Isn't that just an indirect way of saying the short end returns are better? From a diversification perspective too I think diversifying the risk is more important than diversifying the return.comeinvest wrote: ↑Thu Oct 21, 2021 1:36 amYou would favor equal duration risk per bucket. But then total returns would be dominated by the returns of the short end. Trying to look at it purely from a diversification point of view, considering the future might be different from the past.skierincolorado wrote: ↑Wed Oct 20, 2021 11:34 pmYou know what my answer will be haha. Would be a very solid plan IMOcomeinvest wrote: ↑Wed Oct 20, 2021 11:23 pm I know skier is fond of the ZF; but if I wanted to hedge my bets by diversifying across ZF/ZN/TN/ZB (omitting UB for the moment as it seems like it's considered a sin in this thread) - I cannot decide should I use roughly equal dollar amounts (like NTSX), or roughly equal duration risk in each bucket for diversification. Thoughts?
Also, if the future is going to be different, you'd make a bunch of money in the interim. For the future to be different, the term premium on shorter durations would have to decrease relative to the term premium on longer durations. In other words, the spread between the 30y and 5y rate would grow. We'd make more money on the 5y / lose less money than we would on the 30y in the interim. So we'd be glad to own the 5y, then we'd end up in this weird unprecedented situation where the yield on the 5y was like .25% while the yield on the 30y was 2%+ (with 0% short term rates - not negative). At that point I think it would be pretty obvious to abandon the 5y - after we had reaped all the benefit.
We can already *guarantee* that over some reasonable time horizon ZF will have better returns than UB (on a per duration basis). This is because the current interest rate per duration is already much much higher. For ZF to do worse, the rate on ZF would have to keep rising faster than the rate on UB. Which just makes it a better and better buy and there is a limit to how much faster it can rise than UB because eventually the curve would go inverted. Like do we really see a situaiton 5 years from now where ZF has 10% interest rate and UB is 5%? Even if that happened, I'd be fine with it because I'd still just hold knowing it can't get more inverted forever.