Long Treasuries down 55%. Time to bottom fish?

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McQ
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Long Treasuries down 55%. Time to bottom fish?

Post by McQ »

Resuscitating this thread now that the great bond bear market of 2021 -20xx has taken another leg down here in Fall 2023. See the bottom of page 6 for my post coincident with this title update.

[Bogleheads who abjure market timing in all its writhing serpent forms should not read this thread.]

This thread is for those who can entertain the idea of strategically timed portfolio rebalancing. It assumes that you entered 2022 with some kind of balanced portfolio, perhaps a version of the 3-fund portfolio, say with 40% in VTI, 20% in VEU, and 40% in BND—a 60/40 portfolio, to be traditional about it.

Maybe, you even had some cash, or CDs, because you found the bond yields on offer in 2020 and 2021 to be unattractive.

Is now the time to “buy low” in bonds? For those with no cash who were all in on BND, I should point out that “buy low, sell high” is one simple arithmetical transformation away from “sell low, buy lower.” The two are arithmetically equivalent after subtracting a delta.

BND is down about 17%.

EDV, a portfolio of zero-coupon Treasury bonds (STRIPS) with maturity greater than 20 years, is down about 45% as of late Friday, almost 50% on a price basis from the November 2021 high. That’s a 28% delta between the two.

Sell (some portion of) BND and buy EDV? Or maybe VGLT (to have coupon income), down about 34% YTD?

That is the question: whether t’is nobler to stay the course with BND, and accept the slower decline and slower eventual rebound on a total bond fund, or to take arms against the decline in bonds, and go long duration; to buy duration low, and hold come Hades or high water. To buy low, perchance, and enjoy a rebound devoutly to be wished; or to buy low, and see the slow death of the bet, as the Treasury drawdown moves to 60% then 70%, nay, to have been hasty, and missed the chance for a yield of 5% or even 6%, guaranteed by the full faith and credit of the United States of America, for 20 years or more, if only you had the resolve to hold off.

There are alternatives. LTPZ, which holds long TIPS, has a similar duration to EDV. It is down only about 35%. But the underlying TIPS now carry a real yield of 2% or a little more--equal to the 2% real yield on nominal bonds realized 1900 to 2020, US and international alike. viewtopic.php?t=386240

Thinkers.

What say you, Bogleheads? Is it time to buy duration? Or maybe to move away from the credit default risk baked into BND in favor of a pure Treasury fund?

Or is it better to wait for EDV to hit a 60% or 70% drawdown? [That would imply a yield somewhat north of 5% as compared to Friday’s 4 3/8%.]

Were a drawdown of that magnitude to occur, the eventual rebound might compare favorably with the 1932 and 1933 rebounds in stocks. Even as you hold instruments guaranteed by the full faith and credit of the United States of America, world hegemon.

Time to begin legging into EDV? Say yes or no, and why.

PS: If you are following a Liability Matching Protocol this thread does not pertain to you … except insofar as the dramatic increase in long Treasury yields has put within reach an LMP that you could not have made work in 2021. Take the thread title as a heads up to recalculate the LMP you can now achieve (with individual Treasuries, of course).
Last edited by McQ on Tue Oct 03, 2023 11:40 pm, edited 1 time in total.
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Beensabu
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Re: Long Treasuries down almost 50%. Time to bottom fish?

Post by Beensabu »

McQ wrote: Fri Oct 21, 2022 11:58 am This thread is for those who can entertain the idea of strategically timed portfolio rebalancing. It assumes that you entered 2022 with some kind of balanced portfolio...
I entered 2022 with a 20% overall allocation to long-term treasuries and a 45/55 AA...

I'll be rebalancing next year (probably asap next year) and not before.

If that turns out to be a timing trap, then I was doomed to begin with.
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Re: Long Treasuries down almost 50%. Time to bottom fish?

Post by 123 »

It can sometimes be hard to resist jumping in when we think we have found a bargain. But something that's a bargain now may be a bigger bargain later. Years ago I used the Vanguard GNMA fund (VFIIX) for fixed income and over many years it's price varied between $9.50 and $10.50 with interest rates. Now when I see it at a price of $8.83 (yesterday's price) I'm very tempted to jump in, I get the feeling it can't go any lower, but I know it probably will. Our restraint in jumping into fixed income instruments may be feeding further declines.
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Re: Long Treasuries down almost 50%. Time to bottom fish?

Post by vineviz »

McQ wrote: Fri Oct 21, 2022 11:58 am
What say you, Bogleheads? Is it time to buy duration? Or maybe to move away from the credit default risk baked into BND in favor of a pure Treasury fund?
I'm not generally a supporter of tactical asset allocation schemes, and think that bond duration should ALWAYS roughly match the expected investment horizon regardless of what the yield curve looks like.

That said, many investors have spent the past decade or more with bond duration that was far too short for their goals. They've been given a rare "second chance" to fix that prior mismatch by taking advantage of the luck they've experienced. I hope people can see the value in taking advantage of it.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: Long Treasuries down almost 50%. Time to bottom fish?

Post by VartAndelay »

vineviz wrote: Fri Oct 21, 2022 12:32 pm
McQ wrote: Fri Oct 21, 2022 11:58 am
What say you, Bogleheads? Is it time to buy duration? Or maybe to move away from the credit default risk baked into BND in favor of a pure Treasury fund?
I'm not generally a supporter of tactical asset allocation schemes, and think that bond duration should ALWAYS roughly match the expected investment horizon regardless of what the yield curve looks like.

That said, many investors have spent the past decade or more with bond duration that was far too short for their goals. They've been given a rare "second chance" to fix that prior mismatch by taking advantage of the luck they've experienced. I hope people can see the value in taking advantage of it.
Do you think EDV is a suitable fund for this? Or would VGLT make more sense?
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Re: Long Treasuries down almost 50%. Time to bottom fish?

Post by Tamalak »

I've been tempted by this very thing since mid September. But every time long treasuries seem like they can't get any lower and more tempting, they do!
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Re: Long Treasuries down almost 50%. Time to bottom fish?

Post by squirrel1963 »

vineviz wrote: Fri Oct 21, 2022 12:32 pm
McQ wrote: Fri Oct 21, 2022 11:58 am
What say you, Bogleheads? Is it time to buy duration? Or maybe to move away from the credit default risk baked into BND in favor of a pure Treasury fund?
I'm not generally a supporter of tactical asset allocation schemes, and think that bond duration should ALWAYS roughly match the expected investment horizon regardless of what the yield curve looks like.

That said, many investors have spent the past decade or more with bond duration that was far too short for their goals. They've been given a rare "second chance" to fix that prior mismatch by taking advantage of the luck they've experienced. I hope people can see the value in taking advantage of it.
That was me, who in the past 10 years held intermediate TIPS. During the July-September time frame I slowly converted them to a 30 year TIPS ladder.
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Re: Long Treasuries down almost 50%. Time to bottom fish?

Post by toddthebod »

Why would you think interest rates have topped out?

If interest rates continue to rise, moving funds from BND to EDV/VGLT will cause you even greater losses.

The price difference in long-term bonds between last year and this year is irrelevant.
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Re: Long Treasuries down almost 50%. Time to bottom fish?

Post by Lock »

I know this is boglehead blasphemy but another alternative is to increase leverage of intermediate treasuries via a vehicle such as futures.
JSPECO9
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Re: Long Treasuries down almost 50%. Time to bottom fish?

Post by JSPECO9 »

I don't have the [crude word deleted - moderator Kendall] to buy a 30 year treasury at 4.305% when I could buy a 1 year treasury at 4.578%.
nalor511
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Re: Long Treasuries down almost 50%. Time to bottom fish?

Post by nalor511 »

JSPECO9 wrote: Fri Oct 21, 2022 1:03 pm I don't have the [crude word deleted - moderator Kendall] to buy a 30 year treasury at 4.305% when I could buy a 1 year treasury at 4.578%.
You could think of it sort of like a 30yr EE bond, with 4.305% instead of 3.5% that an EE bond usually gets at the 20yr doubling
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Re: Long Treasuries down almost 50%. Time to bottom fish?

Post by CraigTester »

McQ wrote: Fri Oct 21, 2022 11:58 am [Bogleheads who abjure market timing in all its writhing serpent forms should not read this thread.]

This thread is for those who can entertain the idea of strategically timed portfolio rebalancing. It assumes that you entered 2022 with some kind of balanced portfolio, perhaps a version of the 3-fund portfolio, say with 40% in VTI, 20% in VEU, and 40% in BND—a 60/40 portfolio, to be traditional about it.

Maybe, you even had some cash, or CDs, because you found the bond yields on offer in 2020 and 2021 to be unattractive.

Is now the time to “buy low” in bonds? For those with no cash who were all in on BND, I should point out that “buy low, sell high” is one simple arithmetical transformation away from “sell low, buy lower.” The two are arithmetically equivalent after subtracting a delta.

BND is down about 17%.

EDV, a portfolio of zero-coupon Treasury bonds (STRIPS) with maturity greater than 20 years, is down about 45% as of late Friday, almost 50% on a price basis from the November 2021 high. That’s a 28% delta between the two.

Sell (some portion of) BND and buy EDV? Or maybe VGLT (to have coupon income), down about 34% YTD?

That is the question: whether t’is nobler to stay the course with BND, and accept the slower decline and slower eventual rebound on a total bond fund, or to take arms against the decline in bonds, and go long duration; to buy duration low, and hold come Hades or high water. To buy low, perchance, and enjoy a rebound devoutly to be wished; or to buy low, and see the slow death of the bet, as the Treasury drawdown moves to 60% then 70%, nay, to have been hasty, and missed the chance for a yield of 5% or even 6%, guaranteed by the full faith and credit of the United States of America, for 20 years or more, if only you had the resolve to hold off.

There are alternatives. LTPZ, which holds long TIPS, has a similar duration to EDV. It is down only about 35%. But the underlying TIPS now carry a real yield of 2% or a little more--equal to the 2% real yield on nominal bonds realized 1900 to 2020, US and international alike. viewtopic.php?t=386240

Thinkers.

What say you, Bogleheads? Is it time to buy duration? Or maybe to move away from the credit default risk baked into BND in favor of a pure Treasury fund?

Or is it better to wait for EDV to hit a 60% or 70% drawdown? [That would imply a yield somewhat north of 5% as compared to Friday’s 4 3/8%.]

Were a drawdown of that magnitude to occur, the eventual rebound might compare favorably with the 1932 and 1933 rebounds in stocks. Even as you hold instruments guaranteed by the full faith and credit of the United States of America, world hegemon.

Time to begin legging into EDV? Say yes or no, and why.

PS: If you are following a Liability Matching Protocol this thread does not pertain to you … except insofar as the dramatic increase in long Treasury yields has put within reach an LMP that you could not have made work in 2021. Take the thread title as a heads up to recalculate the LMP you can now achieve (with individual Treasuries, of course).
Great post... and really enjoyed the small-print warning...

So, as with all things financial, the answer to your question comes down to which reference point is chosen.

20 year Treasuries are currently yielding about 4.6%

Reference point 1:

"Adjusted" CAPE = 21, so 1/21 = 4.8%

0.2% equity risk premium, suggests one of the two metrics is out of kilter.


Reference point 2:

Long Term CAPE mean/median = ~16%, so 1/16 = 6.25%

1.65% equity risk premium, suggests one of the two metrics is still out of kilter.


Reference point 3:

20 Yr TIPS yield around 1.9%.

So bond market (BEI) is "expecting" 20 year inflation = 2.7%

This is above the Feds 2% goal, thereby suggesting 20 year yields are currently high.


Conclusion

So based on these 3 reference points, a back-of-the-envelope case can be made that it is not a terrible moment in history to buy 20 year Treasuries.....

However, we all know what happened to rates in the late 70's/early 80's.....

If the Fed succumbs to increasing pressure, it might just Pause early (aka Cave), and put us on course to repeat the painful rates march up until the FFR>Inflation.....

Therefore on balance, I do not believe the benefit of a 4.6% 20 yr Yield offsets the substantial risk of outsized pain.

Accordingly, I have been keeping my family's bond durations very short, so far.....

Craig Tester
Last edited by CraigTester on Fri Oct 21, 2022 1:13 pm, edited 1 time in total.
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Leif
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Re: Long Treasuries down almost 50%. Time to bottom fish?

Post by Leif »

I use bonds for ballast. Since their yields are bouncing off the bottom this year they are not much help. But, if I want to do some speculation on pricing I would be buying equities not LT bonds. However, being retired I don't do much speculating.
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Re: Long Treasuries down almost 50%. Time to bottom fish?

Post by mongstradamus »

I was actually thinking about EDV today, as its my bond allocation. I am not sure if its giving me the lower correlation to the market that I wanted when I originally bought them. I haven't jumped ship yet , but am wondering should I go something for less volatile like VGSH. I believe that something buffet is a fan of but I am not a billionaire like he is either so not sure what would be best.
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Re: Long Treasuries down almost 50%. Time to bottom fish?

Post by GAAP »

If I was willing to believe that US Treasuries are truly the safest thing out there, then maybe. I do manage my portfolio as a perpetuity, so extremely long duration isn't a problem for me. The recent issues in the UK combined with some of the recent policy proposals from our wonderful political representatives make me even less willing to drink that particular pitcher of colored sugar-water...

In any case, I prefer greater diversity in my bonds -- including diversity across individual country economies. Ex-pat retirement is still a potential for me, so that reduces my willingness to stick with just one economy -- let alone just one issuer.

BTW, nice Hamlet riff.
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Re: Long Treasuries down almost 50%. Time to bottom fish?

Post by manuvns »

will 30 yr mortgage rates go to 8% or it will top off at 7.5% ?
Thanks!
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Re: Long Treasuries down almost 50%. Time to bottom fish?

Post by wingman4uz »

Most of my fixed income was in a stable value fund. Rather than try to pick the “value” point, I’ve been DCAing into bonds with every 25 basis point increase in the 10 year yield.
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Re: Long Treasuries down almost 50%. Time to bottom fish?

Post by vineviz »

VartAndelay wrote: Fri Oct 21, 2022 12:35 pm
vineviz wrote: Fri Oct 21, 2022 12:32 pm
McQ wrote: Fri Oct 21, 2022 11:58 am
What say you, Bogleheads? Is it time to buy duration? Or maybe to move away from the credit default risk baked into BND in favor of a pure Treasury fund?
I'm not generally a supporter of tactical asset allocation schemes, and think that bond duration should ALWAYS roughly match the expected investment horizon regardless of what the yield curve looks like.

That said, many investors have spent the past decade or more with bond duration that was far too short for their goals. They've been given a rare "second chance" to fix that prior mismatch by taking advantage of the luck they've experienced. I hope people can see the value in taking advantage of it.
Do you think EDV is a suitable fund for this? Or would VGLT make more sense?
I think they are both suitable choices, honestly, and I wouldn't obsess over the distinctions. Either one is more than "good enough" IMHO.

My general recommendation is VGLT or SCHQ, simply because it is less extreme and easier for many investors to tolerate. The current duration, which is about 16-17 years, also happens to be about right for someone starting a 30-35 year retirement so it can function as a core holding well into retirement for people if they choose to.
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Re: Long Treasuries down almost 50%. Time to bottom fish?

Post by vineviz »

JSPECO9 wrote: Fri Oct 21, 2022 1:03 pm I don't have the cojones to buy a 30 year treasury at 4.305% when I could buy a 1 year treasury at 4.578%.
For most investors, the 1-year Treasury is FAR MORE risky than the 30-year Treasury.

You're much more brave taking on the risk of the short-term instrument than you would be with the long-term instrument.
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Re: Long Treasuries down almost 50%. Time to bottom fish?

Post by er999 »

I’m going to add a little more money to tmf and upro starting in January for the Hedgefundie portfolio so am sort of bottom fishing rather than giving up on long term bonds completely. Otherwise I’ve decided to take my risk in equities instead for the rest of my portfolio.

If you are going to do this I’d decide ahead of time if this is a trading move where you will sell if the price spikes up a certain amount or a long term shift in your asset allocation you’ll keep for decades.
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Re: Long Treasuries down almost 50%. Time to bottom fish?

Post by CraigTester »

vineviz wrote: Fri Oct 21, 2022 2:27 pm
JSPECO9 wrote: Fri Oct 21, 2022 1:03 pm I don't have the [crude word deleted - moderator Kendall] to buy a 30 year treasury at 4.305% when I could buy a 1 year treasury at 4.578%.
For most investors, the 1-year Treasury is FAR MORE risky than the 30-year Treasury.

You're much more brave taking on the risk of the short-term instrument than you would be with the long-term instrument.
Ok, I'll bite....

Why?
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Re: Long Treasuries down almost 50%. Time to bottom fish?

Post by er999 »

CraigTester wrote: Fri Oct 21, 2022 2:33 pm
vineviz wrote: Fri Oct 21, 2022 2:27 pm
JSPECO9 wrote: Fri Oct 21, 2022 1:03 pm I don't have the cojones to buy a 30 year treasury at 4.305% when I could buy a 1 year treasury at 4.578%.
For most investors, the 1-year Treasury is FAR MORE risky than the 30-year Treasury.

You're much more brave taking on the risk of the short-term instrument than you would be with the long-term instrument.
Ok, I'll bite....

Why?
Interest rates on t bills could go down to 0.5% in 1 year and stay at that level for the next 10 years. If so you’d be happy to have locked in 4% for 10-20 years as when your 1 year t bill matures all you could get then is 0.5% return when you reinvest the money.
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Re: Long Treasuries down almost 50%. Time to bottom fish?

Post by vineviz »

CraigTester wrote: Fri Oct 21, 2022 2:33 pm
vineviz wrote: Fri Oct 21, 2022 2:27 pm
JSPECO9 wrote: Fri Oct 21, 2022 1:03 pm I don't have the [crude word deleted - moderator Kendall] to buy a 30 year treasury at 4.305% when I could buy a 1 year treasury at 4.578%.
For most investors, the 1-year Treasury is FAR MORE risky than the 30-year Treasury.

You're much more brave taking on the risk of the short-term instrument than you would be with the long-term instrument.
Ok, I'll bite....

Why?
Because most individual investors do not have a 1 year time horizon, and interest rate risk is measured as the difference between bond duration and investment horizon.

Buying a 1-year Treasury only "locks in" your return for that 12-month period. If you're not spending the money on goods and services when that T-bill matures, when you go to reinvest your money you're at the mercy of the markets for the entire amount of the investment.

With a 30-year Treasury, you're locking in your return for the full 30 years: 60 known and certain interest payments plus the principal at maturity.

If you take out a mortgage on a house you intend to occupy for decades, most people intuitively understand that a 1-year ARM is much riskier than a 30-year fixed rate mortgage. The same principle applies with bond investing.
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Re: Long Treasuries down almost 50%. Time to bottom fish?

Post by CraigTester »

er999 wrote: Fri Oct 21, 2022 2:37 pm
CraigTester wrote: Fri Oct 21, 2022 2:33 pm
vineviz wrote: Fri Oct 21, 2022 2:27 pm
JSPECO9 wrote: Fri Oct 21, 2022 1:03 pm I don't have the cojones to buy a 30 year treasury at 4.305% when I could buy a 1 year treasury at 4.578%.
For most investors, the 1-year Treasury is FAR MORE risky than the 30-year Treasury.

You're much more brave taking on the risk of the short-term instrument than you would be with the long-term instrument.
Ok, I'll bite....

Why?
Interest rates on t bills could go down to 0.5% in 1 year and stay at that level for the next 10 years. If so you’d be happy to have locked in 4% for 10-20 years as when your 1 year t bill matures all you could get then is 0.5% return when you reinvest the money.
Reinvestment risk does expose you to modest opportunity cost, but this is arguably asymmetrical against the risk of the Fed repeating the 70's/80 runaway inflation/interest rate scenario, IMHO.... If you buy a 20 year bond and interest rates go up 2 or 3%, you just lost 40% to 60% of your principal....

Further, in a scenario where t-bills are yielding 0.5%, that appears very stimulative..... So you're likely to have lots of risk assets to buy instead of t-bills in that environment....(e.g. you'll likely either be bottom fishing in a recession or riding another Fed induced bull market)
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Re: Long Treasuries down almost 50%. Time to bottom fish?

Post by ray.james »

McQ wrote: Fri Oct 21, 2022 11:58 am
Or is it better to wait for EDV to hit a 60% or 70% drawdown? [That would imply a yield somewhat north of 5% as compared to Friday’s 4 3/8%.]
The most important line OP. Unlike stocks, bond losses are based on yields (which is unknown). But the effect on duration is a known entity. I like VGLT better and would start DCA. The crest might be around 450bps - 520bps. I think the Nov rate hike is priced in. And stocks are pricing in the 3Q results. So hikes beyond that depends on Inflation, consumer sentiment through holidays.
When in doubt, http://www.bogleheads.org/forum/viewtopic.php?f=1&t=79939
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Re: Long Treasuries down almost 50%. Time to bottom fish?

Post by km91 »

CraigTester wrote: Fri Oct 21, 2022 2:50 pm Reinvestment risk does expose you to modest opportunity cost, but this is arguably asymmetrical against the risk of the Fed repeating the 70's/80 runaway inflation/interest rate scenario, IMHO.... If you buy a 20 year bond and interest rates go up 2 or 3%, you just lost 40% to 60% of your principal....

Further, in a scenario where t-bills are yielding 0.5%, that appears very stimulative..... So you're likely to have lots of risk assets to buy instead of t-bills in that environment....(e.g. you'll likely either be bottom fishing in a recession or riding another Fed induced bull market)
In both of these scenarios you are speculating about the future path of rates / asset prices. The 30yr currently guarantees 4.30% regardless of where rates go in the future. If you plan to hold the bond to maturity you do not need to form an opinion about the Fed or future rates or future economic conditions. The fact that the market is pricing the 1yr at a higher yield than the 30yr tells us that the market views short term rates as more risky than long term
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Re: Long Treasuries down almost 50%. Time to bottom fish?

Post by Marseille07 »

km91 wrote: Fri Oct 21, 2022 3:25 pm In both of these scenarios you are speculating about the future path of rates / asset prices. The 30yr currently guarantees 4.30% regardless of where rates go in the future. If you plan to hold the bond to maturity you do not need to form an opinion about the Fed or future rates or future economic conditions. The fact that the market is pricing the 1yr at a higher yield than the 30yr tells us that the market views short term rates as more risky than long term
That is all true, but have you considered how old you'd be at maturity? That's a long long time to have to keep holding to ensure being made whole and then some.
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Re: Long Treasuries down almost 50%. Time to bottom fish?

Post by km91 »

Marseille07 wrote: Fri Oct 21, 2022 3:26 pm
km91 wrote: Fri Oct 21, 2022 3:25 pm In both of these scenarios you are speculating about the future path of rates / asset prices. The 30yr currently guarantees 4.30% regardless of where rates go in the future. If you plan to hold the bond to maturity you do not need to form an opinion about the Fed or future rates or future economic conditions. The fact that the market is pricing the 1yr at a higher yield than the 30yr tells us that the market views short term rates as more risky than long term
That is all true, but have you considered how old you'd be at maturity? That's a long long time to have to keep holding to ensure being made whole and then some.
Of course, you should hold the appropriate duration. If you have a known expense payable in one year, the 1yr is less risky than the 30yr. If you have a long investment horizon, as most savers probably do, the 30yr is less risky than the 1yr
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Re: Long Treasuries down almost 50%. Time to bottom fish?

Post by carminered2019 »

Take risk on stocks, everything else is just gravy.
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Re: Long Treasuries down almost 50%. Time to bottom fish?

Post by Marseille07 »

carminered2019 wrote: Fri Oct 21, 2022 3:42 pm Take risk on stocks, everything else is just gravy.
This is what I say as well. I think our "duration" is shorter than many here assume, because you start spending your portfolio (even if it means 4%/year or what have you) at the end of the day. If your bonds are down then, you start taking hits.
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Re: Long Treasuries down almost 50%. Time to bottom fish?

Post by vineviz »

Marseille07 wrote: Fri Oct 21, 2022 3:26 pm
km91 wrote: Fri Oct 21, 2022 3:25 pm In both of these scenarios you are speculating about the future path of rates / asset prices. The 30yr currently guarantees 4.30% regardless of where rates go in the future. If you plan to hold the bond to maturity you do not need to form an opinion about the Fed or future rates or future economic conditions. The fact that the market is pricing the 1yr at a higher yield than the 30yr tells us that the market views short term rates as more risky than long term
That is all true, but have you considered how old you'd be at maturity? That's a long long time to have to keep holding to ensure being made whole and then some.
For sure it's arguably unnecessary to build a bond ladder which extends far past the end of your planning horizon.

But the intent is not, or at least should not be IMHO, to be "made whole" (whatever that means) per se. The intent should be to manage the risks that can be managed using the best tools for the job. For long-term investors, long-term bonds (including nominal Treasuries and TIPS) are one of those tools.
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Re: Long Treasuries down almost 50%. Time to bottom fish?

Post by Robert T »

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I have a somewhat nuanced view. There is a risk that discussions on long-term bonds assumes (short-term) tolerable loss is irrelevant i.e. the only thing that matters is matching duration to time horizon. While this approach reduces/eliminates interest rate risk it likely increases capitulation risk (while getting to that time horizon), as we have seen with the recent bond capitulation threads. And capitulation risk (selling out of a long-term strategy) could be more costly to final consumption than the interest rate risk an investor is trying to avoid.
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Re: Long Treasuries down almost 50%. Time to bottom fish?

Post by squirrel1963 »

Robert T wrote: Fri Oct 21, 2022 3:53 pm .
I have a somewhat nuanced view. There is a risk that discussions on long-term bonds assumes (short-term) tolerable loss is irrelevant i.e. the only thing that matters is matching duration to time horizon. While this approach reduces/eliminates interest rate risk it likely increases capitulation risk (while getting to that time horizon), as we have seen with the recent bond capitulation threads. And capitulation risk (selling out of a long-term strategy) could be more costly to final consumption than the interest rate risk an investor is trying to avoid.
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I definitely agree that capitulation risk is a greater risk than interest rate risk.
So people who capitulate might have been better off at keeping a short treasury rolling ladder (say 5 years with maturities every 6 months) and hold to maturity. I fully understand a rolling ladder is no different from a fund of similar duration, but the psychological effect of not seeing principal losses is a good thing Imho.
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Re: Long Treasuries down almost 50%. Time to bottom fish?

Post by nisiprius »

I'll go with the efficient market hypothesis... particularly when the asset in question is investment-grade bonds.

If we exclude callable bonds or other bonds with unusual features (convertibles, special provisions, TIPS, whatever), and if we assume that the risk of default is negligible to a good approximation, the value of any portfolio of investment-grade bonds can be calculated, with math. The inputs to the calculation are the bond's term and coupon interest, and the predicted future interest rates... across the whole yield curve.

The only way this can be a significantly better time to buy long Treasurys than any other time, is to assume that the market is seriously misjudging the future interest rates over some or all future time periods. If a bond is going to pay back $1,000 at maturity, plus chump change in coupon payments, and the market says it is worth $500, then that just means the market thinks that the interest rate over the remaining life of the bond is enough to double your money in that number of years. How much longer to the bond matures? Rule of 72, if there is 20 years to go, that amounts to a prediction of 3.6%/year over the next twenty years. 15 years to go, it implies 4.8%. Neither of these numbers is crazy.

$500 for a long Treasury is only a bargain if you feel quite sure that average interest rates over the remaining life of the bond is going to be much less than 3.6% or 4.8% or so.

As for "capitulation," I would hazard a guess that most of the money in long-term Treasurys is from institutional investors, who know how to do bond math and whose guesses on interest rates, while wildly unreliable, are probably no worse than mine.
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Re: Long Treasuries down almost 50%. Time to bottom fish?

Post by Lee_WSP »

Now that they’ve broke 4% there’s got to be a point where I’d want to lock in that rate for my long term.
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Re: Long Treasuries down almost 50%. Time to bottom fish?

Post by 2pedals »

Probably not a bad idea to add some long(er) normal treasuries or TIPS for the purpose to purchase SPIAs in your late 70s or early 80s, in order to get some longevity credits if you are still healthy then.
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Re: Long Treasuries down almost 50%. Time to bottom fish?

Post by alluringreality »

Robert T wrote: Fri Oct 21, 2022 3:53 pm There is a risk that discussions on long-term bonds assumes (short-term) tolerable loss is irrelevant i.e. the only thing that matters is matching duration to time horizon. While this approach reduces/eliminates interest rate risk it likely increases capitulation risk (while getting to that time horizon), as we have seen with the recent bond capitulation threads.
I'm not sure this is how FINRA or the SEC describe interest rate risk. FINRA appears to list market risk as a synonym of interest rate risk, and they appear to define reinvestment risk as a different category of risk. Within such a framework, a focus on time horizon might attempt to eliminate reinvestment risk, yet interest rate risk appears to remain as a subject of caution within their investor presentations.

A well-known maxim of bond investing is that when interest rates rise, bond prices fall, and vice versa. This is also referred to as interest rate risk.
https://www.finra.org/investors/insight ... s-duration

The longer the bond’s maturity, the greater the risk that the bond’s value could be impacted by changing interest rates prior to maturity, which may have a negative effect on the price of the bond. Therefore, bonds with longer maturities generally have higher interest rate risk than similar bonds with shorter maturities.
https://www.sec.gov/files/ib_interestraterisk.pdf
Last edited by alluringreality on Fri Oct 21, 2022 5:31 pm, edited 1 time in total.
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Re: Long Treasuries down almost 50%. Time to bottom fish?

Post by aj76er »

CraigTester wrote: Fri Oct 21, 2022 1:07 pm

Reference point 1:

"Adjusted" CAPE = 21, so 1/21 = 4.8%

0.2% equity risk premium, suggests one of the two metrics is out of kilter.


...

Craig Tester
Two issues with your analysis:
  • I believe you are misusing CAPE by applying it to a 20yr horizon. The Shiller CAPE (or CAPE10) may be more appropriate measure, but still would only apply to a 10yr horizon.
  • You are mixing real returns (Equity CAPE) and nominal returns (Bond YTM)
But anyway, trying to estimate CAGR of equities out 20yrs is a fools errand. Think of all the technological innovation that has occurred over the previous 20yrs to 30yrs of which investors in total market funds have been beneficiaries. I don't think there's a reason to believe that it won't continue. Personally, I am an optimist, and believe equity returns will outpace 4% yielding nominal treasuries over the next 20 to 30 yrs.
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Re: Long Treasuries down almost 50%. Time to bottom fish?

Post by GAAP »

aj76er wrote: Fri Oct 21, 2022 4:53 pm I believe you are misusing CAPE by applying it to a 20yr horizon. The Shiller CAPE (or CAPE10) may be more appropriate measure, but still would only apply to a 10yr horizon.
Actually, the correlations for periods longer than 10 years are better than they are for 10 years. When I looked out to 20 years, I found a peak around 19 years, someone here posted a chart with even better results beyond 20 years.
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Re: Long Treasuries down almost 50%. Time to bottom fish?

Post by CraigTester »

km91 wrote: Fri Oct 21, 2022 3:25 pm
CraigTester wrote: Fri Oct 21, 2022 2:50 pm Reinvestment risk does expose you to modest opportunity cost, but this is arguably asymmetrical against the risk of the Fed repeating the 70's/80 runaway inflation/interest rate scenario, IMHO.... If you buy a 20 year bond and interest rates go up 2 or 3%, you just lost 40% to 60% of your principal....

Further, in a scenario where t-bills are yielding 0.5%, that appears very stimulative..... So you're likely to have lots of risk assets to buy instead of t-bills in that environment....(e.g. you'll likely either be bottom fishing in a recession or riding another Fed induced bull market)
In both of these scenarios you are speculating about the future path of rates / asset prices. The 30yr currently guarantees 4.30% regardless of where rates go in the future. If you plan to hold the bond to maturity you do not need to form an opinion about the Fed or future rates or future economic conditions. The fact that the market is pricing the 1yr at a higher yield than the 30yr tells us that the market views short term rates as more risky than long term
While true that you will earn today's YTM if you hold to maturity, the reason your NAV will adjust with interest rate changes, is to reflect your opportunity cost. If we get another round of 15% rates, like we did in the 80's, you will not be happy watching your NAV get cut in half along the way, no matter how many times you remind yourself that you will get your principal back if hold to maturity....And when you do get your nominal principal back at maturity, it won't buy near as many cheeseburgers as it would have at the beginning of the exercise.

If you read my earlier post on this thread, you'll find several reference points reflecting that I believe 20 yr rates are higher than expected, right now. But I then go on to explain that there is a reason for these higher than expected yields (IMHO).

Even today, Daly (San Fran Fed), let it slip that maybe its time to think about lowering rates. And you saw the market's reaction.

Maybe this slip was part of an organized "pivot", of maybe it was just an example of how hard it is to keep everyone on the same page. But it sure appears to resemble the late 1970's when everyone "knew" that inflation needed to be put in check, but for all sorts of reasons, it just kept getting kicked down the road until Volcker arrived on the scene....

If we get any type of repeat to that, you will rue the day you locked in a 4.3% return for 30 years.

But as they say, disagreements on topics like this are what makes a market.....

All the Best,

Craig Tester
Last edited by CraigTester on Fri Oct 21, 2022 6:20 pm, edited 1 time in total.
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Re: Long Treasuries down almost 50%. Time to bottom fish?

Post by windaar »

McQ wrote: Fri Oct 21, 2022 11:58 am [Bogleheads who abjure market timing]
That's like saying "vegans who abjure baby back ribs." :sharebeer
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Re: Long Treasuries down almost 50%. Time to bottom fish?

Post by km91 »

CraigTester wrote: Fri Oct 21, 2022 5:06 pm If we get any type of repeat to that, you will rue the day you locked in a 4.3% return for 30 years.
Again, this is all based on a purely speculative outcome. I don't know what the future holds. What I do know is that I have a spending requirement in retirement and I want to eliminate some of the risk around funding this requirement by locking in a guaranteed return on a portion of my portfolio. The tool for me to achieve that goal is a long term Treasury, regardless of where future rates go. I'm not going to rue the day I locked in 4.30% on the 30yr because I'm making not making a directional bet on rates
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Re: Long Treasuries down almost 50%. Time to bottom fish?

Post by Marseille07 »

km91 wrote: Fri Oct 21, 2022 5:42 pm Again, this is all based on a purely speculative outcome. I don't know what the future holds. What I do know is that I have a spending requirement in retirement and I want to eliminate some of the risk around funding this requirement by locking in a guaranteed return on a portion of my portfolio. The tool for me to achieve that goal is a long term Treasury, regardless of where future rates go. I'm not going to rue the day I locked in 4.30% on the 30yr because I'm making not making a directional bet on rates
Are you sure you can finance your spending requirement in retirement without touching the LTTs? Which asset are you selling then?

The 4.30% rate is not locked if you have to liquidate & sell when bonds are down.
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Re: Long Treasuries down almost 50%. Time to bottom fish?

Post by km91 »

Marseille07 wrote: Fri Oct 21, 2022 5:48 pm Are you sure you can finance your spending requirement in retirement without touching the LTTs? Which asset are you selling then?

The 4.30% rate is not locked if you have to liquidate & sell when bonds are down.
Presumably by the time I begin drawing on my retirement portfolio I would've shortened up the duration of my bond allocation, so I would probably be selling T-bills
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Re: Long Treasuries down almost 50%. Time to bottom fish?

Post by Marseille07 »

km91 wrote: Fri Oct 21, 2022 5:56 pm Presumably by the time I begin drawing on my retirement portfolio I would've shortened up the duration of my bond allocation, so I would probably be selling T-bills
The ones you already purchased won't be guaranteed to earn 4.3% until 30 years later.

You can certainly "shorten" the duration, but again, there goes 4.3% prospect on those bonds (though the curve is inverted and not too bad currently).
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Re: Long Treasuries down almost 50%. Time to bottom fish?

Post by Beensabu »

Marseille07 wrote: Fri Oct 21, 2022 6:04 pm
km91 wrote: Fri Oct 21, 2022 5:56 pm Presumably by the time I begin drawing on my retirement portfolio I would've shortened up the duration of my bond allocation, so I would probably be selling T-bills
The ones you already purchased won't be guaranteed to earn 4.3% until 30 years later.

You can certainly "shorten" the duration, but again, there goes 4.3% prospect on those bonds (though the curve is inverted and not too bad currently).
You can shorten duration by rebalancing from equities into whatever.
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Re: Long Treasuries down almost 50%. Time to bottom fish?

Post by CraigTester »

km91 wrote: Fri Oct 21, 2022 5:42 pm
CraigTester wrote: Fri Oct 21, 2022 5:06 pm If we get any type of repeat to that, you will rue the day you locked in a 4.3% return for 30 years.
Again, this is all based on a purely speculative outcome. I don't know what the future holds. What I do know is that I have a spending requirement in retirement and I want to eliminate some of the risk around funding this requirement by locking in a guaranteed return on a portion of my portfolio. The tool for me to achieve that goal is a long term Treasury, regardless of where future rates go. I'm not going to rue the day I locked in 4.30% on the 30yr because I'm making not making a directional bet on rates
It's a speculative outcome informed by what happened last time that we found ourselves in this context.

However, all of my comments have been in the context of making decisions around how to populate the fixed income portion of a broader portfolio.

If you are simply viewing this as an LMP, it's a different conversation.

The only comment then would just be a reminder to align nominal Liabilities with nominal bonds.... and Real liabilities with TIPS....

Good luck to you....

Craig Tester
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Re: Long Treasuries down almost 50%. Time to bottom fish?

Post by km91 »

Marseille07 wrote: Fri Oct 21, 2022 6:04 pm
km91 wrote: Fri Oct 21, 2022 5:56 pm Presumably by the time I begin drawing on my retirement portfolio I would've shortened up the duration of my bond allocation, so I would probably be selling T-bills
The ones you already purchased won't be guaranteed to earn 4.3% until 30 years later.

You can certainly "shorten" the duration, but again, there goes 4.3% prospect on those bonds (though the curve is inverted and not too bad currently).
Again, I'm not making a directional bet on rates. In retirement I want to eliminate the risk of not being able to pay my living expenses, so I will hold and sell T-bills regardless of what the prevailing yield is at the time. When saving for retirement I want to eliminate some of the risk around achieving my long term spending goals, so I will hold 30ry Treasuries regardless of what the prevailing yield is. I assume that now and in the future the market will be able to efficiently price T-bills and bonds. I want to hedge certain risks in retirement so I am buying the tools to do that at the market price offered
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Re: Long Treasuries down almost 50%. Time to bottom fish?

Post by km91 »

CraigTester wrote: Fri Oct 21, 2022 6:15 pm However, all of my comments have been in the context of making decisions around how to populate the fixed income portion of a broader portfolio.

If you are simply viewing this as an LMP, it's a different conversation.
Unless you run a mutual fund, your portfolio is a an LMP
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Re: Long Treasuries down almost 50%. Time to bottom fish?

Post by Marseille07 »

Beensabu wrote: Fri Oct 21, 2022 6:14 pm You can shorten duration by rebalancing from equities into whatever.
You can, but your AA can end up too conservative. It'd be ideal if you can shorten duration by doing stuff on the fixed income side alone.
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