Long Bonds–Long or Short?

Long Bonds–Long or Short?

August 27, 2012 Research Insights, Tactical Asset Allocation Research
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(Last Updated On: March 14, 2017)

Timely Portfolio has a great post about the magical long-bond.

http://timelyportfolio.blogspot.tw/2012/08/bonds-much-sharpe-r-than-buffett.html

The thesis he presents is clear: long bonds won’t achieve what they’ve achieved over the past 30 years.

I think this thesis is correct, but this statement of presumed fact doesn’t answer the real question: Should we invest in the long-bond over the next 30 years?

Investing is all about opportunity costs. It may be the case that the long bond will not achieve the same sort of Sharpe over the next 30 years, but perhaps it will achieve a higher Sharpe than alternative investment classes.

I don’t know the answer for investing in bonds, but one can look at historical bond data and get some perspective on what is possible.

For a full research report on the subject, Empiritrage has a new report called “The Truth About Bonds.”

Below is my favorite chart. This chart looks at the performance of JGBs when they first broke 1.80% in April of 1998. The absolute risk/reward isn’t amazing, but relative to equity it is magical.

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About the Author

Wesley R. Gray, Ph.D.

After serving as a Captain in the United States Marine Corps, Dr. Gray earned a PhD, and worked as a finance professor at Drexel University. Dr. Gray’s interest in bridging the research gap between academia and industry led him to found Alpha Architect, an asset management that delivers affordable active exposures for tax-sensitive investors. Dr. Gray has published four books and a number of academic articles. Wes is a regular contributor to multiple industry outlets, to include the following: Wall Street Journal, Forbes, ETF.com, and the CFA Institute. Dr. Gray earned an MBA and a PhD in finance from the University of Chicago and graduated magna cum laude with a BS from The Wharton School of the University of Pennsylvania.