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Old 08-26-2013, 05:08 PM   #21
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And also corresponding discussions on whether the government could continue financing the 16 trillion plus debt at those rates may be occurring also.
Shhhh... Mulligan. You're not supposed to even know about that possibility much less bring it up!

This place is getting full of dangerous radicals!

I see no problem with adding long term t-bills to one's portfolio if they work for a person. Though I would take a serious look at TIPS before I jumped in.
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Old 08-26-2013, 05:12 PM   #22
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We bought I Bonds between 2001 and 2003, and over the intervening years, have received as much as 8.2% and 4.3% depending on the purchase date.

The formula for I bonds is
Quote:
Composite rate = [fixed rate + (2 x inflation rate) + (fixed rate x inflation rate)]
Our "fixed" rate ranges from 3.4 to 2.1, so our current return is 6.0% to 4.3%.
The current CPI is @ .59%

Buying an I Bond today gives a return of 1.18%, as the current "fixed rate" is zero.Individual - I Savings Bonds Rates & Terms: Calculating Interest Rates on I Bonds

The Fixed Rate is apparently arbitrary, as there is no specified formula for setting this... It has been at 00% since 2010.
The CPI is so far away from real inflation because of the sneaky things the government has used to "adjust" the number.
.................................................. ..........................................
When we bought the maximum purchase was $30K/yr... Today it it is $10K/yr or $15K if bought a with tax refund.
We'll hang in there with what we've got, but often wonder if we'll be "gamed", and if high inflation rates will somehow be twisted ala the "chained CPI" to reduce the return in the future.
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Old 08-26-2013, 05:27 PM   #23
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I think if you have enough money that all you need to do is keep up with inflation, TIPS would be something to look in to. I still think equities will offer more growth in the long term.
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Old 08-26-2013, 05:31 PM   #24
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No one is talking about it because of the current war on savers Fed plans to keep interest rates at historically low levels.

OTOH, if we ever get the long term rates of the mid 70's back, I think there would be plenty of talk about long term T-bills.
But but but... If bond rates get back to those levels, it means inflation is also at those levels. Really winning anything in that scenario?
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Old 08-26-2013, 07:32 PM   #25
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But but but... If bond rates get back to those levels, it means inflation is also at those levels. Really winning anything in that scenario?
The hope would be that inflation wouldn't get much higher at that point. Right now it seems likely to me that inflation will be higher for most of the next 30 years than it is now. That may not be true at higher inflation rates. Just a guess though.
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Old 08-26-2013, 09:48 PM   #26
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I think there are quite a few issues raised in this thread that merit discussion, but one salient point that everybody seems to have tacitly decided not to discuss is that it's not currently possible to invest in long term treasury bonds with a 4 or 5% yield. 30 year treasuries closed today with a yield of only 3.783%. That's under 4% and SIGNIFICANTLY under 5%. According to my calculations, a rise in long term t-bond rates to 5% would reduce the market value of 30 year treasuries by about 22%, which is about 5.8 years of interest at the current yield.

So, my personal opinion is that OP has a valid point that in the future long term treasuries may be so beaten down by rising interest rates that they will be attractive to income seeking retirees. Until then there seems to be a touch of fantasy to this thread - OP seems to be thinking, "Long term rates aren't that much under 4%, so let's round up and pretend they've already gotten there. But somebody may object that 4% is too low a yield to make it worthwhile to tie up one's assets for three decades, so let's say that once they get to 4% they will then be in the 4-5% range. That will make everyone feel far better about making a 30 year commitment."

The Bond Market: Ryan Indexes - Markets Data Center - WSJ.com
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Old 08-26-2013, 10:36 PM   #27
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I think there are quite a few issues raised in this thread that merit discussion, but one salient point that everybody seems to have tacitly decided not to discuss is that it's not currently possible to invest in long term treasury bonds with a 4 or 5% yield. 30 year treasuries closed today with a yield of only 3.783%. That's under 4% and SIGNIFICANTLY under 5%. According to my calculations, a rise in long term t-bond rates to 5% would reduce the market value of 30 year treasuries by about 22%, which is about 5.8 years of interest at the current yield.
Maybe on the theory of first things first, since the whole idea of tying up money at a fixed rate for 30 years when interest rates are near generational lows seems kind of counterproductive, what difference does it make if OP has also burnished the expected rate beyond anything that has been available lately? Few would do this in any event.

None of this means that long term bonds might not be a reasonable short term gamble. If rates go to where they were just a month ago, the gains would be considerable. Not for me though, too afraid of what must inevitably happen over the longer term. As we have seen, things can change very quickly.

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Old 08-27-2013, 05:28 AM   #28
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I asked the "What am I missing" question because I was truly wondering if there was something I hadn't considered. I realize this forum may be more stock-oriented, but I haven't been able to find a straight forward discussion about having 30-year Treasury bonds as a portion of ones fixed income portfolio anywhere. Not even a mention of it, which seems curious, because at certain interest rates, it appears (to me) to be a viable fixed income investment.
I'll admit that I missed your emphasis on a portion. FIRECalc which is heavily used on the forum, by default allocated 25% of your assets to long term bonds. You can easily change it to 30 year Treasury bonds and from what I've observed it makes very little different in a portfolio.

You aren't missing anything. If 30 year treasury yields move up to 4-5% than it absolutely makes sense to put a portion into long Treasuries. They will in all likelyhood provide a modest return after inflation at the rate. At 4.5% interest rate a portion as large as 60% makes sense.

I am by nature a stock guy but in 1999-2001 when I could buy Muni bonds that yielded 5-6% and TIPs bonds that were pay 3.5%-4.0% real yield I sold tons of stocks to buy bonds. If bonds went back to 4.5% I'd even invest 25% in bonds some of which would be 30 year treasuries.

But the rub is I can't buy 30 year Treasuries that yield 4-5%. The best I can get is 3.5%. A year ago when they were 2.5% I was telling anybody who would listen and plenty who didn't don't buy Treasuries. (I was hardly alone in my advice) After being wrong for 4 years it was nice to be right this year.

At the current level, I still think the yield is a little too low, but I don't think you'd be dumb to have a portion of your money in them. If and when yields rise, the more attractive bonds become.
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Old 08-27-2013, 10:36 AM   #29
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I'll admit that I missed your emphasis on a portion. FIRECalc which is heavily used on the forum, by default allocated 25% of your assets to long term bonds. You can easily change it to 30 year Treasury bonds and from what I've observed it makes very little different in a portfolio.

You aren't missing anything. If 30 year treasury yields move up to 4-5% than it absolutely makes sense to put a portion into long Treasuries. They will in all likelyhood provide a modest return after inflation at the rate. At 4.5% interest rate a portion as large as 60% makes sense.

I am by nature a stock guy but in 1999-2001 when I could buy Muni bonds that yielded 5-6% and TIPs bonds that were pay 3.5%-4.0% real yield I sold tons of stocks to buy bonds. If bonds went back to 4.5% I'd even invest 25% in bonds some of which would be 30 year treasuries.

But the rub is I can't buy 30 year Treasuries that yield 4-5%. The best I can get is 3.5%. A year ago when they were 2.5% I was telling anybody who would listen and plenty who didn't don't buy Treasuries. (I was hardly alone in my advice) After being wrong for 4 years it was nice to be right this year.

At the current level, I still think the yield is a little too low, but I don't think you'd be dumb to have a portion of your money in them. If and when yields rise, the more attractive bonds become.
Whew, thanks clifp. Based on one posterís comments, I was beginning to think I needed to see a psychiatrist for even asking the question. And thanks for the insight regarding FIRECalc. That was the kind of information I was hoping to get. I agree that rates are too low now. When they started climbing so fast and a lot of news articles implied they would be increasing a lot more soon, I started to pay attention and wonder about the possibilities. I may be in for a long wait, though. The rates have been headed down again recently.
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Old 08-27-2013, 12:38 PM   #30
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Of course, Harry Browne's permanent portfolio includes 25% long bonds.
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Old 08-28-2013, 03:02 PM   #31
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Of course, Harry Browne's permanent portfolio includes 25% long bonds.
How permanent is permanent?

If he was 100% equity or 100% cash right now, would he still put 25% of his money into long bonds, under the current conditions?

That seems like a poor bet to me, but I'm just an amateur.
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Old 08-28-2013, 04:05 PM   #32
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How permanent is permanent?

If he was 100% equity or 100% cash right now, would he still put 25% of his money into long bonds, under the current conditions?

That seems like a poor bet to me, but I'm just an amateur.

I think Harry would have been disciplined enough to stick to his AA. I don't think most of his disciples are. I mean holding 25% gold and 25% 30 year and 25% equities and 25% cash pretty much guarantee that a least 1/4 and often 1/2 your portfolio is losing money every year. You should have been selling gold and buying bonds at the beginning of the year.

Also the PP is a wealth preservation portfolio not particular good way to accumulate wealth.
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Old 08-28-2013, 05:59 PM   #33
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While it is true that the Permanent Portfolio was designed to preserve wealth, the permanent portfolio as offered in mutual fund form has equaled the S&P500 with far less volatility since 1996. Since 1972 it has a CAGR of 9.5%. It lost 1.5% in 2008, the worst year ever was 1981 and it lost 5.1%. Also Harry Browne did not advocate keeping the investments at 25% only rebalancing to 25% when an investment fell to less than 15% of the portfolio or exceeds 35% of the portfolio, then rebalance the entire portfolio back to 25/25/25/25.

I myself think the portfolio is brilliant in that few portfolios are arranged in a manner to state what they hope to accomplish then actually do that. One can argue that gold or bonds are overvalued but my take is we will learn this in the future but there will always be someone who hates one of these 4 investments, which makes them very much worth having. Craig Rowlands book describes the methodology quite well and William Bernsteins review of it on amazon is worth the read.


Amazon.com: The Permanent Portfolio: Harry Browne's Long-Term Investment Strategy (9781118288252): Craig Rowland, J. M. Lawson: Books
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Old 08-28-2013, 07:14 PM   #34
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Thanks for the comments!
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Old 08-29-2013, 03:11 AM   #35
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I will really never understand government bond "math". How is it that long term rates went to 15-20 percent in the early 80's when our debt to gdp bottomed near 30%-40%? Yes, inflation concerns were quite different back then, but still, it really makes me wonder sometimes? Are there fundamental levels of debt to gdp where these bonds are ever a horrible bet? From Japan's experience, it seems like the answer is no.
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Old 08-29-2013, 03:58 AM   #36
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I will really never understand government bond "math". How is it that long term rates went to 15-20 percent in the early 80's when our debt to gdp bottomed near 30%-40%? Yes, inflation concerns were quite different back then, but still, it really makes me wonder sometimes? Are there fundamental levels of debt to gdp where these bonds are ever a horrible bet? From Japan's experience, it seems like the answer is no.
Well anything over 80% seems to be risky (Ireland hit that level before the crisis hit) and I think over 120% is generally the real danger level.


Historically countries like US, Canada, Australia, NZ that have not defaulted on their debt are a much smaller number than countries that have. Even if we restrict defaults to say since 1900, we have defaults by Russia (3 times), Germany, Italy, Japan, and near default by England, China. There is probably some country in Latin America that didn't default in that time frame but I am not sure who. Plenty in Africa, and Asia and more than a few in Europe. I read a paper by a couple of Harvard economist chronically the nasty habits that sovereign countries have on welching on the debt.

Sadly (for bond holders) the days of the debt collector arriving at the capital escorted by fleet of warships from the British or American navy are behind us. I suspect that an army of lawyers lacks the same intimidation factor.

Then recently, Greece, Cyprus, Iceland, Ireland... and possibly more to come from the Eurozone.

When they do default, the collection is worse than getting money from bankrupt companies. The court case take decades to resolve the Argentinian default of 2001 just had a major court victory in the US, but of course not in Argentinian courts.

But as general rules when countries default on their debt bond holder get between $.25 to $.50 on the dollar and any amounts above $.25 seem to require a decade or two of court battles and lawsuits.

Anyway while I don't always see eye to eye with the credit ratings companies. I think S&P is right to give a higher credit rating to Johnson & Johnson, Microsoft, ADP, and Exxon than Uncle Sam. I'd much rather have a JNJ 30 year bond yielding 4.7% than a 30 year treasury at 4.7% much less at 3.7% today.
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Old 08-29-2013, 06:09 AM   #37
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The CPI is so far away from real inflation because of the sneaky things the government has used to "adjust" the number.
Complete nonsense, of course. Here's a comparison of the CPI from the Bureau of Labor Statistics against the Billion Price Index maintained by MIT:



Looks like they line up pretty well to me:

Taken from Krugman:

http://krugman.blogs.nytimes.com/201...l-these-years/
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Old 08-29-2013, 06:16 AM   #38
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I believe Zvi Bodie, a widely published BU professor of economics, has a similar investment strategy suggestion (to invest in treasuries) for what he calls " a worry free retirement".
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Old 08-29-2013, 12:25 PM   #39
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Are there fundamental levels of debt to gdp where these bonds are ever a horrible bet? From Japan's experience, it seems like the answer is no.
I am not sure you would universal agreement with your conclusion.

Ha
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Old 08-29-2013, 12:43 PM   #40
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I am not sure you would universal agreement with your conclusion.

Ha
I have always just been a simplistic government debt alarmist type person. But the someone recently I read pooh poohed the concern in a way I really hadn't thought about. He said the debt is slightly higher than GDP. That is equivalent to a persons mortgage debt slightly exceeding their annual income. In other words, no big deal. That made me think in terms of my mortgage as it is about 150% to current income and I live just fine under that parameter. There, of course, was no counter point to his own argument. What would it be? Does this mean economically speaking we could carry 200% plus, since I know in my budget I could? I was always curious about that line of thinking as I really hadn't been exposed to it before. Aside from interest rate spike exposure and foreigners not buying the debt, what else would be the risk in this thinking?
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