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Old 03-02-2016, 03:59 PM   #41
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Originally Posted by OrcasIslandBound View Post
Lsbcal, Excellent idea to back test model portfolios! I have done this for a simplified investment mix of VTI and BND a few years back when I did so badly during the 2008 crash. I used yahoo finance to get all the values and dividends. I then used Matlab to simulate it all. That process helped me to define my strategy of staying at about 45% stocks going forward. But I don't know how to get raw data for LT bonds going back to the 50's. Also, I believe that BLV will be similar to a single bond in that after the duration has passed, subsequent to an interest rate rise, it will reach the same value it started at when including dividend reinvestment. This becomes a judgment and the 4% vs 2.2% is compelling.

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Here is one source for LT Treasury data: https://research.stlouisfed.org/fred2/series/GS20

Here is the chart:


We see that the rates are at levels of the 1950's. Where will it head? Nobody knows but the valuation story is not compelling. I would want to convince myself that I would have enjoyed the ride in the 1950's and 1960's compared to, say, 5 year Treasuries. Taking this data and using a spreadsheet should answer that, maybe.

I really don't know the answer. I'm betting on intermediate bonds and my strategy involves a bit of market timing between credit risk and Treasuries which is off topic.
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Old 03-02-2016, 08:29 PM   #42
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I looked up BLV and the duration is 15 years. For someone in their 60s that is too long. ... at least for me.
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Old 03-02-2016, 08:56 PM   #43
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Originally Posted by Lsbcal View Post
Here is one source for LT Treasury data: https://research.stlouisfed.org/fred2/series/GS20

Here is the chart:


We see that the rates are at levels of the 1950's. Where will it head? Nobody knows but the valuation story is not compelling. I would want to convince myself that I would have enjoyed the ride in the 1950's and 1960's compared to, say, 5 year Treasuries.
The biggest threat to model here is inflation rather than interest rate sensitivity.

A 20 year bond with a 3% coupon has a duration of about 15 years. From 1950 to 1970 it looks like interest rates climbed from 3% to something a bit under 7.5%. That's an increase of about 20bp each year which would result in an annual principal loss of about 3%.

But that 3% loss in principal is offset by the 3% coupon on your bond. So you're really looking at 0% total return in year one. Each subsequent year, though, your interest rate sensitivity declines so you actually start earning a bit of money in year 2 and beyond on a nominal basis.

The big problem is that when you get your initial investment back at maturity in 1970 that money buys a whole lot less than it did in 1950. If you don't model that too, you miss the big story.
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