A.I.M. Users Bulletin Board

[ls7550]

Hi Toofuzzy

A 20 year Treasury as 'stocks' and inflation bonds (TIPS) as 'cash' might be a reasonable holding for one AIM.

Looking at Ibbotson yearly gains data since 1926, holding a 50-50 weighted (yearly rebalanced) combination of 20 year T and inflation had a worse year loss of -7.4% and averaged 4.5% compared to 3.1% yearly average for inflation. Assuming TIP's earned inflation plus a bit that real gain might have been a little higher. i.e. some price appreciation potential, whilst holding assets that are 'guaranteed' and pay some income.

Toying with the bond price calculator at http://www.fixedincomeinvestor.co.uk/x/yieldcalc.html, assuming a 20 year 3% treasury was held and bought at a 3% market 20 year yield level, you might pay par for that bond ($100 say). If the market yield then declined to 2%, the bond price would rise to $116. If the market yield rose to 4% the bond price would decline to $86, which is a 35% range between those prices.

Should shorter term yields rise to say 10% or 12%, a 20 year T yield might rise to perhaps 8% (i.e. in anticipation of those shorter term high yields not likely to stay that high for the longer term), in which case the bond price might decline around -50%. With perhaps 50% holdings in the 20 year and 50% in inflation bonds, the capital loss would be -25% relative to the total 100% fund value amount, less perhaps 8% income from the TIPS and 3% from the long dated T, so with 50% of each = -5.5% income which reduces the loss down to less than -20%. The TIPS however might also have made some capital gains on top of that and reduce the loss further.

Its more likely that we're in a Japan type situation, where yields might remain very low for a long period of time, perhaps one or two decades. Perhaps with yields on 20 year T's swinging between 2% and 4% type levels (they've done that for most of history - its only been since the 1970's high interest rates era that they've fallen outside of that general pattern). Repeated swings between 2% and 4% yields could be a 35% price motion i.e. AIM type hold zone swings, that could enable AIM to lock in some volatility capture gains from such price swing cycling, and that could accumulate to more than compensate for if/when yields did rise up to 8% type levels.

Certainly not a bet the farm single AIM suggestion, but as one AIM of many, perhaps an option to ponder.

Extend that further to maybe more yield sensitive 30 year T's instead of 20 year, or even zero's, and the volatility (price swings) could enable even greater volatility capture gains (but equally would get hit more if/when yields did rise). Or hit the turbo boost and trade TMF (3x 20 year Treasury ETF), which (guess) might see a 100% high/low swing range that AIM could work. For a small AIM allocation of perhaps no more than 5% of total funds, a 3x 20 year could churn out some volatility capture gains without taking excessive risk (assuming the loss of a large chunk of 5% of total funds wasn't considered as being excessive).

We're in a liquidation of government debt era http://www.bis.org/publ/work363.pdf where in effect indirect taxation by stealth of pensions and savings are bailing out governments. Keeping yields low and less than inflation is a means to both make large debts more serviceable (Treasury buys its own debt that was perhaps paying a 5% yield to replace that with debt paying near 0% yield), whilst investors savings are losing money in real terms i.e. pensions and savings lose out. That's just the way major economies in effect default (partially). And those proceedings take a while to roll through, maybe a decade or two, rather than a few years. As part of that its in Treasury's interest to be issuing new debt (treasury's) at high prices/low yields and then buy back older/existing outstanding higher yield paying bonds at low prices (cheaply), i.e. I suspect we're in for a period of yields swinging repeatedly perhaps between 2% and 4% with relatively high frequency.

I appreciate from a potential capital and income gains perspective only, long dated treasury's might seem like a crazy thing to be trading at present, but often the biggest gains come from the place you least expect (volatility capture of trading long dated T's perhaps). That said, long dated T's had a very good year last year and could reverse back out of some of those gains over the next 12 months. So perhaps a virtual stock (of long dated T's) AIM approach initially and look to buy actual as the price declines from more recent levels might be a better choice at the current time.

Best. Clive.