The Fed has little control over LT interest rates. I’ll exit my TLT/EDV holdings when I see some change in world wide inflation expectations. Currently we’re still on the disinflation/deflationary path. As for the US, I don’t expect the Fed to do anything prior to the November election. After that, since both candidates are proposing new infrastructure spending, I’ll look at that as a possible catalyst for inflation. Maybe fiscal policy will do what monetary policy hasn’t.
Walter
Well said Denny
I don’t think anyone is advocating that TLT or treasuries in general are going to perform as they has in the past 20-30 years. Most here use TLT as a hedge or to dampen volatility. I think it will continue to do that in times of stress (as it did during Brexit). It remains a hedge that has Negative correlation to equities during times of extreme stress and still has a positive return expectancy on it own. Compared to holding inverse equity ETFs as a hedge this seems like a good alternative. TLT may go down with stocks in the future, but holding an inverse ETFs as a hedge will most certainly be a huge drag on performance in the long run.
Lately I have been using TOTL. It also has risks but I am hoping an expert like Jeffrey Gundlach will be able to better navigate the fixed income market than me.
KJ
Another POV on lower risk assets:
http://www.bloomberg.com/news/articles/2016-07-29/are-those-safe-haven-assets-safe-anymore
When they get more expensive, are they inherently riskier?
Separately, it looks like Gundlach likes Gold:
http://www.reuters.com/article/us-funds-doubleline-gundlach-idUSKCN1092BO
Gundlach also thinks Trump will be the next president.
Gundlach - Trump Will Be an Economic Success by Robert Huebscher
http://www.advisorperspectives.com/articles/2016/06/20/gundlach-trump-will-be-an-economic-success?channel=Mutual+Funds
David thanks for mentioning Gold I like it as a Hedge since it is uncorrelated with SPY. Just holding TLT, GLD and SPY over the last 20 years beats the market. Add in some market timing to SPY and use a constant Hedge of TLT and GLD and the results are really good.
Does anyone have any theory on what happens to Gold if their is a bond Bubble? Does it make since to Hedge with both TLT and GLD?
Regards,
MV
Both GLD and TLT will go down with rising interest rates. UUP (bullish USD) will go up but I don’t think it or currencies show up in the hedging module. FXY (Yen) will go up with falling stock market as it is a risk off play. The problem with the Yen is that Japan will ultimately require significant currency devaluation to fix their problems.
Steve
An interesting article on Bloomberg:
The fed is still buying treasuries after QE has officially ended.
Q’s
When will the Fed end these purchases? What effect will the end of purchases have on treasury prices?
Worthy of note
The drop in treasury interest rates since 1981 has been highly correlated to a global drop in treasury rates. There is a reason for this. When the interest rates are imbalanced between countries, it creates effects on the currency exchange rates which in turn creates changes in imports and exports. When rates go up it can cause the U.S. dollar to strengthen. A stronger dollar means cheaper imports but expensive exports. Therefore a stronger dollar benefits consumers but hurts workers. So the market pushes interest rates to be similar between countries.
A great interview with bond bull Gary Shilling Gary Shilling interview with WindRock Wealth
I agree with his assessment that fiscal stimulus may be the factor to rekindle inflation.
Walter
EDIT: Please be aware that the link goes to a fan written blog.
Interesting video Chipper. Finally some thoughts from people not listening to Fed narrative.
Steve
Maybe ‘lower for longer’ is the new narrative:
http://www.cnbc.com/2016/08/16/why-investors-can-stop-freaking-out-over-the-fed-in-three-words.html
Cool. J.P. Morgan’s shoeshine boy is pitching stocks again!
For the bold… TLT has settled down above the floor and looks ready to proceed upward again. The Fed hawks has not been effective with their “jawbone” tactics.
DISCLAIMER: I’m wrong 50% of the time.
Steve
Hi all,
I wanted to briefly revitalize this thread to see if you guys can help me reach some form of personal conclusion.
I am running a few live models. Among those:
I want to keep a day job not related to trading and do not have time to worry about whether the moment is ripe to move into / out of TLT or IEI or whatever. (i.e. don’t want to end up timing the composition of the hedge especially if this one is itself trying to time the market)
In other words, I am after a low maintenance hedge for the next few (10?) years that is negatively correlated with equities so that if there is an equity crash, there is degree of dampening provided.
I am not after max performance, just convenience, negative correlation with equities and better than cash
After reading all the comments of the thread, should I just do → hedge = {1/3rd IEI + 1/3rd IEF + 1/3rd TLT} ?
I don’t really want to add international bonds e.g. BNDX (introduces more unknown) to the mix
Not really sure about GLD as Gold is typically negatively correlated with equities but has also unrelated swings → So maybe {30% TLT + 30% IEF + 30% IEI + 10% GLD} ?
Note that it is difficult to split into several ETFs or replace the hedge ETF provided by an SA model or by the hedge module of a port, but possible via transactions / manual buy/sell to initiate or close the position(s).
Thanks in advance,
Jerome
How about TIPS instead of TLT?
I like UST (2X IEF). Has similar volatility to TLT, but should have less duration risk in a rising rate environment. Other option is leveraging the 5 or 10 yr. treasury bond through futures. Moderately leveraging shorter duration treasuries seems to be a relatively “good” and responsible hedge for equities, from the research I have done.
This is exactly the issue right now. I think you’re going to have give up on one of the three.
If you can give up convenience, you’d be looking at shorting or inverse ETFs or options strategies.
If you can give up negative correlation, then you’re looking at weakly correlated asset classes like gold, possibly real estate, bonds.
If you can give up “better than cash”, then it’s cash or cash equivalent.
Thank you all.
@David: w/o doing the maths, but just eyeballing plotting TIPS against the SP500 over the last 10 to 15 years → does not display a great negative correlation. Was there any specific reason you had in mind e.g. the inflation protection so addresses “better than cash”?
@Charles: do I understand correctly what you mean i.e. using UST or futures allows using less money for the hedge therefore keeping more available to have larger long positions? Overall one ends up with a slightly leveraged portfolio (which should be OK if the investment strategy is a sound one)
Any other thoughts?
yes, TIPS for inflation protection (as compared to just cash at ultra low rates).
the other idea is to ladder bank CDs, if you have something like that in the UK.