festivities by buying corporate bonds:

https://www.marketwatch.com/story/the-f ... cle_inline

The quote that really got me from that article is this one:

“How we got here is ten years of successive liquidity pumped into the market, forcing money into risk assets, building up the economy through financial asset inflation because the real side of the economy didn’t come along to the same extent. The Fed created this monster so it has to be on the other side of it now.”

From a PP perspective nothing changes. You hold your 4 assets. You rebalance. Over time you win. Simple as that. All the wailing and gnashing of teeth about bonds and cash does nothing. Every asset is going to go down someday. From a PP perspective, those days are the days to buy, not the days to sell. A loss in 25% of your portfolio is not going to be "devastating". Was the recent stock decline devastating to the PP? No. How about 2008? Again, no. How about the gold bear market from 2011? Again, no. So why would bonds be uniquely different in how this single asset effects your portfolio as a whole?

[Xan]

From a PP perspective nothing changes. You hold your 4 assets. You rebalance. Over time you win. Simple as that. All the wailing and gnashing of teeth about bonds and cash does nothing. Every asset is going to go down someday. From a PP perspective, those days are the days to buy, not the days to sell. A loss in 25% of your portfolio is not going to be "devastating". Was the recent stock decline devastating to the PP? No. How about 2008? Again, no. How about the gold bear market from 2011? Again, no. So why would bonds be uniquely different in how this single asset effects your portfolio as a whole?

Hear, hear!

[Kevin K.]

Thanks pmward! I needed to hear that.

I need to spend much less time over on the Bogleheads forum.

[pmward]

Thanks pmward! I needed to hear that.

I need to spend much less time over on the Bogleheads forum.

Oh you mean the anti-market-timers market-timers forum hahaha.