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CaptainO 08-25-2013 04:45 PM

Treasury Bonds - What's Not to Like?
 
Iíve seen a lot of disapproving remarks about buying long-term Treasury bonds on this and other forums. Most of them seem to focus on the risk, that if interest rates increase, you will lose principal.

The way I see it, that risk is not a factor for 30 years if the bond is held to maturity. After 30 years, who knows what interest rates will be, and more than likely, most retirees will be taking that long siesta in the sky, so who will care? Even if youíre hanging in there after 30 years, youíll still get the face value of the bond, which yes, wonít buy as much as now, but at 95 years old, you probably wonít be taking any European vacations, either. In the meantime, youíve been getting a risk free 4%-5% (maybe soon) for 30 years.

Why then does this not seem to be considered a good way to invest a portion of your retirement savings? Am I missing something?

Animorph 08-25-2013 05:09 PM

Quote:

Originally Posted by CaptainO (Post 1352491)
Iíve seen a lot of disapproving remarks about buying long-term Treasury bonds on this and other forums. Most of them seem to focus on the risk, that if interest rates increase, you will lose principal.

The way I see it, that risk is not a factor for 30 years if the bond is held to maturity. After 30 years, who knows what interest rates will be, and more than likely, most retirees will be taking that long siesta in the sky, so who will care? Even if youíre hanging in there after 30 years, youíll still get the face value of the bond, which yes, wonít buy as much as now, but at 95 years old, you probably wonít be taking any European vacations, either. In the meantime, youíve been getting a risk free 4%-5% (maybe soon) for 30 years.

Why then does this not seem to be considered a good way to invest a portion of your retirement savings? Am I missing something?

What if inflation pops up? There's still plenty of risk in holding it for 30 years. Certainly recently it would have been better to stay in cash and buy after the price decreased. There's also the usual opportunity costs. For 30 years I'd much rather hold equities for 30 years.

sengsational 08-25-2013 05:37 PM

Before I read Laurence Kotlikoff's "Spend 'till the End", I was pretty cool on treasuries. Yes, I always thought there was a place for them in a portfolio, but a pretty small slice. But he makes a pretty good case for loading-up on TIPS (which would cover you if inflation took-off). It has been a while since I read it now, but I think the idea was basically, if you have enough to get you through "till the end", why gamble at all? Yes, you could do really well in equities and be able to afford, what? What do you want to buy after living life at "X", and suddenly you strike it "richer" at age 75, and find that you can live at "2X" until age 100. If you're happy with "X", then lock it in. I hope I didn't butcher the idea too horrifically, but I guess I'd say that plain "treasuries" don't do much for me because of the risk that the 4% or 5% might not seem like much if inflation takes off. But if you get inflation protected treasuries, then, I'm thinking that might not be such a bad idea.

Mulligan 08-25-2013 05:38 PM

I have to admit the thought has hit my mind, but I just can't do 30. Now if you can somehow get that 10 year up to 4%, I will be very interested in dropping some money in them as most of my money is in lower paying CDs and IBonds.

CaptainO 08-25-2013 05:42 PM

Quote:

Originally Posted by Animorph (Post 1352495)
What if inflation pops up? There's still plenty of risk in holding it for 30 years. Certainly recently it would have been better to stay in cash and buy after the price decreased. There's also the usual opportunity costs. For 30 years I'd much rather hold equities for 30 years.

I think similar "what if" arguments could be said regarding equities. What if there's a prolonged malaise like Japan, and equities languish or drop over the next 20 years? With a Treasury bond, at least you're guaranteed a return. There are no guarantees with equities. Of course there may be better times to buy, or not. Not sure what you mean by "opportunity costs". I mean, I know what opportunity cost is, but doesn't that refer more to tying up money with no return? If you mean maybe I could be getting 6% at some point, instead of 5%, well, yes that's true. But you would still be getting a fairly decent return, and not have to worry about timing anything.



By the way, I just read that the average stock market return over the last 100 years was something like 10%. However, a portion of that total is from dividends, which coincidentally average around 4.5% or so. If that information is correct, the return from a 30 year Treasury at 4-5% is very similar to the average dividend payout from equities. Yes, the stock may be worth more at the end of 30 years, but then again, it might not. And as I said before, after 30 years, most retirees (me) probably won't be around anymore, so what does it matter?

rbmrtn 08-25-2013 05:55 PM

The main risk would be inflation, but for a portion probably no worse or maybe better than an annuity in that least you ( or someone ) would get the principal back. But it's hard to hold anything for 30yrs, might not be around that long.

sengsational 08-25-2013 06:14 PM

Quote:

Originally Posted by CaptainO (Post 1352511)
I think similar "what if" arguments could be said regarding equities.

There are scenarios that will make each look anywhere from bad to horrible.

The simply "mildly unpleasant" scenario would be if rates returned to "normal". If you believe that "regression to the mean" is applicable, then, with interest rates at unprecidented lows now, you might believe that rates will at some point rise back to "normal". While you're cashing your measly 5% check, "every on else" is cashing an 8% check.

The nightmare scenario for bonds is runaway inflation (have you checked the US debt to GDP % lately?). Let's say that you put "5 European vacations worth" of money in treasuries. Not only would your 4 or 5 percent lose it's ability to buy much at all, but at the end of 30 years, you might not even have one European vacations worth of money that comes out. Same number of dollars you put in, but they don't buy squat. TIPS would remedy that problem, for the most part. Although that depends somewhat on the politicized way they calculate the inflation figure. But inflation adjusted bonds would be the only way I'd do treasuries.

But I do agree that there are both mildly unpleasant to nightmare scenarios for equities as well. It's all about how bad and how likely.

clifp 08-25-2013 06:18 PM

As others have the said the big risk with treasuries is inflation. A person who bought $10,000 10 year treasury bond in 1972 ended up with a bond in 1982 worth $4300 in 1972 dollars. Now even after collecting $5750 in interest payments he ends up even. Of course by the time he pays taxes on the interest he ends up well behind.

Treasury bills are great if you have retired with 30 or so times your spending needs and you just need something to keep up with inflation. But for most retirees need income above inflation and equities are one of the best way of achieving this.

FIREd 08-25-2013 06:23 PM

If one wants to buy long term treasuries, why not buy TIPS? They offer principal protection against both inflation and deflation for the long term.

CaptainO 08-25-2013 06:49 PM

Again, some of these arguments center on the "what if" nightmare scenarios, like clifp picking the worst decade in recent memory regarding runaway inflation for a 10 year note, but if you look at averages and most likely scenarios 4-5% guaranteed doesn't seem too shabby for 30 years. I'm not really concerned if somebody else is getting 8% on an investment and I'm only getting 5%. Most likely, they're also being compensated for a riskier bet, so more power to them.


As for TIPS, I don't know enough about them to comment, but as someone already mentioned, real inflation and the government's inflation seem to be way different. Besides, there's some weird "phantom tax" stuff with TIPS that doesn't sound so hot. I-bonds seem like a better deal to me, but amounts allowed to be invested are so small.

Animorph 08-25-2013 07:38 PM

What we're kind of implying but not saying directly is that you want to diversify. You don't want to be 100% 30 year bonds or 100% equities (except for me). You want to be somewhere in between that can cope with all of the scenarios we've discussed. If there's a bad scenario that kills you portfolio you probably should do something to improve your portfolio. You can be covered for inflation and covered for a market malaise.

TIPS kind of gets you there, but current rates are probably not great and you may not think the inflation measure used to adjust them matches your retirement inflation. If I was forced to commit to one thing, I guess this might be it. But that would put me on a one-legged stool and dependent on the government.

Nothing wrong with 30 year bonds for a portion of your portfolio if you think they will provide significant future growth/income/safety and represent a good value compared to other possible investments. The price variations will be an indicator of how well you timed the market. They matter in the sense that you might have been able to wait and get a better price. With deflation, it may indicate you bought at a good time.

haha 08-25-2013 09:42 PM

Quote:

Originally Posted by CaptainO (Post 1352491)
Iíve seen a lot of disapproving remarks about buying long-term Treasury bonds on this and other forums. Most of them seem to focus on the risk, that if interest rates increase, you will lose principal.

The way I see it, that risk is not a factor for 30 years if the bond is held to maturity. After 30 years, who knows what interest rates will be, and more than likely, most retirees will be taking that long siesta in the sky, so who will care? Even if youíre hanging in there after 30 years, youíll still get the face value of the bond, which yes, wonít buy as much as now, but at 95 years old, you probably wonít be taking any European vacations, either. In the meantime, youíve been getting a risk free 4%-5% (maybe soon) for 30 years.

Why then does this not seem to be considered a good way to invest a portion of your retirement savings? Am I missing something?

You seem certain of your position. You'll get no argument from me, that's for sure.

people who ask questions, if I know anything about it I may try to answer. People who say, "What am I missing? Well, if you don't know it's not exactly my place to tell you, since you may well be 100% correct in your opinion, and in any case you likely know all the arguments pro and con. If you don't, it would be exhausting to recite some of them, and I can't see that it would be useful to anyone.

Ha

pb4uski 08-25-2013 09:52 PM

What if I want to spend that money before I turn 95?

CaptainO 08-26-2013 08:13 AM

Quote:

Originally Posted by haha (Post 1352577)
You seem certain of your position. You'll get no argument from me, that's for sure.

people who ask questions, if I know anything about it I may try to answer. People who say, "What am I missing? Well, if you don't know it's not exactly my place to tell you, since you may well be 100% correct in your opinion, and in any case you likely know all the arguments pro and con. If you don't, it would be exhausting to recite some of them, and I can't see that it would be useful to anyone.

Ha

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.

CaptainO 08-26-2013 08:19 AM

Quote:

Originally Posted by pb4uski (Post 1352582)
What if I want to spend that money before I turn 95?

Then you would probably lose some principal, but the idea is to have other investments in stocks, bonds, and cash too, so you wouldn't need to do that, hopefully. At least you would still have principal, as opposed to, say, an annuity.

pb4uski 08-26-2013 10:01 AM

Quote:

Originally Posted by CaptainO (Post 1352620)
Then you would probably lose some principal, but the idea is to have other investments in stocks, bonds, and cash too, so you wouldn't need to do that, hopefully. At least you would still have principal, as opposed to, say, an annuity.

You would still have the principal, but what would you do with the principal at age 95 other than give it away?

I doubt that I would use it to take a big trip around the world at age 95. An annuity would provide better cash flow that could be used when you could enjoy it. and if a life annuity would continue even beyond age 95. BTW, while I don't advocate a SPIA for a 65 yo, if given a choice between a SPIA or a 30 year bond I think it would be an easy decision for me unless I was keen to leave a big inheritance (and I'm not).

If I was going to go out that long, I would at least go with a diversified portfolio of long investment-grade corporate bonds where you get better compensated for tying up your money and the interest rate risk you assume, albeit while assuming some credit risk.

haha 08-26-2013 03:41 PM

Quote:

Originally Posted by CaptainO (Post 1352619)
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.

[mod edit]

IMO this board is not "more stock oriented", and I truly do not understand your comment about not finding any discussions of long duration bond investments. I have myself participated in many over the past few months. If there is any majority preference here I believe it is for a balanced and more or less unvarying asset allocation among various instruments. But there are those with other ides too.

Ha

Katsmeow 08-26-2013 03:56 PM

Quote:

Originally Posted by CaptainO (Post 1352536)
I'm not really concerned if somebody else is getting 8% on an investment and I'm only getting 5%. Most likely, they're also being compensated for a riskier bet, so more power to them.

Inflation doesn't just affect the ending value of the bonds. It also affects the value of the 5% you are getting. In a time of high inflation that 5% you are getting buys you less and less.

And, the person getting 8% might not be someone being compensated for a riskier bet (could be, but not necessarily). For example, maybe interest rates have increased (with that pesky inflation) so the new 30 year bonds being sold now pay 8%. They have 30 year Treasuries just like you do but they bought theirs after you did and theirs pay a higher rate.

I don't buy treasury bonds because I don't buy individual bonds. I do buy bond funds including Vanguard's Total Bond. I have no problem with someone who chooses to buy individual bonds, but I personally would not feel comfortable putting all of my eggs into one basket, no matter what that basket is.

Chuckanut 08-26-2013 04:10 PM

Quote:

Originally Posted by CaptainO (Post 1352619)
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.

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.

Mulligan 08-26-2013 04:53 PM

Quote:

Originally Posted by Chuckanut (Post 1352802)

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.

And also corresponding discussions on whether the government could continue financing the 16 trillion plus debt at those rates may be occurring also. :)


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