Lightening up on LTTs?

[barrett]

The long bond ended today yielding 2.96. Is anyone else trimming their holdings a bit? This was the asset that was the hardest for me to commit to and I just can't see bonds doing so well that they go up to 35% of my PP. I've sold a few but only to bring my bond allocation back to 25%. Just curious at what level others get the urge to tinker... if at all.

[dualstow]

I'm not trimming just to trim, but I have a limit sell order placed to get rid of my last bit of TLT at breakeven, leaving me with only directly held treasury bonds.  I have to admit, I'm tempted to get rid of some real bonds too, the "worst" ones, now that they are bobbing up above breakeven. But then, where's my protection when stocks crash? Not guaranteed to zig when stocks zag, but at least a chance of protection.

[barrett]

Yeah, obviously these bonds have carried the portfolio this year against anything the "experts" would have predicted. When I was trying to figure out how to make transactions on a new TD Ameritrade account earlier this year, the dude I was talking to strongly recommended that I not buy LTTs "because interest rates are going up" I guess I just don't believe there is enough realistically possible upside at these levels to completely offset a 40%-50% stock crash.

Just looked at the numbers and in June of 2008 the 30-year bond was yielding 4.8%. By mid-December of that year the yield was down to around 2.5%. Classic PP performance but at a certain point (meaning when bonds are already expensive), there's not a lot of pop left.

The scenario I keep coming back to is that if we really are in a deflationary environment that is going to LAST for years, then of course I want those 11/15/43 bonds in my portfolio because their 3.75% coupon payments will be a big plus over a longer period (ditto for holding cash that pays nothing & possibly gold for a "negative-real-rate" environment).

[dualstow]

In 2010, a non-pp'er friend was wondering aloud why I was buying long bonds. "The yield is only 4%", he practically yelled. I'm not expecting a lot of upside either, from this point. But, to paraphrase what you wrote above, Barrett, just to move sideways and collect the interest would be enough.

[barrett]

Don't know how much difference it makes in the big picture but I did lighten up a bit on LTTs during that spike this morning. It feels great to sell high but when I look at how little $ I actually "took off the table" in profits, well, let's just say that, as always, it's best to concentrate on the career. Not quitting my day job to become a day trader but, man, what an opening hour or so this morning.

To paraphrase a recent Bean post, "I now crawl back into my cave."

[rickb]

Yeah, obviously these bonds have carried the portfolio this year against anything the "experts" would have predicted. When I was trying to figure out how to make transactions on a new TD Ameritrade account earlier this year, the dude I was talking to strongly recommended that I not buy LTTs "because interest rates are going up" I guess I just don't believe there is enough realistically possible upside at these levels to completely offset a 40%-50% stock crash.

Just looked at the numbers and in June of 2008 the 30-year bond was yielding 4.8%. By mid-December of that year the yield was down to around 2.5%. Classic PP performance but at a certain point (meaning when bonds are already expensive), there's not a lot of pop left.

The scenario I keep coming back to is that if we really are in a deflationary environment that is going to LAST for years, then of course I want those 11/15/43 bonds in my portfolio because their 3.75% coupon payments will be a big plus over a longer period (ditto for holding cash that pays nothing & possibly gold for a "negative-real-rate" environment).

Regarding how much "pop" is left:

If long term rates drop from 3% to 2.5% 30 year bonds will go up about 10.5%.

If long term rates drop from 3% to 2%, 30 year bonds will go up about 22%.

If long term rates drop from 3% to 1.5%, 30 year bonds will go up about 36%.

If long term rates drop from 3% to 1%, 30 year bonds will go up about 52%.

If stocks drop 50% can long term bonds go up enough to compensate?  Absolutely (long term interest rates drop to 1%).  In 2008 (for the year) stocks were down 37%, long term bonds were up 22.5%, cash was up 6.7% and gold was up 5% for a PP total of down 0.7% (per Craig's numbers at https://web.archive.org/web/20160324133 ... l-returns/).  Will long term bonds increase by 50% if stocks drops by 50%? 

Who knows.

However, any increase in long term bonds will tend to offset the drop in stocks.  If stocks drop 50% and long term bonds only increase 20%, the overall portfolio (assuming gold stays the same) decreases by about 7.5%.  Way better than a 60/40 BH portfolio (which would drop by something like 25%).

[barrett]

However, any increase in long term bonds will tend to offset the drop in stocks.  If stocks drop 50% and long term bonds only increase 20%, the overall portfolio (assuming gold stays the same) decreases by about 7.5%.  Way better than a 60/40 BH portfolio (which would drop by something like 25%).

Thanks for posting those numbers, rickb. In your example above, don't forget that you are sitting on way more cash than a 60/40 BH investor would be. With stocks down 50% and bonds up 20%, it would be time to reallocate funds and you would have your dry powder at the ready.

Not that it matters one iota what I can imagine, BUT, I can see long-term rates going as low as 1.5%-2% but not as low as 1%. How low are long-term rates in Japan now? Can't seem to find the data at the moment.