A.I.M. Users Bulletin Board

[ls7550]

Rolling ladder of treasury bonds. Personally prefer a 5 year ladder.

My home UK's yields differ to US's. Looking up US data :

http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield

Looks like year to date 1.634%, forward year 1.43% for such a 5 year ladder

Month   Day     Year    5 year yield % 
 3	23	15	1.41 
 3	25	14	1.76 
 3	22	13	0.8 
 3	23	12	1.1 
 3	23	11	2.07 
 3	23	10	2.44

When you need to liquidate (AIM buying), select whichever is the more appropriate to reduce at the time. Sometimes that might the the longer dated end, sometimes the shorter dated, sometimes a middle rung. Otherwise just roll a maturing bond into another 5 year as each bond matures.

In the UK we can often secure safe and higher yields than treasury bonds via high street bank bonds i.e. equivalent of Federal insured. But that's limited protection (insured only up to a finite limit) and more often those bonds have to be held to redemption (illiquid).

Another choice is to ride the yield curve and steer towards to near the peak of the steepest part of the yield curve - so that if the yield curve remains unchanged then that choice gains capital value the fastest. Recent 5 year US yield 1.42%, 4 year 0.92%, if you bought a 5 year at a 1.42% yield, held for a year and the yield curve remained the same (or re-converged back to 4 year bonds having a 0.92% yield), then the price of the bond would be 1.96% higher than the price paid a year earlier. Add on the 1.42% interest received = 3.4%. If 4 year yields after a year are lower the capital gain is more; If 4 year yields are higher there's a capital loss.

You can scale up risk/reward by including corporate bonds that typically pay higher yields, but carry greater default risk. I usually use a yield map such as this UK one http://www.fixedincomeinvestor.co.uk/x/bondtable.html?groupid=12&zoom=1 when hunting around for appropriate choices i.e. hover the mouse over each dot and a popup summary is shown, click a dot and it takes you into deeper detail. More recent 4% interest and possible capital gains on top are reasonably achieved IME.

Or as Tom suggested something like SHY where the fund manager should be doing similar sorts of things.

Yet another choice is to hold a combination of short dated conventional, long dated conventional, long dated inflation bonds and gold. When you need cash in hand then part liquidate whichever is relatively up at the time. Many have hated/avoided longer dated treasury bonds post 2008 with the typical proclamation being that yields have only one way to go (up), however there have been some nice capital gains realised in the post 2008 years from such bonds. For UK 2011 both longer dated (20 year) inflation bond and conventional bonds in the UK gained around 20%. 2010 around 10%. Last year around 20%. 2013 was the worst year when longer dated inflation bonds about broke even in nominal terms whilst conventional declined around -10%. By the time that longer dated (20 year) yields do perhaps move up from 3% to 5% and endure a -20% loss, in avoiding such bonds in the lead up to that investors have missed out on some reasonable gains. Especially if such gains were locked in by rebalancing (reduce high, add low). That said - at least from a UK perspective, such bonds have swung high and the present time isn't the best time to be adding i.e. personally I've more recently reduced longer dated to add to shorter dated (and further topped up with some additional gold).

If you hold cash and stocks decline -20% then in effect cash relatively gained +25% relative to stocks. If instead one choice of bond had risen +10% then when liquidated to buy stock that's in effect 'cash' having relatively gained +37.5% relative to stocks. Potentially profit taking out of the best choice of 'cash' holding (shorter dated bonds, longer dated...etc) when expanding AIM stock, topping up with the best choice of 'cash' when AIM is reducing stock - is in effect working both sides (stocks and cash) to potential better overall effect.

The easiest choice IMO is to diversify 'cash' widely and just pick the best choice(s) to trade as/when rather than trying to be clever/predictive and concentrating into just one form of 'cash'. Personally I spend a lot more time/effort managing 'cash' than I do stocks.

Clive.