prioritarian wrote: ↑Wed Nov 24, 2021 4:05 pm
steve r wrote: ↑Wed Nov 24, 2021 3:00 pm
prioritarian wrote: ↑Wed Nov 24, 2021 1:12 pm
The idea that someone could predict that the return of LTT, for example, will be negative over ~20+ years is patently absurd. Treasury yields are not constant and an increase in yield over the medium- to long-term wipes away price losses due to increasing yield.
Tracking bond total returns over 20 years or with great precision might be a touch absurd.
But the reality is forecast of future bond total returns (as opposed to inflation or stock returns) is not that hard if you are simply trying to get "good enough" estimates -- the expected total return is very close to the starting yield. Increasing yields are offset by a decline in bond prices.
I don't think your graph is showing total returns but maybe I'm mistaken.
I want to clarify that I'm not a LTT bond bull and think it's possible, even likely, that LTTs will have very poor returns for a number of years
but I have a much longer investment horizon than a few years .
It's really not a matter of graphs of past bond return, which are entirely irrelevant to expected return now. There is no reason to set the expected return on riskless bond investing higher than yield on today's curve to the investment horizon. And even if that's past 30 yrs, no reason to think that if the US govt issued a 50 yr TIPS it would have a greatly higher yield than the 30 yr TIPS. The expected return of riskless investing is <0% real pre tax to the horizon. We're just kidding ourselves with arguments like 'but in the future bond yield could go back up'. They could also go further down. If the market is at all efficient and it was clear the 'very long run' expected return *now* (past again irrelevant) on bonds was significant positive real...very long term rates now would go to positive yields. Or at least the forward rates on the TIPS curve starting 10 or 20 yrs out would go to significant positive, they aren't.
There is some degree of validity in looking at forward interest rates for money one would only invest in the future, not by timing but I mean with money you don't yet have. The expected return on that money is best estimated by forward rates on today's curve, and since eg. the 30 yr TIPS has a significantly less negative yield than the 10 yr TIPS the forward rate '10x30' isn't very negative. But it still isn't remotely near where bond expected real returns used to be.
And therefore one should think through the fallacy, I believe it is, of assuming one would never invest for a negative real return. The need, if any, for low risk assets in your portfolio is not a defined function of expected return. This is admitted in 'I don't invest in bonds for their great return'. Thinking through the implication of that sentence makes it clear there's no arbitrary cut off at 0% real return where 'bonds no long make sense'. They are only sensible or not compared to what you can get *now* on other investments, your future goals and risk tolerance. The expected return doesn't factor in directly.
And those investing mainly in taxable have been investing in safe assets at negative after tax expected real return (the only return that matters in taxable) for years. The fact that the realized after tax real return might have turned out positive (though didn't necessarily) for bonds sold prior to maturity, because of falling rates, doesn't affect the past decision. I knew years ago that at my tax bracket safe investments had negative after tax real expected return. That was not a rational reason to shift to 100% risk assets (there could be good reasons to have that allocation, but the level of bond yields would not would not automatically dictate it, and as I mentioned before, the seeming assumption by some that stock expected return hasn't declined just as much as bond yields have, or perhaps more, is a questionable one also).