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Building a Treasury Bond Ladder

terenz.io

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Re: Building a Treasury Bond Ladder

#71

Post by ThrustVectoring »

whitepoplar wrote: post #69
valenciarose wrote: post #59

This under-represents the risks of bond investment. While it's true that the credit risk of treasuries is incredibly low, interest rate and inflation risk needs to be addressed more seriously than it is in this post. In today's market, it's easy to think of holding a bond until maturity under adverse interest rate movements as "not losing money". This is a false model. For example, a ten year treasury purchased at is…

So buy TIPS? But the elephant in the room is that inflation isn't the same for everyone. It's calculated based on a basic basket of goods, but if you're high income, it may not replicate your spending habits. Private school isn't factored into the CPI.

Over a long timeframe, the investment with the lowest risk of underperforming against inflation is broad-market equity index funds. Bear markets and corrections happen, sure, but the nigh-inevitable performance during bull markets more than covers for that. Over something like 30 years, the only question is whether your investment will outperform inflation or massively outperform it.

Like, the 5th percentile worst result is definitely worse for stocks compared to bonds over a one-year timeframe. But, the advantage of a better compound annual growth rate means that as you add more and more time to your investment timeframe, worst-case results for stocks get better compared to bonds. IIRC, the crossover point is very roughly 20 years out - at this point, the risk of stock corrections has been completely absorbed by having superior expected returns.

Re: Building a Treasury Bond Ladder

#72

Post by jterenzio »

ThrustVectoring wrote: post #68
jterenzio wrote: post #40

Earlier quoted context omitted.

> Some firms offer target maturity bond funds which will is the best of both worlds. These are great for corporate bonds. Check out iShares iBonds if you want to include corporate bonds in your portfolio without building a ladder or taking on interest rate risk.

You don't want to include corporate bonds in your portfolio. Generally speaking, buying equities gets you a better price for the risk you take; a slightly higher equity percentage with government-backed bonds will generally outperform at the same level of risk.

Is there a good link to learn more about that?

Re: Building a Treasury Bond Ladder

#73

Post by ctlby »

This advice is dangerous and misguided. If you think rates will rise, don't be long duration. Holding to maturity does not insulate you from interest rate risk--you will certainly make nominal dollars, but in real terms, you will under-perform or even lose.

There are reasons to avoid bond funds (management fees, trading costs, tax implications), but this isn't one of them.

https://www.northerntrust.com/documents/commentary/investmen...

Re: Building a Treasury Bond Ladder

#74

Post by yasp »

ThrustVectoring wrote: post #71
whitepoplar wrote: post #69

Earlier quoted context omitted.

So buy TIPS? But the elephant in the room is that inflation isn't the same for everyone. It's calculated based on a basic basket of goods, but if you're high income, it may not replicate your spending habits. Private school isn't factored into the CPI.

Over a long timeframe, the investment with the lowest risk of underperforming against inflation is broad-market equity index funds. Bear markets and corrections happen, sure, but the nigh-inevitable performance during bull markets more than covers for that. Over something like 30 years, the only question is whether your investment will outperform inflation or massively outperform it. Like, the 5th percentile worst re…

Tell that to the people that invested in the Nikkei in 1989.

Re: Building a Treasury Bond Ladder

#75

Post by Lavery »

ThrustVectoring wrote: post #71
whitepoplar wrote: post #69

Earlier quoted context omitted.

So buy TIPS? But the elephant in the room is that inflation isn't the same for everyone. It's calculated based on a basic basket of goods, but if you're high income, it may not replicate your spending habits. Private school isn't factored into the CPI.

Over a long timeframe, the investment with the lowest risk of underperforming against inflation is broad-market equity index funds. Bear markets and corrections happen, sure, but the nigh-inevitable performance during bull markets more than covers for that. Over something like 30 years, the only question is whether your investment will outperform inflation or massively outperform it. Like, the 5th percentile worst re…

None of what you're saying is wrong, but remember the context here when using the historical performance of markets to talk about these kinds of hard-and-fast rules. The period for which we have market data also spans: the period with the fastest growth in global population, including population growth in developed markets; the outbreak of extended peace between world powers; and roughly tracks human exploitation of fossil fuels.

Which is not to say that this is for sure coming to an end (hopefully not peace!), but it's impossible to know that there will be similar growth going forward. Population may level off (in advanced economies, this appears to have happened), and while we may well find new energy sources and technologies, it's not likely any will offer the massive productivity gains seen in the advent of fossil fuel and the the internet.

Re: Building a Treasury Bond Ladder

#76

Post by ThrustVectoring »

yasp wrote: post #74
ThrustVectoring wrote: post #71

Earlier quoted context omitted.

Over a long timeframe, the investment with the lowest risk of underperforming against inflation is broad-market equity index funds. Bear markets and corrections happen, sure, but the nigh-inevitable performance during bull markets more than covers for that. Over something like 30 years, the only question is whether your investment will outperform inflation or massively outperform it. Like, the 5th percentile worst re…

Tell that to the people that invested in the Nikkei in 1989.

Global market-cap weighted equity investment has done fine since 1989. And anyhow, Japan's lost decade is more of a central bank policy failure than anything else, and one that is unlikely to be repeated.

The pre-Soviet Russian stock market is probably a better example.

Re: Building a Treasury Bond Ladder

#77

Post by ThrustVectoring »

Lavery wrote: post #75
ThrustVectoring wrote: post #71

Earlier quoted context omitted.

Over a long timeframe, the investment with the lowest risk of underperforming against inflation is broad-market equity index funds. Bear markets and corrections happen, sure, but the nigh-inevitable performance during bull markets more than covers for that. Over something like 30 years, the only question is whether your investment will outperform inflation or massively outperform it. Like, the 5th percentile worst re…

None of what you're saying is wrong, but remember the context here when using the historical performance of markets to talk about these kinds of hard-and-fast rules. The period for which we have market data also spans: the period with the fastest growth in global population, including population growth in developed markets; the outbreak of extended peace between world powers; and roughly tracks human exploitation of…

If things are bad enough that the 30-year treasury outperforms global stocks at maturity, then the correct hedge is canned food, guns, and ammunition. The most pessimistic long-term outlooks cannot be mitigated by any sort of market mechanism because that level of pessimism implies a breakdown of the market itself.

Re: Building a Treasury Bond Ladder

#78

Post by tanderson92 »

ThrustVectoring wrote: post #67

If you want exposure to interest rate risk, you're generally better off getting it in the futures market than the physical one. Roughly speaking, instead of buying $200k of 2-year treasuries, you can open a single 2-year treasury futures contract, fully fund it with a 3-month treasury bill purchase, and get the same return. Why do this? Treasury bond income gets taxed as ordinary income, while treasury futures get tr…

Hello from the Bogleheads 90/60 thread ;-)

For others, you can extend this to building a 60/40 balanced equity portfolio. See: https://www.bogleheads.org/forum/viewtopic.php?f=10&t=256020

Re: Building a Treasury Bond Ladder

#79

Post by tanderson92 »

One thing that is not discussed is that one can participate in U.S. Treasury auctions at brokerages (as well as TreasuryDirect but I sympathize with those who would want to avoid that site). Fidelity and Schwab both promise retail investors the so-called "high rate", with no bid/ask spread on new treasury auctions. There are no markups or fees. Furthermore, at Fidelity one can manually roll over treasuries into new auctions and at Schwab it is not much harder but is done manually a day or two before the auction.

Bid/ask spreads are an annoying feature of OTC bond markets since bonds are not currently traded on exchanges (hello SEC! Please fix this) for retail customers since they don't have the volume to obtain the tightest spreads. So, one can just avoid spreads entirely by only participating in auctions, at least while building/maintaining a ladder.

Re: Building a Treasury Bond Ladder

#80

Post by Lavery »

ThrustVectoring wrote: post #77
Lavery wrote: post #75

Earlier quoted context omitted.

None of what you're saying is wrong, but remember the context here when using the historical performance of markets to talk about these kinds of hard-and-fast rules. The period for which we have market data also spans: the period with the fastest growth in global population, including population growth in developed markets; the outbreak of extended peace between world powers; and roughly tracks human exploitation of…

If things are bad enough that the 30-year treasury outperforms global stocks at maturity, then the correct hedge is canned food, guns, and ammunition. The most pessimistic long-term outlooks cannot be mitigated by any sort of market mechanism because that level of pessimism implies a breakdown of the market itself.

But what you're talking about isn't guaranteed. There's a lot of room between "stocks rip higher forever" and "societal collapse".

I'm not saying the right call is 100% t-bonds, but when you say things like "Over something like 30 years, the only question is whether your investment will outperform inflation or massively outperform it", you're making guarantees based on data from a narrow slice of history that is also the most economically favorable period just about ever.

Equities are the residual claim on assets, and their outperformance is predicated on growth. Economic growth comes from growing population and productivity. Neither of those is a given.

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