Investing - Theory, News & General • After 2022-23, how are we feeling about Vineviz’s first 20% of bonds in Long-Term Treasuries?

Totally. That's why I said that changing market conditions could indeed result in one taking more risk (albeit short-term risk) than originally intended.

Can you explain why you think it’s “short-term risk?”

Because the hit to NAV from rising rates for a bond fund is temporary.

My perception is that once you own a long-term low coupon bond you are stuck with it. You either have to hold it to maturity and realize it’s low yield or you sell it at a discount from par and take a loss.

Or you wait until you can sell it at a premium from par (if ever) and take a gain.

This is why the “point of indifference” to recover capital loss via increased yield after a rate increase for a bond or bond fund is proportional to its duration.

That is supposing that the rate remains static from that point on, which it never does.

If rates go down than you can recover some value of course, but you are then stuck with the low coupons.

Or you can sell it.

To me that’s a long term risk. Longer than most equity bear markets.

With a bond fund, after a loss in NAV, you rebalance into the allocation, committing more money to a now higher yield.

You do this if rates continue to go up, as necessary to maintain your AA.

After a sufficient gain in NAV, you rebalance out of the allocation, reducing the amount of money committed to a now lower yield.

The thing with rates is... they fluctuate.

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Aug 2020 thru Oct 2023: ~45% drawdown in LTT with the 30-year rate going from 1% to 5% in a little over 3 years.

Nov 2023 thru Sep 2024: 21% gain in LTT with the 30-year rate going from 5% to 4% in a little less than a year. Turning the 45% drawdown into 34% down, four years into the pop of the greatest bond bubble in recent history. Plus a ~21% 1-year return on the money you rebalanced into LTTs sometime in the fall of 2023.

If (and that's a big if) it goes from 4% to 3% in the next year, that's another ~23% gain from there. That would be 18% down, five years into the "bond bloodbath"). If (and that's another big if), long rates stay around 3% for awhile, it takes ~7 more years to recoup the NAV loss from the 2020-2023 drawdown on whatever money was invested in LTTs in Aug 2020. If long rates stay around 4% for awhile, it takes ~11 more years.

If (yet another big if), it goes from 4% back up to 5%, that's another ~11% loss (back to 41% down - time to rebalance back into LTTs). Back down to 4%, 21% gain (now ~28% down from Aug 2020). Pretty much the same as if it stayed at 4% for those two years. Oh, and don't forget, you're buying more LTTs (at higher yield) whenever you suffer a NAV loss.

As rates fluctuate, particularly in this current range, you are making a decent return on new/rebalanced money at the same time that your original investment is coming closer and closer to even.

Nothing is ever linear. Bond convexity works in your favor as long bond rates fluctuate within a range (as they are wont to do in the short to intermediate term), as long as you are rebalancing instead of allowing asset drift.

Statistics: Posted by Beensabu — Sun Oct 20, 2024 10:59 pm — Replies 363 — Views 20055

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