We can agree that the 5%+ yields for short term T-Bills that we've enjoyed since early 2023 have been great! In fact, you could purchase a 1 Year T-Bill for 5.16% YTM today. That's pretty refreshing given the last two decades. (And as a Gen X'er, it gives me flashbacks to my passbook savings accounts from the late 70s and early 80s with their rates well north of 6%.)
Also, as of today (5/9/24), an investor in 2044 Treasuries or Treasury STRIPS/Zeroes would have seen a Yield to Maturity of 4.71%.
Is that also "great?" Is it too risky? Without a doubt 4.71% YTM is going to pay that annual effective yield every year compounded for 20 years; correspondingly, the biggest risk an investor faces making this 20 year purchase is inflation. So somehow, despite locking the yield in for 20 years, and perhaps due to the unknowability of it all, it doesn't necessarily feel so great. In fact, some folks consider long individual bonds for retail investors anathema.
As someone who's purchased some longer bonds lately, here's some observations inviting your feedback and thoughts:
Also, as of today (5/9/24), an investor in 2044 Treasuries or Treasury STRIPS/Zeroes would have seen a Yield to Maturity of 4.71%.
Is that also "great?" Is it too risky? Without a doubt 4.71% YTM is going to pay that annual effective yield every year compounded for 20 years; correspondingly, the biggest risk an investor faces making this 20 year purchase is inflation. So somehow, despite locking the yield in for 20 years, and perhaps due to the unknowability of it all, it doesn't necessarily feel so great. In fact, some folks consider long individual bonds for retail investors anathema.
As someone who's purchased some longer bonds lately, here's some observations inviting your feedback and thoughts:
- Individual Long Treasuries look relatively cheap in today's dollars. You could purchase a bond with a $1,000 par value in May 2044 for about $395-$405 today. That's about a 20%, or $100, discount from the May-Oct EE Bonds which have a YTM of 3.52%. It's kind of like finding a house for sale for $395,000 today that's also guaranteed to be worth exactly $1,000,000 in twenty years.
- Long Treasuries are also pretty well-positioned for an accumulator who does not need to sell before maturity and for whom the long bond position is a smaller portfolio component. Let's say long bond rates jump higher. The first thing to note is that the market value of the bond goes down. But the YTM goes up. You lose market value, but you gain the same YTM as someone purchasing that bond at the new rate. Balanced against your overall portfolio, that can look pretty good, as the bond portion of your portfolio locks in higher future returns (something that an equity investment does not do when its value falls.)
- The second thing to note is that for an accumulator there's absolutely nothing stopping you from also adding to your position at the new, lower, rate. (Other than a larger tax bite.) I think this is an overlooked antidote to some of the scariness of long bonds. Basically, if you buy at a high enough YTM for a long enough duration, ie. $395 to get $1,000, it only gets much less expensive for you to add to your position if the bond market tumbles. So, in that scenario, you would have the opportunity to pay $300 to get $1,000, or even $200 to get $1,000 par value. Given that your initial outlay is quite low (which potentially allows you to invest the savings elsewhere, like equities) you are also well positioned to respond if bond yields soar.
- Finally, as someone who holds short and long government bonds in my brokerage account I've noticed something that's actually reassuring about holding this combination of individual bonds. While the market price of the bonds, especially the long bonds, can vary, the overall impact on my brokerage portfolio is one of incremental progress towards par value. The short term bonds gain (and sometimes lose) small increments every day and the long bonds gain and lose and gain and lose as they slowly build to maturity. Schwab doesn't list the market value of the bonds till the very end of the accounting day, but when it does post, I'm often pleasantly surprised at how much progress "team bonds" have made towards their ultimate par value in a given day.
Statistics: Posted by SantaClaraSurfer — Thu May 09, 2024 10:48 pm — Replies 3 — Views 789