Long Bonds–Long or Short?
Timely Portfolio has a great post about the magical long-bond.
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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