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Old 10-17-2020, 09:39 AM   #41
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Originally Posted by audreyh1 View Post
Thatís past performance - no future guarantees. If you ALREADY owned bond funds, you did very well this year due to the sudden drop in rates. But that will not be repeated, unless rates go negative.....

Also, Total Bond Fund holds a lot of corporate debt, whereas Clements was focusing on treasuries.
Exactly. Clements, in an earlier post, said he was going with a barbell of half short-term TIPS, half short-term Treasuries (e.g. VTIP, VGSH) since he's agnostic about whether we'll have inflation or deflation.

Unfortunately short-term TIPS only offer a modicum of protection against "sudden" inflation and both they and long-term TIPS have negative coupons right now. iBonds are an infinitely better option but the 10K per person per year purchase limit and having to open a separate Treasury Direct account will dissuade many.

To Audreyh1's point bonds have had a decent run this year thanks to the March market panic but there's just not much room left. This article makes a pretty compelling argument, in my opinion, for why even short-term Treasury funds aren't worth owning at this point, let alone Total Bond or IT Treasuries:

https://seekingalpha.com/article/437...vestment-sense
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Old 10-17-2020, 11:55 AM   #42
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Originally Posted by tenant13 View Post
I'm betting on another market crash followed by Fed panicking and going negative on the rates. Given that they have no other place to go but below zero and the fact that market and politicians are addicted to Fed's intervention, it's not unlikely. All we need is a failed vaccine and we're in the dumpster. And that's the only reason I hold on to some LT US treasuries. Otherwise I'd buy more Chinese government bonds.
That is a likely/possible scenario. There are others, as horrific or even worse.

At the end of the day, the Fed cannot control where rates go - the market wields more strength than the Fed, unless the Fed prints to infinity and devalues the USD to nothing, making inflation take off. At what point do we believe the Fed will back off when it becomes clear that failure is the only outcome? Remember George Soros shorting the British Pound when it was teetering on the brink? How far does the Fed go before a similar scenario arises?

https://theeconreview.com/2018/10/16...british-pound/

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What kept the pound from nose diving in value was simply the British governmentís guarantee that it would keep the value propped up, and the market had faith that it would. As long as everyone believed that England would stay indefinitely committed to buying pounds and keep it in the agreed upon level, the status quo was maintained.

Following an interview with the then President of the Bundesbank, Helmut Schlesinger, it was revealed that the pound sterling was one of those currencies that could ďcome under pressureĒ and be devalued since it was trading at levels that were far away from its inherent value. This caused a huge dent in market sentiments and probed major speculation about the pound and the possibility of it being devalued.

Meanwhile in New York City, Soros and his Quantum Fund had been building a $1.5 billion short position anticipating that an overvalued pound would be compelled by the market to drop down to its equilibrium price devoid of any artificial intervention. A short position, in essence, allows an investor to garner profits when the price of a commodity or security goes down rather than up.

Since the pound was trading at the lower end of the agreed level, this was a brilliant and well thought out strategy. If the pound tanked, Soros would make billions owing to his short position. Any increase in the value of the currency is virtually impossible given the fact that the market was now convinced that the pound was overpriced. It was already trading at low levels and required support from the Bank of England to remain on its current level.

And so, on the morning of Wednesday September 16, 1992, Soros and his fund increased their short position against the British pound from $1.5 to $10 billion. Consequently, Soros borrowed and sold pounds from anyone that he could. Other hedge funds found out about the bold trade and decided that it would be prudent to short the pound too.

Therefore, by the time London markets opened, tens of billions of pounds had been sold, placing the pound to be trading dangerously close to below the levels mandated by the ERM. British officials responded by buying up the pound, depleting its reserves of foreign currency in order to prop up the price and induce an uptick in the demand for the British sterling. However, the huge supply glut could not be mitigated by the purchase of the currency and its value still remained surprisingly low.

Having no other option, the British government was forced to drive up interest rates to manage the currency and prevent it from free falling. At around noon local time, an increase in interest rates of 200 basis points, from 10% to 12%, was announced. However, the pound continued to plummet. Investors around the world were convinced that the currency would continue its downward trajectory thereby prompting them to offload the currency and cut their losses. This caused the situation to exacerbate further.
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Old 10-17-2020, 12:43 PM   #43
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Well it looks like there is quite a spread in strategies here.

After looking at some strategies of the past I decided to do the following with our 60/40 portfolio:

Take the 22% that we have in short and intermediate investment grade and split that into 30% SP500 plus 70% intermediate Treasuries. The rest of our bonds are in high yielding iBonds and TIPS paying positive rates. So this raises the equity part of the portfolio to 67/33.

That 30% SP500 is market timed using a simple moving average approach to minimize downside risk. I've posted a thread on this strategy some months ago. I know most here will puke at the thought of market timing but I've been doing this successfully for many years. And market timing just to beat bonds has a long history of success but few people use it for this reason.
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Old 10-17-2020, 01:49 PM   #44
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Well it looks like there is quite a spread in strategies here.


It does not matter what you choose, risks come with rewards. Understanding the risks is crucial no matter what one does. A guy has got to stick with what he is comfortable with.
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Old Yesterday, 12:46 AM   #45
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I like the author's Role 3 rationale for owning bonds right now. The returns, though meager, are not terribly threatened by inflation. My only concern regarding inflation is that if we de-couple from China that it could drive the cost of many common products higher until a new source of cheap labor is found and exploited. It would be a different source of inflationary pressure than we have typically seen in the past.

The general consensus seems to be that we are going into a deflationary mode and overall inflation will not occur until the Fed does something dramatic - like direct stimulus payments to taxpayers, or gets rid of cash, or both. Inflation is highly unlikely because the terrible economy is cratering the demand necessary for it to occur. (With the exception of certain assets that have temporarily artificial high demand for their products because of tight supply and/or fear-based hoarding - like Real Estate and guns and ammo.)

In this deflationary scenario, Bonds are seen as the one of the safer options; and bond returns beyond the coupon rate are highly feasible - until the Fed develops new tools to stimulate consumption and/or inflation.

There are so many convenient ways to own bonds that mitigate the long-term risk - and so much uncertainty in owning stocks right now - it seems irresponsible not to have a piece of the portfolio in that asset class simply to diversify risk.
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Old Yesterday, 06:10 AM   #46
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I like the author's Role 3 rationale for owning bonds right now. The returns, though meager, are not terribly threatened by inflation. My only concern regarding inflation is that if we de-couple from China that it could drive the cost of many common products higher until a new source of cheap labor is found and exploited. It would be a different source of inflationary pressure than we have typically seen in the past.

The general consensus seems to be that we are going into a deflationary mode and overall inflation will not occur until the Fed does something dramatic - like direct stimulus payments to taxpayers, or gets rid of cash, or both. Inflation is highly unlikely because the terrible economy is cratering the demand necessary for it to occur. (With the exception of certain assets that have temporarily artificial high demand for their products because of tight supply and/or fear-based hoarding - like Real Estate and guns and ammo.)


In this deflationary scenario, Bonds are seen as the one of the safer options; and bond returns beyond the coupon rate are highly feasible - until the Fed develops new tools to stimulate consumption and/or inflation.

There are so many convenient ways to own bonds that mitigate the long-term risk - and so much uncertainty in owning stocks right now - it seems irresponsible not to have a piece of the portfolio in that asset class simply to diversify risk.
+1 Well said!!
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Old Yesterday, 08:07 AM   #47
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Of course no one knows whether we'll see inflation or deflation, but a prolonged bout of the latter is something the U.S. has never experienced and is unlikely to in the future, for reasons William Bernstein goes into in considerable detail in his excellent booklet "Deep Risk:How History Informs Portfolio Design."

From the review in Forbes (link below):

"Deflation, on the other hand, is the least likely to happen. It is good for bonds and bad for stocks. Solutions include cash, bonds, and international diversification, as well as gold. But using bonds and bills carries a high cost if we experience inflation rather than deflation."

Of course Bernstein's book, while recent, was published before today's era of unprecedented negative real returns on Treasury bonds of all durations. Starsky's comment about mitigating [deflation] risk now applies only to long-term Treasuries but the downside risk of holding them if interest rates spike far exceeds any remaining benefit they might provide in the unlikely event of prolonged deflation. IMHO a mixture of the other assets Bernstein recommends - all of which also help mitigate inflation - along with ample safe cash makes much more sense.

https://www.forbes.com/sites/wadepfa.../#29d2dff43dac
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Old Yesterday, 08:30 AM   #48
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There is nothing we can do about deflation or inflation... I am surprised why anyone would buy a Treasury Bond with rates this low... you can instead get a decent rate of return by just buying a well rated Corporate Bond... if you compare a " Safe " Treasury Bond to a " Safe " Corporate Bond like say, Apple that is AA1 rated and pays a coupon of 4.65%... if you buy a Treasury Bond do you really need to worry yourself about inflation/deflation.... why? Apple is in better financial shape than the USA Treasury... think about that... and of course there are many many options to Corporate Bonds than just Apple...
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Old Yesterday, 08:49 AM   #49
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Well it looks like there is quite a spread in strategies here.



.

And mistakes will be made, since no one can predict the future. So my strategy is to sit tight on our globally-diversified, 50/50 portfolio of index funds and try to maintain a 20 year-plus view. By then, hopefully, what ever needs to cycle through, will cycle.
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Old Yesterday, 10:01 AM   #50
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There is nothing we can do about deflation or inflation... I am surprised why anyone would buy a Treasury Bond with rates this low... you can instead get a decent rate of return by just buying a well rated Corporate Bond... if you compare a " Safe " Treasury Bond to a " Safe " Corporate Bond like say, Apple that is AA1 rated and pays a coupon of 4.65%... if you buy a Treasury Bond do you really need to worry yourself about inflation/deflation.... why? Apple is in better financial shape than the USA Treasury... think about that... and of course there are many many options to Corporate Bonds than just Apple...
Corporate bonds and other options include an equity like risk. So the logic in using Treasury bonds is to have a very low risk bond stash with a suitable percentage of equity. This is an attempt to isolate the risk into a pure equity component and a pure bond component. I cannot prove that the risk isolation is superior but it seems to have beaten some alternatives I've studied with data going back to 1987.

What is the duration on the Apple bonds? Why are they paying such a premium over an equivalent duration Treasury? Not saying you are wrong to buy these bonds, just curious how the market prices these.

I found this article on Apple bonds: https://www.barrons.com/articles/app...ek-51597344992
It says for a 10 year Apple bond the rate is 1.25% to maturity. That would be the max maturity I'd personally consider.
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Old Yesterday, 10:07 AM   #51
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... Why are they paying such a premium over an equivalent duration Treasury? ...
Maybe because of this: "Callable on 13 Dec 2022 at 100." Heads Apple wins, tails you lose.
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Old Yesterday, 10:08 AM   #52
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And mistakes will be made, since no one can predict the future. So my strategy is to sit tight on our globally-diversified, 50/50 portfolio of index funds and try to maintain a 20 year-plus view. By then, hopefully, what ever needs to cycle through, will cycle.
Yep, just keep rebalancing. Iím not letting go my bond funds! Rebalancing takes care of appreciation/depreciation.
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Old Yesterday, 10:22 AM   #53
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....you can instead get a decent rate of return by just buying a well rated Corporate Bond... if you compare a " Safe " Treasury Bond to a " Safe " Corporate Bond like say, Apple that is AA1 rated and pays a coupon of 4.65%...
I see our one-trick pony who doesn't understand the difference between coupon and yield has resurfaced.

From the Forbes article:
Quote:
...The company’s bonds were sold with coupons of 0.55% for the five-year maturity, 1.25% for the 10-year maturity, 2.4% for the 30-year maturity and 2.55% for 40-year maturity. Its credit is rated AA+, the second-best rating available. ...
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Old Yesterday, 10:27 AM   #54
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Maybe because of this: "Callable on 13 Dec 2022 at 100." Heads Apple wins, tails you lose.
actually " NO " here is the data from Fidelity... the call date is 2045 and matures in 2046...

Call Schedule
APPLE INC NOTE CALL MAKE WHOLE4.65000% 02/23/2046 ISIN #US037833BX70 SEDOL #BYN2GF7
Call Defeased
NO
Continuously Callable
YES
Callable After
08/23/2045
Next Call Date *
08/23/2045
Extraordinary Redemption
NO
Make Whole Call
YES
Conditional Call
NO
* The Next Call Date is, where applicable, the earlier of either the continuously callable effective date calculated from the current business day, or the next scheduled call date.
Call Date Call Price Call Type
08/23/2045 100.000 Par Call
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Old Yesterday, 10:36 AM   #55
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Ok... lets go over to the secondary Treasury Bonds.... here's what shows there.... its better than a bank, better than a CD.. its call protected but... and there's always a but that gets pointed out by " you know who from the trailer park " ...its cost is above par...

UNITED STATES TREAS SER BONDS
3.37500% 11/15/2048 BDS
Buy Sell
Hypothetical Trade | Fixed Income Alerts
OverviewPrice & Performance
Details
CUSIP 912810SE9
Pay Frequency SEMI-ANNUALLY
Coupon 3.375
Maturity Date 11/15/2048
Moody's Rating AAA
S&P Rating --
Bond Type Treasury

and for the yld sensitive, the yld to maturity is

Basic Analytics
Price (Bid) 141.328
Price (Ask) 141.412
Depth of Book View
Ask Yield to Worst 1.550%
Ask Yield to Maturity 1.550%
Current Yield 2.386%
Third Party Price 141.594
Spread to Treasuries 0.000
Treasury Benchmark 28 YR.(3.375% 11/15/2048)

not bad...
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Old Yesterday, 10:43 AM   #56
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From the Forbes article:
Better to look at all the Bonds Apple has outstanding than to quote a Forbes article that singles out a few bonds showing small coupon rates....
yep, Apple is smart to take advantage of the near zero percent environment we are in today... cheap money... If buying Apple Bonds, I'd get the ones paying the higher coupons like 4.65%
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Old Yesterday, 11:09 AM   #57
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Not sure I would lump muni's in with this article. Most articles seem to talk about "bonds" as if they are all the same.
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Old Yesterday, 11:19 AM   #58
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Better to look at all the Bonds Apple has outstanding than to quote a Forbes article that singles out a few bonds showing small coupon rates....
yep, Apple is smart to take advantage of the near zero percent environment we are in today... cheap money... If buying Apple Bonds, I'd get the ones paying the higher coupons like 4.65%
Those bonds maure 25 years from now. A lot can happen between now and then. Things like Apple, Inc. goes to pot, interest rates rise quickly and the NAV of the bond drops like a rock, etc. You could easily get stuck holding a long term bond @4.65% with a NAV way lower than par when everyone else is making 8% on CD's.

There is no free lunch and lots of risk.

Oh, there is also a default risk, low probability, but real.

Just my 2 cents.
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Old Yesterday, 11:29 AM   #59
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Not sure I would lump muni's in with this article. Most articles seem to talk about "bonds" as if they are all the same.
Those are not " muni " bonds... so far in the thread we are showing Investment Grade Corporate Bonds and US Treasury Bonds...

The article is just show casing Apple has decided to borrow funds while the money is cheap to get... a very good business decision... the actual value of the bond for us to purchase will be lower at those coupon rates than a same type bond paying the higher coupons that are also available...

but even if you pay above par for a bond then the objective would be to sell the bond at above par values before they mature... this is what will affect the actual yld when you sell and how long you held the bond and collected the coupons... so the actual yld isn't determined until you see what price you sell the bonds for... Bonds aren't like a CD that you buy and hold until maturity... you have the choice to keep or sell a Bond before maturity...
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Old Yesterday, 11:29 AM   #60
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... If buying Apple Bonds, I'd get the ones paying the higher coupons like 4.65%
You go ahead and do that. How much does it cost to buy that 4.65% coupon bond and what is the effective yield?
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