I should probably admit some error in that calculation since it relied on forward rates which include an unknown term premium. Actual market expected future rates could be lower or higher than what I used depending on whether the term premium is positive or negative respectively.klaus14 wrote: ↑Tue Nov 16, 2021 8:18 pmThat would only make sense if nominal return expectation was negative AND correlation to equities is positive.Lock wrote: ↑Tue Nov 16, 2021 10:29 amWhy not just go short (i.e. sell contracts)? YTD the stock/bond correlation has been positive so you can re-create a negative correlation asset.klaus14 wrote: ↑Mon Nov 15, 2021 4:45 pmskierincolorado wrote: ↑Fri Sep 10, 2021 2:39 pm In case anyone missed it, this is my "final" estimate.
.3% ITT
.4% LTT
4.5% domestic stock
5% international stock
The efficient frontier is: 34/22/44 domestic stock / intl stock / ITT
https://www.portfoliovisualizer.com/eff ... ints=false
***This is extremely sensitive to asssumptions. I suggest simply using the historical efficient frontier.***
I sold all my bond futures today.
Reasoning:
I am not confident that backtests apply to today. I was holding $1M worth of /ZN. ZN is close to 7 years maturity. The real yield on 7 years treasury is -1.5%. This is the median of return expectation for the 7 year time frame. So I'll loose (real) ~$15k (plus futures financing cost minus roll down yield)* every year on the average case. Notice that i am not saying rates will go up or down. This is just the mean expectation. Yes negative correlation with equities may help in the event of a recession. However, unlike past, now this hedge has significant costs compared to potential benefit (which is lower since real yields are at the lowest - less room to go down). I couldn't justify this given my investment horizon is very long (I am mid 30s)
*skierincolorado above did more complex math including roll down yield and forward rate estimates. Using that figure, nominal return expectation: 0.3% ITT => real: -2.8% (using breakeven). And quote is from Sept 7 and real rates are worse today.
So now my only bond holdings are: I Bonds, EE Bonds, an old CD yielding 2.75%
I am planning to buy /ZN when 7 years real yield is positive again.
I wish best of luck to everyone in this thread. I learned a lot here.
Disclaimer: I've been running a risk parity portfolio for about 3 years and this year I sold ZN contracts for the first time.
I don't know how to do the math myself unfortunately but skierincolorado posted +0.3 or +0.4 above which is too small for me to justify a position but still positive.
Ultimately I think the case for bonds rests mostly on a century of positive returns and weak correlations with stocks. There is some reason to believe demand for capital is much lower than it was historically, but ultimately I think we should expect positive returns from bond carry. Instances of sustained completely flat or inverted yield curves I think are rare or unheard of globally, although they are certainly a lot flatter than they used to be.
This market is in the many tens of trillions so we will be in good company