Why treasuries are TERRIBLE long term investment in the current economy

[VFK57]

US Debt, what foreign countries hold, is $7,13 trillions. China holds over $1 trillion of that amount and threatens to dump $200 billions of our Debt on world markets if we place more suctions on them. Seems like nothing for the Feds but it will be a bad signal for the rest of the world.

[OldShooter]

Quote:

Originally Posted by VFK57 ... China holds over $1 trillion [4% of US debt] and threatens to dump $200 billions [less than 1%] of our Debt on world markets if we place more suctions [sic] on them. ...

Thereby driving down the value of the bonds they continue to hold. That doesn't sound like a real genius move on their part and, in any event, it would probably not be a big deal in the markets. Average daily trading volume of US debt is around $500B, so $200B is around 5% of a week's trading. (https://www.statista.com/statistics/...es-since-1990/)

Trying to predict stuff like this is a fool's errand IMO. To just worry about all possible scenarios is more than a full time job. So I don't do any of that. YMMV.

[tenant13]

Quote:

Originally Posted by OldShooter Trying to predict stuff like this is a fool's errand IMO. To just worry about all possible scenarios is more than a full time job. So I don't do any of that. YMMV.

I would definitely agree with you on the particulars: predicting events in the future is a fool's errand. But I think it's prudent to observe macro trends, look back at the history and make assessments of the current economic situation. I think that's what the article I originally linked to does quite well. Interpretations of the data may vary and that's where we also may differ when it comes to making decisions for the future (not just us on this forum - big name economists argue about all that non stop) but I just find following monetary policy more important than daily political squabbles masquerading as economic discussions. It's refreshingly apolitical while depressingly consistent...

[target2019]

Quote:

Originally Posted by njhowie If you don't already, you should tune in to The Keiser Report with Max Keiser and Stacy Herbert 3 or 4 times a week on RT. It's also posted to RT's Youtube channel a day after.

RT = Russian Television.
Reference: https://en.wikipedia.org/wiki/RT_(TV_network)

I did subscribe and will listen.

[OldShooter]

Quote:

Originally Posted by tenant13 ... But I think it's prudent to observe macro trends, look back at the history and make assessments of the current economic situation. ...

I agree, though I would replace "prudent" with "interesting." Otherwise why would I have subscribed to The Economist for decades? But I think "prudent" implies "actionable."

Quote:

Originally Posted by tenant13 I would definitely agree with you on the particulars: predicting events in the future is a fool's errand. ... when it comes to making decisions for the future (not just us on this forum - big name economists argue about all that non stop) ...

Yes. There is no evidence that the economy is anything but basically random. And no one can predict random. I continue to recommend Nate Silver's chapter on economic forecasting in "the signal and the noise."

Quote:

Originally Posted by tenant13 ... I think that's what the article I originally linked to does quite well. ..

I decided to skip the article after reading her bio. She has so little confidence in her opinions and/or so little investing success that she keeps a day job. Half-remembered quotation: "The best way to make money from investing letters is to write one." To me, she is just one randomly chattering monkey in the crowd.

[daylatedollarshort]

I'm pretty happy with the 4% 30 year Treasuries I bought some time ago. I usually buy TIPS or CDs, but those seemed like a good deal. Too bad I didn't buy more.

[2177V]

Quote:

Originally Posted by VFK57 US Debt, what foreign countries hold, is $7,13 trillions. China holds over $1 trillion of that amount and threatens to dump $200 billions of our Debt on world markets if we place more suctions on them. Seems like nothing for the Feds but it will be a bad signal for the rest of the world.

All treasuries have a maturity date. If China dump $200B treasuries before the maturity date, they have to find a buyer on the secondary market which means China will receive the secondary market price...based on the interest rate, the coupon value, the maturity date and demand. No buyers? Then the secondary market will reduce the price of the treasuries until a buyer is willing to bite. Supply and demand. Dumping means over supply. Over supply means the price drops. China is smart enough not to do this. China will either sell incrementally or wait until the maturity date to get their principle back.

If Japan decides that the price is low enough and buys the $200B, all that means the debt is transfer from one country to another. Hardly affects USA because the USA already issued the treasuries and got the initial money from China. However, USA do have to pay these same treasuries at their maturity date but it does not matter who owns the treasuries at that time.

Dumping only affect the price of treasuries on the secondary market. IMO, dumping of treasuries owned by China will NOT cause the system to collapse and the only problem for the USA is paying the treasuries at the maturity date. If the USA can't pay, then the USA will be in default which is highly unlikely and I do not want to go there because it may also mean the dollar may collapse.

[FireProoof]

For years I thought bonds were a fools game as in the long haul stocks have out performed them. But messing around with Firecalc showed that I could get a better return by holding some.

Didn't make much sense to me until I realized it is not necessarily the return on the bonds so much as the rebalancing that matters. While the stock market is going up there are ebbs and flows. By rebalancing you are essentially committing to selling stocks when they are high and buying stocks when they are low. Yes there are times (sometimes significant) where bonds out perform but in the long haul it's stocks stocks stocks.

For me at least, it's the rebalancing that makes them an important part of portfolio.

[harley]

Quote:

Originally Posted by daylatedollarshort I'm pretty happy with the 4% 30 year Treasuries I bought some time ago. I usually buy TIPS or CDs, but those seemed like a good deal. Too bad I didn't buy more.

Humble brag, but justified. I (and my .6% savings account) envy you.

[bingybear]

I've got some I bonds from 2000 ish now paying about 4.8%

[bjorn2bwild]

Acknowledging their limitations, the only thing that comes close right now are EE bonds at ~3.5% when held to maturity. At year 4 the YTM is 4.6%, year 7 5.08%, year 10 6.5% etc......

[daylatedollarshort]

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Originally Posted by harley Humble brag, but justified. I (and my .6% savings account) envy you.

Unfortunately I didn't buy enough to invoke envy, and I also have plenty of fixed income money these days I've had to reinvest at the current low rates. My only point is sometimes long term Treasuries can be a good deal. The 4% was less interest than our fixed mortgage rate at the time. I could have bought more, but the fixed mortgage is already offset by a couple of non-COLA pensions. Usually the only 30 year fixed income investments we buy are TIPS, but we haven't been making new purchases of those at the current yields.

[tenant13]

Quote:

Originally Posted by FireProoof For years I thought bonds were a fools game as in the long haul stocks have out performed them. But messing around with Firecalc showed that I could get a better return by holding some. Didn't make much sense to me until I realized it is not necessarily the return on the bonds so much as the rebalancing that matters. While the stock market is going up there are ebbs and flows. By rebalancing you are essentially committing to selling stocks when they are high and buying stocks when they are low. Yes there are times (sometimes significant) where bonds out perform but in the long haul it's stocks stocks stocks. For me at least, it's the rebalancing that makes them an important part of portfolio.

I think that these are very valid points. I just wish that bonds weren't priced in a way that didn't make them a losing proposition right from the get go. Had I invested 40% of my portfolio in something that consistently pays 3-4%, I wouldn't have complained today; those bonds would compliment my riskier but possibly better performing equities. But at current interest rates, if we want to stick to the classic 4% withdrawal mantra we are essentially forced out of treasuries and into riskier investment. OR, we accept that it's not 4% anymore.

[daylatedollarshort]

Quote:

Originally Posted by tenant13 I think that these are very valid points. I just wish that bonds weren't priced in a way that didn't make them a losing proposition right from the get go. Had I invested 40% of my portfolio in something that consistently pays 3-4%, I wouldn't have complained today; those bonds would compliment my riskier but possibly better performing equities. But at current interest rates, if we want to stick to the classic 4% withdrawal mantra we are essentially forced out of treasuries and into riskier investment. OR, we accept that it's not 4% anymore.

Sometimes it helps to have low standards. We have always just used zero real return as a target in our retirement plan and anything over that was gravy. Inflation seems to be 1.3%, so even the zero real is becoming a challenge at current prevailing yields. But since we have ladders, including the 4% Treasuries and 30 year TIPS bought when yields were higher, I think our blended real return is still well above zero. At our expected remaining life span now, 100/20 years = 5% safe withdrawal rate, though we actually try to keep it at much less.

[VFK57]

Quote:

Originally Posted by tenant13 But at current interest rates, if we want to stick to the classic 4% withdrawal mantra we are essentially forced out of treasuries and into riskier investment. OR, we accept that it's not 4% anymore.

There is a saying: If I knew ahead of time where I will fall, I would put a pillow there. Until we have a working vaccination of our population, it is risky investing in stock, let alone sell it while it is deeply in red. In my case it is Oil and REITs portion of our portfolio. Lets hope we will live through this pandemic and then economy would recover.

[2177V]

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Originally Posted by daylatedollarshort I'm pretty happy with the 4% 30 year Treasuries I bought some time ago. I usually buy TIPS or CDs, but those seemed like a good deal. Too bad I didn't buy more.

Brilliant move. A 4% annual treasury earnings (usually paid semi-annually) for 30 years means you have less risk than withdrawing 4% from a stock/bond portfolio. After 30 years, you even get your face value or the principle back from the government...which should help your survivors.

The current yield for a 30 years treasury is currently 1.43% so you have done well. Investors are typically 60/40 and they tend to ignore long term treasuries when the yield climb to 4%. It is true that a 60/40 portfolio earns about 7 to 8% in the long term but there are risks and volatility involved. Meanwhile treasury investors can potentially have a worry free retirement...which is priceless to some people.

[tenant13]

So to test my own convictions about two months ago I bought 100k worth of 20 yrs treasuries AND 100k worth of bitcoin. Treasuries are almost 4k down and bitcoin is 50k up. I'd be curious to take another look at that a year, 5 or 10 years from now.

[Chuckanut]

Quote:

Originally Posted by tenant13 So to test my own convictions about two months ago I bought 100k worth of 20 yrs treasuries AND 100k worth of bitcoin. Treasuries are almost 4k down and bitcoin is 50k up. I'd be curious to take another look at that a year, 5 or 10 years from now.

I am not sure what the comparison will prove whether done in two months, 5 years, 10 years, or 20 years. One is a highly speculative purchase guaranteed by nobody. The other is a highly conservative purchase guaranteed by the full faith and credit of the government.

[tenant13]

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Originally Posted by Chuckanut I am not sure what the comparison will prove whether done in two months, 5 years, 10 years, or 20 years. One is a highly speculative purchase guaranteed by nobody. The other is a highly conservative purchase guaranteed by the full faith and credit of the government.

I'm not necessarily out to prove anything but since I strongly believe in the long term viability of one and not at all in the other's, I figured it'll be more entertaining to actually be personally invested in finding out whether I'm right or wrong.

[Montecfo]

It seems to me the flip side of low interest rates is high equity values. Given the environment, I can tolerate low rates in my investment portfolio.

As much as 4 percent treasuries would be nice , I am happy with higher equity values since, for most folks, the equity allocation is larger-and it is something we can also adjust if desired.

Not sure at all how bitcoin enters the discussion since it bears no interest and has no intrinsic value.