First 20% of bonds in long-term Treasuries

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slicendice
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Re: First 20% of bonds in long-term Treasuries

Post by slicendice »

Morik wrote: Thu Feb 03, 2022 9:54 am Looking at implementing a long duration treasury strategy, which bond funds are candidates?
Looking on my own I see EDV at ~24 year duration at 0.06 ER, GOVZ/ZROZ at ~27 years duration at 0.15 ER.
Everything else I have found when looking for long duration bond funds is ~15 year duration or less.

EDIT: What are good intermediate or long duration TIPS funds? I see short term is VTIP/STIP with ~2.5 year duration, (I'm sure there are others, these two have low ER), I see SCHP at ~7.5 year duration for 0.05 ER, and LTPZ for ~21 year duration at 0.2 ER.
For long term (10-30 yr) nominal treasuries VGLT with a duration of 18-19 yr. If you are at Fidelity FNBGX ER = 0.03, 18.5 yr duration.

For TIPS at Fidelity there is FIPDX ER = 0.05, 5 yr duration-- on this forum I have seen it mentioned that it is more likely similar to the duration of SCHP.
As far as I know for funds LTPZ is the only long-term one available. If you don't want to pay the ER on LTPZ, you way want to consider building your own long term ladder to save the ER of LTPZ buying different maturity long term TIPS at auction.
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Re: First 20% of bonds in long-term Treasuries

Post by Morik »

One more question--if I'm holding I & EE bonds, how would I account for those duration wise?
E.g., if my target duration is 21 years and I have $100k to invest in funds and have $20k in Ibonds and $20k in EEbonds. I am targeting EDV (24 year.) and SCHQ (18 years).

Would I put $50k EDV & $50k SCHQ (so ignore the I & EE bonds)?
Or would I assign some duration to the I & EE bonds (not sure how to calculate that), and include them?
E.g., if I determined they should be treated like having duration 22, I would do:
$40k/$140k * 22 + $57k/$140k * 18 + $43k/$140k * 24 ~= 21 years.

I'm guessing since I & EE bonds are non-marketable, the concept of duration doesn't really apply, so I should just ignore them for duration calculations? I.e., in the above example I'd go 50/50 EDV/SCHQ, not 43/57.
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Re: First 20% of bonds in long-term Treasuries

Post by SnowBog »

Morik wrote: Fri Feb 18, 2022 10:49 pm One more question--if I'm holding I & EE bonds, how would I account for those duration wise?
Given their doubling at 20 years, I think it's safe to consider EE duration of 20 years (or whatever is left).

Not sure on I Bonds...
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FoundingFather
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Re: First 20% of bonds in long-term Treasuries

Post by FoundingFather »

Morik wrote: Fri Feb 18, 2022 10:49 pm One more question--if I'm holding I & EE bonds, how would I account for those duration wise?
Duration matching is all about offsetting the interest rate risk of the fixed income portion of a portfolio. It is an attempt to ensure that if interest rates increase, which would lower your bond fund value, that the fund has time to recover around when your planned expenses are expected. The correct rule of thumb for this is to have the bond fund duration match how far away your expenses are, as you have implied is your goal.

Since both I bonds and EE bonds are non-marketable and can never lose value, they act more like cash or a CD than a bond. In essence, they are a 0 duration bond that still makes a decent return.

I'm not a duration-matching kind of guy (I'm still willing to hang out with duration matchers, I just don't participate myself :P), but for your example, if you wanted a duration of 21 years, an extended duration bond fund, such as EDV, would be the right choice to combine with I bonds or EE bonds.

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Morik
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Re: First 20% of bonds in long-term Treasuries

Post by Morik »

FoundingFather wrote: Sat Feb 19, 2022 1:59 am
Morik wrote: Fri Feb 18, 2022 10:49 pm One more question--if I'm holding I & EE bonds, how would I account for those duration wise?
Duration matching is all about offsetting the interest rate risk of the fixed income portion of a portfolio. It is an attempt to ensure that if interest rates increase, which would lower your bond fund value, that the fund has time to recover around when your planned expenses are expected. The correct rule of thumb for this is to have the bond fund duration match how far away your expenses are, as you have implied is your goal.

Since both I bonds and EE bonds are non-marketable and can never lose value, they act more like cash or a CD than a bond. In essence, they are a 0 duration bond that still makes a decent return.

I'm not a duration-matching kind of guy (I'm still willing to hang out with duration matchers, I just don't participate myself :P), but for your example, if you wanted a duration of 21 years, an extended duration bond fund, such as EDV, would be the right choice to combine with I bonds or EE bonds.

Founding Father
I am curious, if you are willing to share, what are reasons not to duration match?
The one I can think of off the top of my head are if you aren't sure on your investment horizon. Are there other good reasons not to duration match?
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Re: First 20% of bonds in long-term Treasuries

Post by Ketawa »

Morik wrote: Fri Feb 18, 2022 10:49 pm One more question--if I'm holding I & EE bonds, how would I account for those duration wise?
E.g., if my target duration is 21 years and I have $100k to invest in funds and have $20k in Ibonds and $20k in EEbonds. I am targeting EDV (24 year.) and SCHQ (18 years).

Would I put $50k EDV & $50k SCHQ (so ignore the I & EE bonds)?
Or would I assign some duration to the I & EE bonds (not sure how to calculate that), and include them?
E.g., if I determined they should be treated like having duration 22, I would do:
$40k/$140k * 22 + $57k/$140k * 18 + $43k/$140k * 24 ~= 21 years.

I'm guessing since I & EE bonds are non-marketable, the concept of duration doesn't really apply, so I should just ignore them for duration calculations? I.e., in the above example I'd go 50/50 EDV/SCHQ, not 43/57.
Non-marketability does not mean that I Bonds and EE Bonds don't have a duration. The question becomes, when would you redeem them in favor of something better?

You can't rebalance using I Bonds and EE Bonds, but rebalancing is not the only way to realize their outsize value compared to similar alternatives. You can simply hold on to them and reap the higher returns. Alternatively, you can invest fewer dollars up-front to get the same returns as if you invested in a fund like EDV or LTPZ, with a similar risk profile.

I wrote this earlier in the thread:
Ketawa wrote: Sun Jan 30, 2022 10:24 am
Pawpatrol wrote: Sat Jan 29, 2022 6:47 pm If I am trying to find my overall fixed income duration what do I count I and EE bonds as in the calculation (i own a bunch of them).
If your EE Bonds are beyond the initial holding period where you might possibly redeem them if rates for nominal Treasuries went far higher, then their duration is however long it will take until they double in price.

For I Bonds, it is more complicated. For example, consider 0% real yield (i.e. 0% fixed rate) I Bonds. The question is, when does the market expect TIPS to offer 0% real yield as an alternative? TIPS don't currently offer any positive yields (https://www.treasury.gov/resource-cente ... =realyield), but the yield curve is pricing for rates to be 0% in 5 years for maturities 15 years or higher. The best it is projecting to offer is 0.2%, and that's not for 20 years from now. The optionality of I Bonds also has some value, so you might never choose to redeem 0% fixed rate I Bonds in exchange for TIPS, and would keep them until full maturity.

This is basically an adaptation of this post from this thread: what is an ibonds duration? There are a lot of perspectives in the thread, I happen to agree with those that say the duration is not zero.
For asset allocation purposes, I would value the I Bond and EE Bonds at whatever is the prevailing rate for TIPS and nominal Treasuries, respectively. For example, consider a $10K EE Bond that has a 0.10% fixed rate and has been held for 19 years. There is virtually no circumstance where you will redeem this before 1 more year has passed. To count it in my portfolio, I would compare it to 1-year nominal Treasuries, which currently offer 1.03%. In my portfolio, the EE Bond would be a fixed income asset with a 1 year duration that has a value of $19,794. I would not use the value that the Treasury gives me, which is $10,192, since there is no circumstance where I will redeem at that value. An EE Bond that will have a value of $20K in 1 year and a 1-year nominal Treasury that was worth $19,794 today would have virtually the same risk and return characteristics in my portfolio.
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Re: First 20% of bonds in long-term Treasuries

Post by FoundingFather »

Morik wrote: Sat Feb 19, 2022 9:05 am I am curious, if you are willing to share, what are reasons not to duration match?
The one I can think of off the top of my head are if you aren't sure on your investment horizon. Are there other good reasons not to duration match?
It's along those lines - I do not have fixed income for a planned future expense. Instead, it is my ballast / emergency fund. I am still working and have a decent income, so all of my expenses come out of my income. When I get closer to retirement, I will enlarge my fixed income for the purpose of allowing for retirement whenever I decide it's the right time, without worrying about what the market has done (i.e. Sequence of return risk).

Given that I use my fixed income as ballast, I heavily favor series I savings Bonds, since they are amazing for that purpose.

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Re: First 20% of bonds in long-term Treasuries

Post by bigoilboomer »

9-5 Suited wrote: Thu Aug 08, 2019 5:35 pm This won’t be the most intellectual thing I’ll ever post, but it’s just hard to believe that I’ll reap much meaningful financial gain from locking into a bunch of 2% nominal long term treasuries as a 33 year old.

Without using a backtest (because of the specific bond regime it will cover) what is the actual expected forward looking range of ending portfolio values for 20% ITT vs. 20% LTT? Maybe it’s a lot bigger difference than I’m giving credit?

And this isn’t a comment on the diversification of risk aspect, which I totally agree with.
What are you comparing the 2% to? If I'm grossing $100/hr playing poker in home game but paying $75/hr in rake, is that better than grossing $50/hr in a casino and paying only $20/hr in rake?

People think the stock market has made 10% historically. It hasn't. That's its average return, not its compound return.

Stocks' compound return was 7–9% historically. The risk-free rate was 3–4% historically. Compared to history and people's inflated ideas of a 10% return, 2% is garbage.

Stocks' forward return is only 5–6%. The interest rate is 0% (for a few more weeks). So if I can borrow at 0.3% to make 2%—effectively getting paid to hedge my own portfolio with LTT!—2% doesn't look so bad.

(LTT used to pay 8–10%. But that's back when inflation was persistently high and also when LTT had high beta. We try to "control" inflation these days instead of letting it be whatever it's supposed to be, which might or might not end in disaster... IDFK.)
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Re: First 20% of bonds in long-term Treasuries

Post by 9-5 Suited »

bigoilboomer wrote: Sun Feb 20, 2022 1:52 pm
9-5 Suited wrote: Thu Aug 08, 2019 5:35 pm This won’t be the most intellectual thing I’ll ever post, but it’s just hard to believe that I’ll reap much meaningful financial gain from locking into a bunch of 2% nominal long term treasuries as a 33 year old.

Without using a backtest (because of the specific bond regime it will cover) what is the actual expected forward looking range of ending portfolio values for 20% ITT vs. 20% LTT? Maybe it’s a lot bigger difference than I’m giving credit?

And this isn’t a comment on the diversification of risk aspect, which I totally agree with.
What are you comparing the 2% to? If I'm grossing $100/hr playing poker in home game but paying $75/hr in rake, is that better than grossing $50/hr in a casino and paying only $20/hr in rake?

People think the stock market has made 10% historically. It hasn't. That's its average return, not its compound return.

Stocks' compound return was 7–9% historically. The risk-free rate was 3–4% historically. Compared to history and people's inflated ideas of a 10% return, 2% is garbage.

Stocks' forward return is only 5–6%. The interest rate is 0% (for a few more weeks). So if I can borrow at 0.3% to make 2%—effectively getting paid to hedge my own portfolio with LTT!—2% doesn't look so bad.

(LTT used to pay 8–10%. But that's back when inflation was persistently high and also when LTT had high beta. We try to "control" inflation these days instead of letting it be whatever it's supposed to be, which might or might not end in disaster... IDFK.)
Weird to be quoted from a post in 2019. My views on this have changed substantially as I learned more about the philosophy of duration-matching from Vineviz. I still am leery of too much in nominal LTT as inflation risk is (quite obviously) a real thing, and a reversal of correlations could be a bit nasty. So I have about 25% LTT, 25% LTIPS, and 50% TBM/ITT as my bond holdings (along with a smattering of I and EE bonds).
bigoilboomer
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Re: First 20% of bonds in long-term Treasuries

Post by bigoilboomer »

9-5 Suited wrote: Mon Feb 21, 2022 3:52 pm
bigoilboomer wrote: Sun Feb 20, 2022 1:52 pm
9-5 Suited wrote: Thu Aug 08, 2019 5:35 pm This won’t be the most intellectual thing I’ll ever post, but it’s just hard to believe that I’ll reap much meaningful financial gain from locking into a bunch of 2% nominal long term treasuries as a 33 year old.

Without using a backtest (because of the specific bond regime it will cover) what is the actual expected forward looking range of ending portfolio values for 20% ITT vs. 20% LTT? Maybe it’s a lot bigger difference than I’m giving credit?

And this isn’t a comment on the diversification of risk aspect, which I totally agree with.
What are you comparing the 2% to? If I'm grossing $100/hr playing poker in home game but paying $75/hr in rake, is that better than grossing $50/hr in a casino and paying only $20/hr in rake?

People think the stock market has made 10% historically. It hasn't. That's its average return, not its compound return.

Stocks' compound return was 7–9% historically. The risk-free rate was 3–4% historically. Compared to history and people's inflated ideas of a 10% return, 2% is garbage.

Stocks' forward return is only 5–6%. The interest rate is 0% (for a few more weeks). So if I can borrow at 0.3% to make 2%—effectively getting paid to hedge my own portfolio with LTT!—2% doesn't look so bad.

(LTT used to pay 8–10%. But that's back when inflation was persistently high and also when LTT had high beta. We try to "control" inflation these days instead of letting it be whatever it's supposed to be, which might or might not end in disaster... IDFK.)
Weird to be quoted from a post in 2019. My views on this have changed substantially as I learned more about the philosophy of duration-matching from Vineviz. I still am leery of too much in nominal LTT as inflation risk is (quite obviously) a real thing, and a reversal of correlations could be a bit nasty. So I have about 25% LTT, 25% LTIPS, and 50% TBM/ITT as my bond holdings (along with a smattering of I and EE bonds).
Yeah, I'm an idiot. I'm new here, and your post was at the bottom of the first page of an active thread. I didn't see there were many more pages. :?
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Re: First 20% of bonds in long-term Treasuries

Post by 9-5 Suited »

bigoilboomer wrote: Thu Feb 24, 2022 9:37 am
9-5 Suited wrote: Mon Feb 21, 2022 3:52 pm
bigoilboomer wrote: Sun Feb 20, 2022 1:52 pm
9-5 Suited wrote: Thu Aug 08, 2019 5:35 pm This won’t be the most intellectual thing I’ll ever post, but it’s just hard to believe that I’ll reap much meaningful financial gain from locking into a bunch of 2% nominal long term treasuries as a 33 year old.

Without using a backtest (because of the specific bond regime it will cover) what is the actual expected forward looking range of ending portfolio values for 20% ITT vs. 20% LTT? Maybe it’s a lot bigger difference than I’m giving credit?

And this isn’t a comment on the diversification of risk aspect, which I totally agree with.
What are you comparing the 2% to? If I'm grossing $100/hr playing poker in home game but paying $75/hr in rake, is that better than grossing $50/hr in a casino and paying only $20/hr in rake?

People think the stock market has made 10% historically. It hasn't. That's its average return, not its compound return.

Stocks' compound return was 7–9% historically. The risk-free rate was 3–4% historically. Compared to history and people's inflated ideas of a 10% return, 2% is garbage.

Stocks' forward return is only 5–6%. The interest rate is 0% (for a few more weeks). So if I can borrow at 0.3% to make 2%—effectively getting paid to hedge my own portfolio with LTT!—2% doesn't look so bad.

(LTT used to pay 8–10%. But that's back when inflation was persistently high and also when LTT had high beta. We try to "control" inflation these days instead of letting it be whatever it's supposed to be, which might or might not end in disaster... IDFK.)
Weird to be quoted from a post in 2019. My views on this have changed substantially as I learned more about the philosophy of duration-matching from Vineviz. I still am leery of too much in nominal LTT as inflation risk is (quite obviously) a real thing, and a reversal of correlations could be a bit nasty. So I have about 25% LTT, 25% LTIPS, and 50% TBM/ITT as my bond holdings (along with a smattering of I and EE bonds).
Yeah, I'm an idiot. I'm new here, and your post was at the bottom of the first page of an active thread. I didn't see there were many more pages. :?
Ha! All good. It was just odd to go back in the time machine. I guess it’s a good sign that I have old posts from myself that I don’t agree with anymore? :sharebeer
secondopinion
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Re: First 20% of bonds in long-term Treasuries

Post by secondopinion »

9-5 Suited wrote: Mon Feb 21, 2022 3:52 pm
bigoilboomer wrote: Sun Feb 20, 2022 1:52 pm
9-5 Suited wrote: Thu Aug 08, 2019 5:35 pm This won’t be the most intellectual thing I’ll ever post, but it’s just hard to believe that I’ll reap much meaningful financial gain from locking into a bunch of 2% nominal long term treasuries as a 33 year old.

Without using a backtest (because of the specific bond regime it will cover) what is the actual expected forward looking range of ending portfolio values for 20% ITT vs. 20% LTT? Maybe it’s a lot bigger difference than I’m giving credit?

And this isn’t a comment on the diversification of risk aspect, which I totally agree with.
What are you comparing the 2% to? If I'm grossing $100/hr playing poker in home game but paying $75/hr in rake, is that better than grossing $50/hr in a casino and paying only $20/hr in rake?

People think the stock market has made 10% historically. It hasn't. That's its average return, not its compound return.

Stocks' compound return was 7–9% historically. The risk-free rate was 3–4% historically. Compared to history and people's inflated ideas of a 10% return, 2% is garbage.

Stocks' forward return is only 5–6%. The interest rate is 0% (for a few more weeks). So if I can borrow at 0.3% to make 2%—effectively getting paid to hedge my own portfolio with LTT!—2% doesn't look so bad.

(LTT used to pay 8–10%. But that's back when inflation was persistently high and also when LTT had high beta. We try to "control" inflation these days instead of letting it be whatever it's supposed to be, which might or might not end in disaster... IDFK.)
Weird to be quoted from a post in 2019. My views on this have changed substantially as I learned more about the philosophy of duration-matching from Vineviz. I still am leery of too much in nominal LTT as inflation risk is (quite obviously) a real thing, and a reversal of correlations could be a bit nasty. So I have about 25% LTT, 25% LTIPS, and 50% TBM/ITT as my bond holdings (along with a smattering of I and EE bonds).
My views on LTTs are quite a bit different; unless one has a nominal expense long into the future, LTTs are a position on the long-term future of the US dollar. The core question is how it compares to inflation and the US dollar relates to other countries' currencies.

I no longer see LTTs as safe even for the long term if no expenses get matched up (or even close to being matched up). They are a risk asset in this case.
Passive investing: not about making big bucks but making profits. Active investing: not about beating the market but meeting goals. Speculation: not about timing the market but taking profitable risks.
CletusCaddy
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Re: First 20% of bonds in long-term Treasuries

Post by CletusCaddy »

secondopinion wrote: Thu Feb 24, 2022 8:24 pm
9-5 Suited wrote: Mon Feb 21, 2022 3:52 pm
bigoilboomer wrote: Sun Feb 20, 2022 1:52 pm
9-5 Suited wrote: Thu Aug 08, 2019 5:35 pm This won’t be the most intellectual thing I’ll ever post, but it’s just hard to believe that I’ll reap much meaningful financial gain from locking into a bunch of 2% nominal long term treasuries as a 33 year old.

Without using a backtest (because of the specific bond regime it will cover) what is the actual expected forward looking range of ending portfolio values for 20% ITT vs. 20% LTT? Maybe it’s a lot bigger difference than I’m giving credit?

And this isn’t a comment on the diversification of risk aspect, which I totally agree with.
What are you comparing the 2% to? If I'm grossing $100/hr playing poker in home game but paying $75/hr in rake, is that better than grossing $50/hr in a casino and paying only $20/hr in rake?

People think the stock market has made 10% historically. It hasn't. That's its average return, not its compound return.

Stocks' compound return was 7–9% historically. The risk-free rate was 3–4% historically. Compared to history and people's inflated ideas of a 10% return, 2% is garbage.

Stocks' forward return is only 5–6%. The interest rate is 0% (for a few more weeks). So if I can borrow at 0.3% to make 2%—effectively getting paid to hedge my own portfolio with LTT!—2% doesn't look so bad.

(LTT used to pay 8–10%. But that's back when inflation was persistently high and also when LTT had high beta. We try to "control" inflation these days instead of letting it be whatever it's supposed to be, which might or might not end in disaster... IDFK.)
Weird to be quoted from a post in 2019. My views on this have changed substantially as I learned more about the philosophy of duration-matching from Vineviz. I still am leery of too much in nominal LTT as inflation risk is (quite obviously) a real thing, and a reversal of correlations could be a bit nasty. So I have about 25% LTT, 25% LTIPS, and 50% TBM/ITT as my bond holdings (along with a smattering of I and EE bonds).
My views on LTTs are quite a bit different; unless one has a nominal expense long into the future, LTTs are a position on the long-term future of the US dollar. The core question is how it compares to inflation and the US dollar relates to other countries' currencies.

I no longer see LTTs as safe even for the long term if no expenses get matched up (or even close to being matched up). They are a risk asset in this case.
It doesn’t even matter if the expenses are “matched up”, it only matters that you will have some expenses at that future date. Of at least as much as your bonds.

What is less risky to fulfill an expense 30 years from now? A 20 year bond or a one year bond rolling over 20 times? See how it doesn’t matter if that expense is real or nominal? The answer will always be LTT.
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Re: First 20% of bonds in long-term Treasuries

Post by secondopinion »

CletusCaddy wrote: Thu Feb 24, 2022 10:55 pm
secondopinion wrote: Thu Feb 24, 2022 8:24 pm
9-5 Suited wrote: Mon Feb 21, 2022 3:52 pm
bigoilboomer wrote: Sun Feb 20, 2022 1:52 pm
9-5 Suited wrote: Thu Aug 08, 2019 5:35 pm This won’t be the most intellectual thing I’ll ever post, but it’s just hard to believe that I’ll reap much meaningful financial gain from locking into a bunch of 2% nominal long term treasuries as a 33 year old.

Without using a backtest (because of the specific bond regime it will cover) what is the actual expected forward looking range of ending portfolio values for 20% ITT vs. 20% LTT? Maybe it’s a lot bigger difference than I’m giving credit?

And this isn’t a comment on the diversification of risk aspect, which I totally agree with.
What are you comparing the 2% to? If I'm grossing $100/hr playing poker in home game but paying $75/hr in rake, is that better than grossing $50/hr in a casino and paying only $20/hr in rake?

People think the stock market has made 10% historically. It hasn't. That's its average return, not its compound return.

Stocks' compound return was 7–9% historically. The risk-free rate was 3–4% historically. Compared to history and people's inflated ideas of a 10% return, 2% is garbage.

Stocks' forward return is only 5–6%. The interest rate is 0% (for a few more weeks). So if I can borrow at 0.3% to make 2%—effectively getting paid to hedge my own portfolio with LTT!—2% doesn't look so bad.

(LTT used to pay 8–10%. But that's back when inflation was persistently high and also when LTT had high beta. We try to "control" inflation these days instead of letting it be whatever it's supposed to be, which might or might not end in disaster... IDFK.)
Weird to be quoted from a post in 2019. My views on this have changed substantially as I learned more about the philosophy of duration-matching from Vineviz. I still am leery of too much in nominal LTT as inflation risk is (quite obviously) a real thing, and a reversal of correlations could be a bit nasty. So I have about 25% LTT, 25% LTIPS, and 50% TBM/ITT as my bond holdings (along with a smattering of I and EE bonds).
My views on LTTs are quite a bit different; unless one has a nominal expense long into the future, LTTs are a position on the long-term future of the US dollar. The core question is how it compares to inflation and the US dollar relates to other countries' currencies.

I no longer see LTTs as safe even for the long term if no expenses get matched up (or even close to being matched up). They are a risk asset in this case.
It doesn’t even matter if the expenses are “matched up”, it only matters that you will have some expenses at that future date. Of at least as much as your bonds.

What is less risky to fulfill an expense 30 years from now? A 20 year bond or a one year bond rolling over 20 times? See how it doesn’t matter if that expense is real or nominal? The answer will always be LTT.
Umm, it does matter whether it is real or nominal expense.

Ask yourself this question, does a long-term Canadian nominal bond meet real expenses? If there is an argument that "the Canadian dollar might not be as strong as the US dollar and it could lag real expenses after inflation", then that points a valid argument that a currency might not carry against real expenses even after interest; however, it is an argument that equally applies to the US dollar lagging against real expenses.

When the far away expenses are nominal, the above claim that LTTs are safer is true. It is not true when one is talking real expenses. LTTs are subject to the cumulative effect of inflation, only receiving the yield defined at purchase as a means to fight it. STTs rely on rates to adjust to hopefully fight inflation. Neither is guaranteed to fighting inflation over time (as inflation varies).
Passive investing: not about making big bucks but making profits. Active investing: not about beating the market but meeting goals. Speculation: not about timing the market but taking profitable risks.
JSPECO9
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Re: First 20% of bonds in long-term Treasuries

Post by JSPECO9 »

BND - Vanguard Total Bond:

Average duration: 6.8 years
Yield to maturity: 2.1%

VGLT - Vanguard Long-Term Treasury:

Average duration: 17.9 years
Yield to maturity: 2.1%

Still worth it to buy the long term treasury?
SafeBonds
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Re: First 20% of bonds in long-term Treasuries

Post by SafeBonds »

JSPECO9 wrote: Fri Feb 25, 2022 10:48 am BND - Vanguard Total Bond:

Average duration: 6.8 years
Yield to maturity: 2.1%

VGLT - Vanguard Long-Term Treasury:

Average duration: 17.9 years
Yield to maturity: 2.1%

Still worth it to buy the long term treasury?
You left out credit risk. BND is 66% US Government bonds, 3.7% AAA, 3.1% AA. 12% A, 15.2% BBB. Long term treasury is all US Government. I see SEC yields at 2.14% and 2.23% respectively. BND is investment grade no doubt but long term treasury bonds behave differently than BBB rated bonds during crises and in a portfolio that is 80%+ stock the best diversifier is still long term treasuries.

The whole point of this thread is that long term treasuries are lousy investments for retirement investors when looked at in isolation but they are the best diversifier for an 80%+ stock portfolio. But people keep missing that point.
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Re: First 20% of bonds in long-term Treasuries

Post by JSPECO9 »

SafeBonds wrote: Fri Feb 25, 2022 5:42 pm
JSPECO9 wrote: Fri Feb 25, 2022 10:48 am BND - Vanguard Total Bond:

Average duration: 6.8 years
Yield to maturity: 2.1%

VGLT - Vanguard Long-Term Treasury:

Average duration: 17.9 years
Yield to maturity: 2.1%

Still worth it to buy the long term treasury?
You left out credit risk. BND is 66% US Government bonds, 3.7% AAA, 3.1% AA. 12% A, 15.2% BBB. Long term treasury is all US Government. I see SEC yields at 2.14% and 2.23% respectively. BND is investment grade no doubt but long term treasury bonds behave differently than BBB rated bonds during crises and in a portfolio that is 80%+ stock the best diversifier is still long term treasuries.

The whole point of this thread is that long term treasuries are lousy investments for retirement investors when looked at in isolation but they are the best diversifier for an 80%+ stock portfolio. But people keep missing that point.
Sorry I didn't mention credit risk because I thought that goes without saying.

What I meant to ask is: in this case, where both are yields are so close, do you take on the duration risk or the credit risk?

Sorry I ask because I know absolutely nothing about bonds.
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Re: First 20% of bonds in long-term Treasuries

Post by drumboy256 »

SafeBonds wrote: Fri Feb 25, 2022 5:42 pm
JSPECO9 wrote: Fri Feb 25, 2022 10:48 am BND - Vanguard Total Bond:

Average duration: 6.8 years
Yield to maturity: 2.1%

VGLT - Vanguard Long-Term Treasury:

Average duration: 17.9 years
Yield to maturity: 2.1%

Still worth it to buy the long term treasury?
You left out credit risk. BND is 66% US Government bonds, 3.7% AAA, 3.1% AA. 12% A, 15.2% BBB. Long term treasury is all US Government. I see SEC yields at 2.14% and 2.23% respectively. BND is investment grade no doubt but long term treasury bonds behave differently than BBB rated bonds during crises and in a portfolio that is 80%+ stock the best diversifier is still long term treasuries.

The whole point of this thread is that long term treasuries are lousy investments for retirement investors when looked at in isolation but they are the best diversifier for an 80%+ stock portfolio. But people keep missing that point.
Honestly, I think people need to just trigger others and say "TMF". That said, LTT's point is to redeem the bond yield at a future date (i.e. duration) in which independent of the NAV cost or current yields. So while yes, the investment right now maybe absolute trashy, the point is to hold it to duration which most go full 360 and just say "Why not just BND?" Of which, I think has happened ca. ~ 1,432,782 times in this thread because "reasons".
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Re: First 20% of bonds in long-term Treasuries

Post by secondopinion »

JSPECO9 wrote: Fri Feb 25, 2022 6:21 pm
SafeBonds wrote: Fri Feb 25, 2022 5:42 pm
JSPECO9 wrote: Fri Feb 25, 2022 10:48 am BND - Vanguard Total Bond:

Average duration: 6.8 years
Yield to maturity: 2.1%

VGLT - Vanguard Long-Term Treasury:

Average duration: 17.9 years
Yield to maturity: 2.1%

Still worth it to buy the long term treasury?
You left out credit risk. BND is 66% US Government bonds, 3.7% AAA, 3.1% AA. 12% A, 15.2% BBB. Long term treasury is all US Government. I see SEC yields at 2.14% and 2.23% respectively. BND is investment grade no doubt but long term treasury bonds behave differently than BBB rated bonds during crises and in a portfolio that is 80%+ stock the best diversifier is still long term treasuries.

The whole point of this thread is that long term treasuries are lousy investments for retirement investors when looked at in isolation but they are the best diversifier for an 80%+ stock portfolio. But people keep missing that point.
Sorry I didn't mention credit risk because I thought that goes without saying.

What I meant to ask is: in this case, where both are yields are so close, do you take on the duration risk or the credit risk?

Sorry I ask because I know absolutely nothing about bonds.
Why not take both risks? I look at bonds on the bold side. I will gladly hold long-term corporate bonds; historically, they hold up through a lot.

All bonds (except maybe high yield) have an aspect of safety; but generally, they are a position on the future of the currency and rates. Long term bonds are those that subject themselves to the mercy of inflation with a constant payment; short term bonds are those that subject themselves to the mercy of inflation with a variable payment (in the long term, that is). High yield rely on market success to do well in general because the margin of error is not as good.

One could leverage shorter term bonds by futures to obtain more returns, but that is a different prospect.

At the end, pick the bonds that match the investing needs.
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Re: First 20% of bonds in long-term Treasuries

Post by theac »

I know this topic is about long-term treasuries, but I have a general bond question on the interest rate (short-term 3 mo T-Bill). I just bought one for the first time to dip my toes in slowly. Can someone explain which is the interest rate I will be getting if held to maturity?

Schwab's site shows this :
Yield To Maturity
Bid = 0.344%
Ask = 0.302%

Meanwhile, Treasury Direct shows this:

13-Week........High Rate...0.380%........ Investment Rate....0.386%

Thanks
"We keep you alive to serve this ship. Row well...and live." Ben Hur...and The Taxman! hahaha (a George Harrison song)
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Re: First 20% of bonds in long-term Treasuries

Post by occambogle »

I have a small 2-3% allocation of EDV in an otherwise all-equities taxable account, as a small diversifier and hedge. While it worked nicely when COVID hit, subsequent interest rate rises have obviously hit it and it's currently siting at a 23% unrealized loss.
Without going much into all the arguments for and against LTTs (although they are very interesting) ... would it make sense to sell all the EDV now and immediately replace it with GOVZ for the sole purpose of tax-loss-harvesting? GOVZ has a slightly higher duration, slightly higher expense ration (0.15 vs 0.06), though possibly lower capital gains distributions from what I've read.. but I'd be booking a $2k capital loss (long-term).
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Re: First 20% of bonds in long-term Treasuries

Post by secondopinion »

occambogle wrote: Tue Mar 15, 2022 2:17 pm I have a small 2-3% allocation of EDV in an otherwise all-equities taxable account, as a small diversifier and hedge. While it worked nicely when COVID hit, subsequent interest rate rises have obviously hit it and it's currently siting at a 23% unrealized loss.
Without going much into all the arguments for and against LTTs (although they are very interesting) ... would it make sense to sell all the EDV now and immediately replace it with GOVZ for the sole purpose of tax-loss-harvesting? GOVZ has a slightly higher duration, slightly higher expense ration (0.15 vs 0.06), though possibly lower capital gains distributions from what I've read.. but I'd be booking a $2k capital loss (long-term).
It has more to do with the percentage of loss and volatility than the nominal amount of losses. Because of the friction of trading and the variation due to not exactly matching the original, this can work somewhat against you. You could get lucky and it works out better. EDV and GOVZ look similar enough that the difference should be lower in the near term.

I think at 23% down that the potential benefit could be in your favor for sure; it is too bad it is not short-term capital losses.
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Re: First 20% of bonds in long-term Treasuries

Post by occambogle »

secondopinion wrote: Tue Mar 15, 2022 3:15 pm It is too bad it is not short-term capital losses.
That’s a good point. Though I almost never sell for STCG, only when they are long-term gains. But in the absence of any other gains/losses can long-term capital losses as proposed above still be used to offset ordinary income? (Up to 3000 MFJ / 1500 MFS)
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Re: First 20% of bonds in long-term Treasuries

Post by secondopinion »

occambogle wrote: Tue Mar 15, 2022 3:39 pm
secondopinion wrote: Tue Mar 15, 2022 3:15 pm It is too bad it is not short-term capital losses.
That’s a good point. Though I almost never sell for STCG, only when they are long-term gains. But in the absence of any other gains/losses can long-term capital losses as proposed above still be used to offset ordinary income? (Up to 3000 MFJ / 1500 MFS)
Right. If that is the case, then that helps to take it anyway; I get the "pleasure" of the $1,500. I wish they would accept larger amounts in general.
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Re: First 20% of bonds in long-term Treasuries

Post by garlandwhizzer »

There has been a lot of love for LTT expressed on the Forum in past years. In past years until recently they had backtested beautifully for 40 years. Some even suggested using leverage in increase LTT exposure. It is entirely true that LTT have over the long term offered the best diversification to equity volatility relative to ITT. That works as long as equity and LTT are going in opposite directions. They have both been going strongly in the same direction recently, down. All bonds have suffered as the specter of increasing inflation and higher rates has arisen from its 40 year grave. Long term bonds have taken the worst hit relative to shorter duration nominals and especially to VTIP which has actually gained as principle value of EDV tanked. So the diversification benefit of EDV has backfired over the last 18 months or so as both equity and bonds struggled.

We're now in stagflation which is bad for both stocks and bonds and duration only makes bond losses worse. Those who were investing in the 70s have seen all this before. How long it will last I don't know. I believe it will be temporary, not persistent, and I expect a return to slow economic growth/low inflation/historically low rates, but it may take years to get there.

Several lessons can be learned from this difficult recent past. First, while LTT are expected to provide increased diversification to stock volatility, that depends completely on the macroeconomic background. Usually it does, but not in face of sudden rising rates and rising inflation like now. Don't automatically believe that bonds that backtested well over the last 40 years are going to do likewise going forward. Second, the downside to LTT and duration exposure in general is increased volatility of principal value. EDV has lost about 33% of its principal value in since its peak less than 2 years ago. That turns out to be considerably more volatility than VTI had over this period. MMF had no volatility at all and ST TIPs had volatility in the right direction. Third, the case for TIPS has been made. Unexpected inflation did happen and is still happening and TIPS hit that target. Those who has a portion of their bond portfolio in TIPS weathered this nasty fixed income storm better.

Personally, I keep my fixed income holdings in zero duration Treasury MMF, TBM, and TIPS. My average duration averages out to about intermediate. Intermediate takes a position somewhere in the middle between short term on the one hand (more stability of principal, less volatility, less equity diversification, modestly lower expected long term returns) and long term on the other (more equity diversification, more volatility of principal, modestly increased expected long term expected returns--very modest difference in our low current rate environment). I do adjust the relative weights of these 3 rarely and modestly in response to my pereception of changes in the market and economy.

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Re: First 20% of bonds in long-term Treasuries

Post by Kevin M »

theac wrote: Sat Feb 26, 2022 5:52 am I know this topic is about long-term treasuries, but I have a general bond question on the interest rate (short-term 3 mo T-Bill). I just bought one for the first time to dip my toes in slowly. Can someone explain which is the interest rate I will be getting if held to maturity?

Schwab's site shows this :
Yield To Maturity
Bid = 0.344%
Ask = 0.302%

Meanwhile, Treasury Direct shows this:

13-Week........High Rate...0.380%........ Investment Rate....0.386%

Thanks
If you buy from Schwab on the secondary market, your yield to maturity will be close the the Ask (buy) yield at the time you buy. I haven't used TD in awhile, but the investment rate at auction is basically the yield to maturity.

Kevin
If I make a calculation error, #Cruncher probably will let me know.
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Re: First 20% of bonds in long-term Treasuries

Post by 000 »

vineviz wrote: Wed Aug 07, 2019 7:24 pm However, it seems to me that precious few of these same Bogleheads are allocating their fixed income allocations in a manner congruent with modern financial knowledge.
Just a lot of words for projecting the recent past into the future forever.
Long-term bond funds not only offer superior diversification, but they also minimize interest rate risk for investors with long-term investment horizons (including virtually all investors who are currently accumulating retirement savings).
They are sensitive to real rate risk, not nominal rate risk. The nominal bond market is full of participants using them for monetary policy engineering, foreign trade purposes, or nominal liability matching as opposed to individual retirement investing.
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Re: First 20% of bonds in long-term Treasuries

Post by theac »

Kevin M wrote: Tue Mar 15, 2022 6:56 pm
theac wrote: Sat Feb 26, 2022 5:52 am I know this topic is about long-term treasuries, but I have a general bond question on the interest rate (short-term 3 mo T-Bill). I just bought one for the first time to dip my toes in slowly. Can someone explain which is the interest rate I will be getting if held to maturity?

Schwab's site shows this :
Yield To Maturity
Bid = 0.344%
Ask = 0.302%

Meanwhile, Treasury Direct shows this:

13-Week........High Rate...0.380%........ Investment Rate....0.386%

Thanks
If you buy from Schwab on the secondary market, your yield to maturity will be close the the Ask (buy) yield at the time you buy. I haven't used TD in awhile, but the investment rate at auction is basically the yield to maturity.

Kevin
OK thanks, that answers my question.

I forgot to mention that my buy at Schwab was a new issue,
not on the secondary market.
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Re: First 20% of bonds in long-term Treasuries

Post by Kevin M »

theac wrote: Tue Mar 15, 2022 7:35 pm
Kevin M wrote: Tue Mar 15, 2022 6:56 pm
theac wrote: Sat Feb 26, 2022 5:52 am I know this topic is about long-term treasuries, but I have a general bond question on the interest rate (short-term 3 mo T-Bill). I just bought one for the first time to dip my toes in slowly. Can someone explain which is the interest rate I will be getting if held to maturity?

Schwab's site shows this :
Yield To Maturity
Bid = 0.344%
Ask = 0.302%

Meanwhile, Treasury Direct shows this:

13-Week........High Rate...0.380%........ Investment Rate....0.386%

Thanks
If you buy from Schwab on the secondary market, your yield to maturity will be close the the Ask (buy) yield at the time you buy. I haven't used TD in awhile, but the investment rate at auction is basically the yield to maturity.

Kevin
OK thanks, that answers my question.

I forgot to mention that my buy at Schwab was a new issue,
not on the secondary market.
For Treasuries bought at auction (what you refer to as new issue) there is no bid ask spread; you get the investment rate for Tbills. That rate was 0.386% for the 13-week bill issued on 3/20/2022.

Kevin
If I make a calculation error, #Cruncher probably will let me know.
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Re: First 20% of bonds in long-term Treasuries

Post by international001 »

garlandwhizzer wrote: Tue Mar 15, 2022 6:30 pm TEDV has lost about 33% of its principal value in since its peak less than 2 years ago. That turns out to be considerably more volatility than VTI had over this period. MMF had no volatility at all and ST TIPs had volatility in the right direction. Third, the case for TIPS has been made. Unexpected inflation did happen and is still happening and TIPS hit that target. Those who has a portion of their bond portfolio in TIPS weathered this nasty fixed income storm better.
Or 20% if you consider its yield also (i.e. total returns)
But what did you expect? in this bull market. EDV is a good diversifier in good times and bad times. AFAIS this has not changed. But it's something that needs to be judged in 10 years, not after a couple of years.

https://www.portfoliovisualizer.com/bac ... tion2_3=40
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Re: First 20% of bonds in long-term Treasuries

Post by slicendice »

international001 wrote: Wed Mar 16, 2022 8:53 pm
garlandwhizzer wrote: Tue Mar 15, 2022 6:30 pm TEDV has lost about 33% of its principal value in since its peak less than 2 years ago. That turns out to be considerably more volatility than VTI had over this period. MMF had no volatility at all and ST TIPs had volatility in the right direction. Third, the case for TIPS has been made. Unexpected inflation did happen and is still happening and TIPS hit that target. Those who has a portion of their bond portfolio in TIPS weathered this nasty fixed income storm better.
Or 20% if you consider its yield also (i.e. total returns)
But what did you expect? in this bull market. EDV is a good diversifier in good times and bad times. AFAIS this has not changed. But it's something that needs to be judged in 10 years, not after a couple of years.

https://www.portfoliovisualizer.com/bac ... tion2_3=40
The uncorrelated volatility of the long bonds and steadier coupon is why I hold them. They seem to work particularly well with SCV equities. At around their peak almost 2 years ago, I was selling LTT to buy equities to maintain a target asset allocation. In December 2021 I sold some equities to buy LTT. This year has been somewhat rough so far, but again these are long term investments. You'll get no argument from me on the usefulness of TIPS, this past year as proven that. The suggestion up-thread for all bonds after the first 20% in LTT to be in TIPS has been shown to be prudent as well.
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Re: First 20% of bonds in long-term Treasuries

Post by dziuniek »

Lee_WSP wrote: Sun Sep 15, 2019 11:06 am The problem of being time rich & resource poor when young and time poor, but resource rich when near death is a real problem, but I'm not sure what the solution is.
This one is easy. Lottery. :sharebeer
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Re: First 20% of bonds in long-term Treasuries

Post by garlandwhizzer »

vineviz wrote:

Long-term bond funds not only offer superior diversification, but they also minimize interest rate risk for investors with long-term investment horizons (including virtually all investors who are currently accumulating retirement savings).
Tell that to EDV investors who have suffered 25% nominal, about 30% real of their investment in less than 18 months, and those figures from Morningstar include reinvested dividends. Is that really minimizing interest rate risk? It appears to be maximizing it over this time span. As 000 pointed out the so called reduction in interest rate risk is in nominal terms only, nor real terms which are the only kind that matter for paying your expenses many years down the road. If you choose to believe that LTT alone are now are the ultimate bullet-proof safe fixed income holding for the next 10, 20, or 30 years, I beg to differ.

I personally believe in diversification in bonds as well as diversification in stocks in order to balance the conflicting goals of equity diversification on the one hand (LTT best) and stability of principal plus resistance to long term inflation on the other (shorter duration, TIPS best). Important to remember that LTT underperformed T-bills in real terms for the 40 years between 1940 -1980. Is accepting today's puny 2.4% nominal yield on 30 year Treasuries adequate payment for 30 years of duration risk? I think not. 40 years ago, 30 year treasuries yielded 15% nominal. That was an incredible deal, but if inflation now does the unexpected and gets into self-reinforcing wage price cycle, you won't be happy with your LTT fund. You'll be saddled with 30 years of substantially negative real yields like now while newly issued bonds of all durations climb progressively higher and higher in yields. LTT were risk free going forward 40 years ago, but not going forward from here. A lot of LTT popularity comes from those who mistake the last 40 years of bond market backtesting for an oracle of the future. The bond market today is a totally different animal than it was 40 years ago.

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Re: First 20% of bonds in long-term Treasuries

Post by invest4 »

garlandwhizzer wrote: Thu Mar 17, 2022 1:31 pm
vineviz wrote:

Long-term bond funds not only offer superior diversification, but they also minimize interest rate risk for investors with long-term investment horizons (including virtually all investors who are currently accumulating retirement savings).
Tell that to EDV investors who have suffered 25% nominal, about 30% real of their investment in less than 18 months, and those figures from Morningstar include reinvested dividends. Is that really minimizing interest rate risk? It appears to be maximizing it over this time span. As 000 pointed out the so called reduction in interest rate risk is in nominal terms only, nor real terms which are the only kind that matter for paying your expenses many years down the road. If you choose to believe that LTT alone are now are the ultimate bullet-proof safe fixed income holding for the next 10, 20, or 30 years, I beg to differ.

I personally believe in diversification in bonds as well as diversification in stocks in order to balance the conflicting goals of equity diversification on the one hand (LTT best) and stability of principal plus resistance to long term inflation on the other (shorter duration, TIPS best). Important to remember that LTT underperformed T-bills in real terms for the 40 years between 1940 -1980. Is accepting today's puny 2.4% nominal yield on 30 year Treasuries adequate payment for 30 years of duration risk? I think not. 40 years ago, 30 year treasuries yielded 15% nominal. That was an incredible deal, but if inflation now does the unexpected and gets into self-reinforcing wage price cycle, you won't be happy with your LTT fund. You'll be saddled with 30 years of substantially negative real yields like now while newly issued bonds of all durations climb progressively higher and higher in yields. LTT were risk free going forward 40 years ago, but not going forward from here. A lot of LTT popularity comes from those who mistake the last 40 years of bond market backtesting for an oracle of the future. The bond market today is a totally different animal than it was 40 years ago.

Garland Whizzer
I was going to respond to your similar post earlier this week Gw, but somehow couldn't find it! I am a bond novice (only added in the last couple of years...now age 49), but agree with your comments and definitely felt I had missed the boat on LTT when conditions were more favorable and decided not to invest in them (chasing performance). I maintain my positions in BND / BNDX (80/20) and since last year, any new fixed income contributions have been invested in my 401k Stable Value Fund (~2%).

I still have interest in LTTs for many of the reasons cited. However, I think it may be some time (and increase in interest rates) before I will consider them again.

Best wishes.
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Re: First 20% of bonds in long-term Treasuries

Post by secondopinion »

garlandwhizzer wrote: Thu Mar 17, 2022 1:31 pm
vineviz wrote:

Long-term bond funds not only offer superior diversification, but they also minimize interest rate risk for investors with long-term investment horizons (including virtually all investors who are currently accumulating retirement savings).
Tell that to EDV investors who have suffered 25% nominal, about 30% real of their investment in less than 18 months, and those figures from Morningstar include reinvested dividends. Is that really minimizing interest rate risk? It appears to be maximizing it over this time span. As 000 pointed out the so called reduction in interest rate risk is in nominal terms only, nor real terms which are the only kind that matter for paying your expenses many years down the road. If you choose to believe that LTT alone are now are the ultimate bullet-proof safe fixed income holding for the next 10, 20, or 30 years, I beg to differ.

I personally believe in diversification in bonds as well as diversification in stocks in order to balance the conflicting goals of equity diversification on the one hand (LTT best) and stability of principal plus resistance to long term inflation on the other (shorter duration, TIPS best). Important to remember that LTT underperformed T-bills in real terms for the 40 years between 1940 -1980. Is accepting today's puny 2.4% nominal yield on 30 year Treasuries adequate payment for 30 years of duration risk? I think not. 40 years ago, 30 year treasuries yielded 15% nominal. That was an incredible deal, but if inflation now does the unexpected and gets into self-reinforcing wage price cycle, you won't be happy with your LTT fund. You'll be saddled with 30 years of substantially negative real yields like now while newly issued bonds of all durations climb progressively higher and higher in yields. LTT were risk free going forward 40 years ago, but not going forward from here. A lot of LTT popularity comes from those who mistake the last 40 years of bond market backtesting for an oracle of the future. The bond market today is a totally different animal than it was 40 years ago.

Garland Whizzer
It is insurance for nominal expenses in the far future; that is what the comment is suggesting. With such nominal expenses, they are risk-free even with inflation and low yields because they are hedging out the expenses completely or close to it.

Without such nominal expenses, it is a bold speculation on the long-term future of the US dollar. Diversification is true either way you look at it; the question is whether one should be taking the risks with such a speculation.
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Re: First 20% of bonds in long-term Treasuries

Post by Robot Monster »

garlandwhizzer wrote: Thu Mar 17, 2022 1:31 pm ...if inflation now does the unexpected and gets into self-reinforcing wage price cycle, you won't be happy with your LTT fund. You'll be saddled with 30 years of substantially negative real yields like now while newly issued bonds of all durations climb progressively higher and higher in yields...
The Wall Street Journal had a recent article about an economist's prediction that inflation is going to stay higher, settling at 3% to 4% for decades. Unsure we can say how far bond yields would grind higher in response, though. Is it not possible bond yields could continue to stay muted, suppressed by central banks? Long-term TIPS could potentially work out, no?
Mr. Goodhart reasoned that a seismic shift was under way in the world economy, one that fiscal stimulus and the post-pandemic recovery would only hasten. A long glut of inexpensive labor that had kept prices and wages down for decades, he said, was giving way to an era of worker shortages, and hence higher prices.

“The coronavirus pandemic will mark the dividing line between the deflationary forces of the last 30 to 40 years and the resurgent inflation of the next two decades,” said the 85-year-old economist in an interview. He predicted that inflation in advanced economies will settle at 3% to 4% around the end of 2022 and remain at that level for decades, compared with about 1.5% in the decade before the pandemic.
-- from "Will Inflation Stay High for Decades? One Influential Economist Says Yes" WSJ link
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Re: First 20% of bonds in long-term Treasuries

Post by sycamore »

Robot Monster wrote: Thu Mar 17, 2022 5:04 pm
garlandwhizzer wrote: Thu Mar 17, 2022 1:31 pm ...if inflation now does the unexpected and gets into self-reinforcing wage price cycle, you won't be happy with your LTT fund. You'll be saddled with 30 years of substantially negative real yields like now while newly issued bonds of all durations climb progressively higher and higher in yields...
The Wall Street Journal had a recent article about an economist's prediction that inflation is going to stay higher, settling at 3% to 4% for decades. Unsure we can say how far bond yields would grind higher in response, though. Is it not possible bond yields could continue to stay muted, suppressed by central banks? Long-term TIPS could potentially work out, no?
I don't know when/what manner bond yields will rise or stay steady or drop over the coming years. Crystal ball is broken. Pandemics, wars, demand shocks, supply constraints, etc. -- there are many variables at play, each with large potential impacts. Hard to put much credence in multi-decade predictions.

I do agree that TIPS are a very reasonable choice for at least a portion of a portfolio regardless of interest rate movements. And for me and many millions more, Social Security benefits will cover a big portion of spending needs. SS is inflation-adjusted so there's less need for TIPS.
Robot Monster wrote: Thu Mar 17, 2022 5:04 pm
Mr. Goodhart reasoned that a seismic shift was under way in the world economy, one that fiscal stimulus and the post-pandemic recovery would only hasten. A long glut of inexpensive labor that had kept prices and wages down for decades, he said, was giving way to an era of worker shortages, and hence higher prices.

“The coronavirus pandemic will mark the dividing line between the deflationary forces of the last 30 to 40 years and the resurgent inflation of the next two decades,” said the 85-year-old economist in an interview. He predicted that inflation in advanced economies will settle at 3% to 4% around the end of 2022 and remain at that level for decades, compared with about 1.5% in the decade before the pandemic.
-- from "Will Inflation Stay High for Decades? One Influential Economist Says Yes" WSJ link
[Insert obligatory snide remark about economists' prediction abilities here. :)]

Maybe Mr. Goodhart will be right, maybe not -- any idea how well his previous predictions played out?

How does one decide that an economist's prediction is likely to be right? What criteria to use? How much weight to put on the prediction? Maybe an economist has an easier time making a prediction that do people trying to make sense of it or apply it.
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Re: First 20% of bonds in long-term Treasuries

Post by RubyTuesday »

garlandwhizzer wrote: Tue Mar 15, 2022 6:30 pm
We're now in stagflation…
We have high inflation, but how can you say we’re in “stagflation”, which is generally described as:
What Is Stagflation?
Stagflation is characterized by slow economic growth and relatively high unemployment—or economic stagnation—which is at the same time accompanied by rising prices (i.e. inflation). Stagflation can be alternatively defined as a period of inflation combined with a decline in the gross domestic product (GDP).
Source Investopedia: Stagflation

We have real GDP growth and low unemployment.
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Re: First 20% of bonds in long-term Treasuries

Post by BigJohn »

secondopinion wrote: Thu Mar 17, 2022 4:21 pm It is insurance for nominal expenses in the far future; that is what the comment is suggesting. With such nominal expenses, they are risk-free even with inflation and low yields because they are hedging out the expenses completely or close to it.

Without such nominal expenses, it is a bold speculation on the long-term future of the US dollar. Diversification is true either way you look at it; the question is whether one should be taking the risks with such a speculation.
Sure but what expenses does an individual have that are in nominal dollars that far out in the future? The only one I can think of is early in a long term fixed rate mortgage. In my mind this is hardly enough for most people to justify the first 20% of bonds in LTTs.

Insurance companies have a lot of long term nominal expenses which is why they use LTTs as an appropriate risk matching strategy. However, they know that inflation is a wild card they can't predict. I think that's why you can no long purchase a COLA adjusted annuity, it's just not a risk that they want to take.

This lack of nominal expenses with the potential for purchasing power erosion if high and unexpected inflation arose is just the reason that I never bought into this strategy of using LTTs. For those that did, I hope the Fed gets inflation under control relatively quickly before the erosion gets any worse.
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Re: First 20% of bonds in long-term Treasuries

Post by Robot Monster »

sycamore wrote: Thu Mar 17, 2022 7:50 pm
[Insert obligatory snide remark about economists' prediction abilities here. :)]

Maybe Mr. Goodhart will be right, maybe not -- any idea how well his previous predictions played out?

How does one decide that an economist's prediction is likely to be right? What criteria to use? How much weight to put on the prediction? Maybe an economist has an easier time making a prediction that do people trying to make sense of it or apply it.
All good questions. I have no idea. My own take-away is that if an economist outright predicts something, then I take the possibility of that thing occurring as, at the very least, a not unfathomable tail risk. As to what someone might do with an economist's prediction--how it's actionable--is a worthy subject, but one I don't particularly want to get ensnared in. If you think economists' predictions should outright be ignored, I'm certainly not going to argue against you.
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Re: First 20% of bonds in long-term Treasuries

Post by secondopinion »

BigJohn wrote: Thu Mar 17, 2022 9:16 pm
secondopinion wrote: Thu Mar 17, 2022 4:21 pm It is insurance for nominal expenses in the far future; that is what the comment is suggesting. With such nominal expenses, they are risk-free even with inflation and low yields because they are hedging out the expenses completely or close to it.

Without such nominal expenses, it is a bold speculation on the long-term future of the US dollar. Diversification is true either way you look at it; the question is whether one should be taking the risks with such a speculation.
Sure but what expenses does an individual have that are in nominal dollars that far out in the future? The only one I can think of is early in a long term fixed rate mortgage. In my mind this is hardly enough for most people to justify the first 20% of bonds in LTTs.

Insurance companies have a lot of long term nominal expenses which is why they use LTTs as an appropriate risk matching strategy. However, they know that inflation is a wild card they can't predict. I think that's why you can no long purchase a COLA adjusted annuity, it's just not a risk that they want to take.

This lack of nominal expenses with the potential for purchasing power erosion if high and unexpected inflation arose is just the reason that I never bought into this strategy of using LTTs. For those that did, I hope the Fed gets inflation under control relatively quickly before the erosion gets any worse.
Nominal expenses in the far future for an individual are rare. I personally think that long-term treasuries are more speculative than a safe investment; most of the time, you are getting beta, which may work to one's advantage or disadvantage. Without any ability to adjust to inflation, long-term treasuries are also very speculative even if held to maturity. I can see the speculative value, but most here are trying to avoid speculation.
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Re: First 20% of bonds in long-term Treasuries

Post by NiceUnparticularMan »

Robot Monster wrote: Thu Mar 17, 2022 5:04 pmLong-term TIPS could potentially work out, no?
Just a quick note on this.

LT TIPS are of course great for long-term real liability matching--as long as you are prepared for the fact that these days, your returns might be negative real! Kind of a bummer, that these liabilities being in the future and not the present isn't doing anything for you, but c'est la vie.

However, there is no reason to expect LT TIPS to behave relative to stocks the same way as LT nominals. Indeed, a lot of why LT nominals might plausibly help in SOME stock crises is a lot of bad stock periods are associated with disinflationary/deflationary economic events, where future rate expectations decrease due to decreasing future inflation expectations, and LT nominals appreciate.

Of course we are in the midst of a different kind of bad stock period and that predictably isn't working. But still if that is why you are interested in LT nominals, then you are taking away a lot of that benefit with LT TIPS instead, precisely because they will not necessarily appreciate at all in response to rate expectation decreases that are solely due to decreasing future inflation expectations.

So yeah, LT TIPS are a better idea for matching LT real liabilities. Not necessarily a good idea for combining with stocks in disinflationary bad stock events.
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Re: First 20% of bonds in long-term Treasuries

Post by BigJohn »

NiceUnparticularMan wrote: Fri Mar 18, 2022 11:06 am However, there is no reason to expect LT TIPS to behave relative to stocks the same way as LT nominals. Indeed, a lot of why LT nominals might plausibly help in SOME stock crises is a lot of bad stock periods are associated with disinflationary/deflationary economic events, where future rate expectations decrease due to decreasing future inflation expectations, and LT nominals appreciate.

Of course we are in the midst of a different kind of bad stock period and that predictably isn't working. But still if that is why you are interested in LT nominals, then you are taking away a lot of that benefit with LT TIPS instead, precisely because they will not necessarily appreciate at all in response to rate expectation decreases that are solely due to decreasing future inflation expectations.

So yeah, LT TIPS are a better idea for matching LT real liabilities. Not necessarily a good idea for combining with stocks in disinflationary bad stock events.
Probably not enough data on LT TIPS to demonstrate this since we have not had this kind of inflation in 40 years but I think this is a good planning basis. One of the main drivers of this LTT strategy is that they zig when stocks zag. Without that benefit, not sure why you would want to lock in negative real rates for 20+ years. The 50% of my bond holdings that are in TIPS are split about evenly between ST and IT.
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Re: First 20% of bonds in long-term Treasuries

Post by Robot Monster »

Vineviz,

Garlandwhizzer made an interesting reply to this thread that you might have missed, as well as an interesting post in another thread touching upon the same ideas. I'm a little dying of curiosity if you had any thoughts about his take. Not trying to push you two into battle, or anything. That said, please fight, and welcome to Thunderdome.
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Re: First 20% of bonds in long-term Treasuries

Post by hudson »

Robot Monster wrote: Sat Apr 09, 2022 10:35 am Vineviz,

Garlandwhizzer made an interesting reply to this thread that you might have missed, as well as an interesting post in another thread touching upon the same ideas. I'm a little dying of curiosity if you had any thoughts about his take. Not trying to push you two into battle, or anything. That said, please fight, and welcome to Thunderdome.
I think that Garlandwhizzer's point is that EDV, a 25 year average duration treasury fund, has declined much.
I speculate that if your duration was 25 years, you should be OK.
EDV is a Vanguard Risk Potential 5 fund. The scale is 1 to 5.
5 is riskiest.
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Re: First 20% of bonds in long-term Treasuries

Post by muffins14 »

garlandwhizzer wrote: Thu Mar 17, 2022 1:31 pm

Tell that to EDV investors who have suffered 25% nominal, about 30% real of their investment in less than 18 months, and those figures from Morningstar include reinvested dividends. Is that really minimizing interest rate risk? It appears to be maximizing it over this time span.
Well someone with a 25-year horizon shouldn’t really be worried about a middle 18 months, they should be thinking about 25 years from now, right? Like suggesting a stock investor should be concerned by a dip when they are investing for retirement in 30 years. Stay the course, rebalance, etc
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Re: First 20% of bonds in long-term Treasuries

Post by secondopinion »

Anyway, back to long-term treasuries…

I see one benefit of long-term treasuries that is not commonly discussed; they have a good amount of bond convexity. That is, they gain more than suggested by the duration during rate drops; and lose less than suggested during rate increases (not to say that they are not risky, as they have plenty of risk). In fact, if one buys short-term bonds and long-term bonds to match the duration of intermediate bonds, then they will see a greater bond convexity than for intermediate bonds usually.

This usually has drawbacks on yield, since we get better results on capital gains. But the yield curve can throw a curveball.

Maybe something to think about instead of all the rate mayhem.
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Re: First 20% of bonds in long-term Treasuries

Post by LadyGeek »

The thread is getting derailed. Please stay on-topic.
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Re: First 20% of bonds in long-term Treasuries

Post by vineviz »

garlandwhizzer wrote: Thu Mar 17, 2022 1:31 pm
vineviz wrote:

Long-term bond funds not only offer superior diversification, but they also minimize interest rate risk for investors with long-term investment horizons (including virtually all investors who are currently accumulating retirement savings).
Tell that to EDV investors who have suffered 25% nominal, about 30% real of their investment in less than 18 months, and those figures from Morningstar include reinvested dividends. Is that really minimizing interest rate risk? It appears to be maximizing it over this time span.
There is no such thing as "maximizing interest rate risk over a particular time span" unless that timespan matches the investor's time horizon. Any investor with an 18-month time horizon has no business owning EDV as their only fund, and I have never suggested such a thing to anyone. If you have a 25 year investment horizon you should treat a period of "less than 18 months" as what it is: noise.

Short-run outperformance was never the point of the this thread. We can note, however that from the time this thread began in August, 2019 to present a hypothetical 80/20 portfolio using EDV is up 33% while a similar portfolio using BND is up 32%. The EDV portfolio has experience less volatility and a smaller drawdown.

So, if the question is whether I stand by my earlier analysis then the answer is "yes".
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Re: First 20% of bonds in long-term Treasuries

Post by vineviz »

secondopinion wrote: Fri Mar 18, 2022 10:33 am
BigJohn wrote: Thu Mar 17, 2022 9:16 pm
secondopinion wrote: Thu Mar 17, 2022 4:21 pm It is insurance for nominal expenses in the far future; that is what the comment is suggesting. With such nominal expenses, they are risk-free even with inflation and low yields because they are hedging out the expenses completely or close to it.

Without such nominal expenses, it is a bold speculation on the long-term future of the US dollar. Diversification is true either way you look at it; the question is whether one should be taking the risks with such a speculation.
Sure but what expenses does an individual have that are in nominal dollars that far out in the future? The only one I can think of is early in a long term fixed rate mortgage. In my mind this is hardly enough for most people to justify the first 20% of bonds in LTTs.

Insurance companies have a lot of long term nominal expenses which is why they use LTTs as an appropriate risk matching strategy. However, they know that inflation is a wild card they can't predict. I think that's why you can no long purchase a COLA adjusted annuity, it's just not a risk that they want to take.

This lack of nominal expenses with the potential for purchasing power erosion if high and unexpected inflation arose is just the reason that I never bought into this strategy of using LTTs. For those that did, I hope the Fed gets inflation under control relatively quickly before the erosion gets any worse.
Nominal expenses in the far future for an individual are rare. I personally think that long-term treasuries are more speculative than a safe investment; most of the time, you are getting beta, which may work to one's advantage or disadvantage. Without any ability to adjust to inflation, long-term treasuries are also very speculative even if held to maturity. I can see the speculative value, but most here are trying to avoid speculation.
I have three thoughts on this:

One is that the topic of this thread mentions "long-term Treasuries", not "long-term nominal Treasuries". TIPS are Treasuries too.

The second thought is that the rule of thumb is to put the first 20% of the portfolio into long-term Treasuries. Any portfolio which is 80%+ invested in stocks still has virtually all of its risk tied to the performance of the stock sleeve. And historically nominal Treasuries are a better diversifier than TIPS because the total return of TIPS is partially tied to economic growth, like stocks are. Plus, generally speaking, investors with high equity concentrations tend to be younger and naturally have inflation protection elsewhere in their portfolio (e.g. human capital, fixed rate mortgages, and so forth). Investors with more than 20% of their portfolio in bonds should increasingly focus on the risk exposure of the bonds themselves. Maybe that means the next 20% (or whatever) should be long-termTIPS, or short-term corporate bonds, or total bond market, etc.

The third thought is that the idea that nominal expenses are rare is a bit of a red herring, because it mistakes the price of goods as the thing we're trying to hedge. In truth, it is the amount of consumption that we are trying to hedge. It might be easy to assume that prices and consumption have the same inflation beta, but all the empirical evidence we have about retiree spending tells us differently. Retirement consumption does NOT have an inflation beta of 1, and for many retirees it is far less than one. So once you factor Social Security benefits into the picture, the consumption that must be funded by portfolio withdrawals is - for many, though certainly no all, investors - effectively nominal at least to a large degree.
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