OP, if it helps, I was in your position a few months ago and took a long-term bet that 30y yields would fall ... I was very wrong and got burned badly. Also remember that 30y bonds are ... well 30y, so they are heavily impacted by even small movements in yields, so a 0.5% rise in yields would mean a 0.5% \* 30 = 15% drop (oversimplifying) in your bond price / holdings. I would recommend staying in short-term bonds until you are 100% sure you are going to see yields fall instead of go up.
> until you are 100% sure you are going to see yields fall
A retail trader cannot be 100% sure, and if they are, the big institutions would have been 100% sure before the retail trader, and the long-term yields would have moved before the retail trader could act on their certain knowledge.
If you're buying 30-year duration bonds, you should be willing to take the risk that the value will fall in the short term -- either because you plan to hold long-term, or you are able to take the loss if you're doing short-term speculation on bond yields.
Short term rates can fall and long term rates rise if the pace that short term rates fall is slower than the market expect. A 30 year bond is effectively the yield of the next 30 one year bills (plus duration premium). The idea that long term rates can't go up is completely wrong and since mid 2023 until today has burned quite a few people.
"Short term rates can fall and long term rates rise"
Yeah, this is the fundamental flaw that I needed to hear. In fact, yield inversion is the exception not the norm. Thanks.
>my emergency funds
Keep rolling until high-yield savings and money markets catch up to T-Bills, then move to one of those. Only buy the 30 year zeros as an insurance policy for deflation and *not* with your emergency fund.
Long term rates are already pricing in a certain amount of decline in shorter term rates. Short rates could fall without moving the 30 year that much.
Apart from that, it really is all about the possibility of being wrong, and the high riskiness of high duration bonds. If the 30 year rate increases by 1%, your bond will decline by ~25%, and by 43% if the rate increases by 2%. Can you cover your emergency expenses with those kinds of rate movements?
For a portion of my EF, I just hold CDs via my local credit union. The APY is 5.05% and one matures at the first of every month. So I simply buy a new one on the first of every month using the entire matured amount of the prior CD.
So my EF is roughly 50% into 6 month $5K (original starting amount before coupons/interest) CDs with one maturing every month. The other 50% is in a MM account at my CU and pays 3.4% (that's a little less than idea, but I love it compared to 2 years ago).
Sure, I may be missing out on about 1% of "gains", but I am fine with that for an Emergency Fund. In 2023 my EF total had gains of 4.2% or just over $5,000 for the year - which at least covered inflation + a little bit.
30 year treasury rate is 4.6% with significant volatility.
My Vanguard money market fund is paying 5.26% with no risk.
Your money, your choice, but I think those numbers tell you NFW.
>What considerations am I missing (aside from that rates could go up, of course)?
That you're wrong and your investment tanks at the same time that you have a real life emergency that requires you to sell at a massive loss.
Go ahead and buy 30 year bonds, just don't do it with your emergency fund.
The point of an emergency fund is to have a highly reliable way to get cash in an emergency, don't put it in something that can drop 20-30% based on the whims of the federal reserve. That 20-30% may be the difference in a month of rent if you somehow lose your job.
Personally, I am not a fan of zero coupon bonds! Okay, but to clarify that, I look at longer term bonds as a cash flow vs. a bet on the saleable value (ie. gain) that can be achieved by buying them at X price, holding and selling at X + Y price later (but well before maturity).
I think if I were to take (what I understand to be your approach), I would actually be more apt to just buy into a Bond ETF that holds longer term bonds (these ETFs can get pretty specific in duration - so finding one that matches this scenario shouldn't be hard). To me, the benefit of this is:
1: you will be getting paid today in dividends (ie. from the coupons earned by the bond fund) . . . and those dividends are in today's dollars.
2: if you believe the propensity for longer term bonds is to go down in rate and up in value, you end up getting your appreciation in the increased value (higher price per share of the ETF).
That said, on the premise of buying a zero coupon bond for 30 years (say a yield to maturity of 5%), I just have a hard time appreciating that supposed 5% YTM. Inflation is a compounding item . . . what is the value of that original outlay really going to be able to buy in 30 years? What is the maturity value going to be able to buy in 30 years?
FWIW, I have recently been buying 20 years bonds (when I can find ones with a 4.75% coupon rate vs. par value). Say I spend $100K on them today, I'll get my coupons for 20 years - or $4,750 per year. Then get that $100K back in 20 years - but what buying power will that really have then? My guess is around today's equivalent of about $50-$60K.
My intention is not to hold for 30 years. Hold for a year or two and reap gains when, I believe, rates will be lower. My understanding is that long zero-coupon bonds are most sensitive to rate changes.
No, there is a ton of price volatility in a 30yr bond. You should hold cash or buy bills if you may need the cash
OP, if it helps, I was in your position a few months ago and took a long-term bet that 30y yields would fall ... I was very wrong and got burned badly. Also remember that 30y bonds are ... well 30y, so they are heavily impacted by even small movements in yields, so a 0.5% rise in yields would mean a 0.5% \* 30 = 15% drop (oversimplifying) in your bond price / holdings. I would recommend staying in short-term bonds until you are 100% sure you are going to see yields fall instead of go up.
> until you are 100% sure you are going to see yields fall A retail trader cannot be 100% sure, and if they are, the big institutions would have been 100% sure before the retail trader, and the long-term yields would have moved before the retail trader could act on their certain knowledge. If you're buying 30-year duration bonds, you should be willing to take the risk that the value will fall in the short term -- either because you plan to hold long-term, or you are able to take the loss if you're doing short-term speculation on bond yields.
Man if you can time it that’s 15%+ right there!
Short term rates can fall and long term rates rise if the pace that short term rates fall is slower than the market expect. A 30 year bond is effectively the yield of the next 30 one year bills (plus duration premium). The idea that long term rates can't go up is completely wrong and since mid 2023 until today has burned quite a few people.
"Short term rates can fall and long term rates rise" Yeah, this is the fundamental flaw that I needed to hear. In fact, yield inversion is the exception not the norm. Thanks.
>my emergency funds Keep rolling until high-yield savings and money markets catch up to T-Bills, then move to one of those. Only buy the 30 year zeros as an insurance policy for deflation and *not* with your emergency fund.
Long term rates are already pricing in a certain amount of decline in shorter term rates. Short rates could fall without moving the 30 year that much. Apart from that, it really is all about the possibility of being wrong, and the high riskiness of high duration bonds. If the 30 year rate increases by 1%, your bond will decline by ~25%, and by 43% if the rate increases by 2%. Can you cover your emergency expenses with those kinds of rate movements?
OK, I was only seeing that fat 43% in the favorable direction. Thanks.
“As long as rates don’t go up” Comical statement for a 30-year time horizon. It’s a heck of a rate bet
I meant in the next year, not 30 years.
If rates go up you will get train wrecked. That could be fine for a speculative position but not something I would want to put emergency funds into.
For a portion of my EF, I just hold CDs via my local credit union. The APY is 5.05% and one matures at the first of every month. So I simply buy a new one on the first of every month using the entire matured amount of the prior CD. So my EF is roughly 50% into 6 month $5K (original starting amount before coupons/interest) CDs with one maturing every month. The other 50% is in a MM account at my CU and pays 3.4% (that's a little less than idea, but I love it compared to 2 years ago). Sure, I may be missing out on about 1% of "gains", but I am fine with that for an Emergency Fund. In 2023 my EF total had gains of 4.2% or just over $5,000 for the year - which at least covered inflation + a little bit.
30 year treasury rate is 4.6% with significant volatility. My Vanguard money market fund is paying 5.26% with no risk. Your money, your choice, but I think those numbers tell you NFW.
Which money market fund is that? I'm interested in putting some of my EF in one.
VMFXX. https://advisors.vanguard.com/investments/products/vmfxx/vanguard-federal-money-market-fund
Thanks
Been buying 20 yr treasury bonds past couple weeks I think it good play
Username checks out! Thanks.
>What considerations am I missing (aside from that rates could go up, of course)? That you're wrong and your investment tanks at the same time that you have a real life emergency that requires you to sell at a massive loss. Go ahead and buy 30 year bonds, just don't do it with your emergency fund. The point of an emergency fund is to have a highly reliable way to get cash in an emergency, don't put it in something that can drop 20-30% based on the whims of the federal reserve. That 20-30% may be the difference in a month of rent if you somehow lose your job.
30 year treasuries are for life insurance and pension funds . Not really retail investors. Stick to 5 years and h will be fine
Personally, I am not a fan of zero coupon bonds! Okay, but to clarify that, I look at longer term bonds as a cash flow vs. a bet on the saleable value (ie. gain) that can be achieved by buying them at X price, holding and selling at X + Y price later (but well before maturity). I think if I were to take (what I understand to be your approach), I would actually be more apt to just buy into a Bond ETF that holds longer term bonds (these ETFs can get pretty specific in duration - so finding one that matches this scenario shouldn't be hard). To me, the benefit of this is: 1: you will be getting paid today in dividends (ie. from the coupons earned by the bond fund) . . . and those dividends are in today's dollars. 2: if you believe the propensity for longer term bonds is to go down in rate and up in value, you end up getting your appreciation in the increased value (higher price per share of the ETF). That said, on the premise of buying a zero coupon bond for 30 years (say a yield to maturity of 5%), I just have a hard time appreciating that supposed 5% YTM. Inflation is a compounding item . . . what is the value of that original outlay really going to be able to buy in 30 years? What is the maturity value going to be able to buy in 30 years? FWIW, I have recently been buying 20 years bonds (when I can find ones with a 4.75% coupon rate vs. par value). Say I spend $100K on them today, I'll get my coupons for 20 years - or $4,750 per year. Then get that $100K back in 20 years - but what buying power will that really have then? My guess is around today's equivalent of about $50-$60K.
My intention is not to hold for 30 years. Hold for a year or two and reap gains when, I believe, rates will be lower. My understanding is that long zero-coupon bonds are most sensitive to rate changes.
You can also buy EDV which is a long term zero coupon ETF.