30 yr Treasuries outperforming US stocks over the past 40 years!

[opihiman2]

US Treasuries have outperformed domestic US Stocks over the past 40 years:

 

 

On a risk adjusted basis, it's no comparison.  So much for equities always >> bonds.  Moreso, if you bought 30 yr Treasuries in the 90's, in fact, not even the 80's, but any point in the 90's, and rolled duration over yoy till now, you would have STOMPED the S&P on a compounded basis.  It wouldn't even be close.  It's something like 20+% CAGR.

 

Finally, more nice nuggets from Meb:

 

 

I think the next decade brings a significant amount of U.S. equity under performance. 

[stahleyp]

You think US equities will underperform treasuries over the next 10 years?

[KJP]

US Treasuries have outperformed domestic US Stocks over the past 40 years:

 

 

On a risk adjusted basis, it's no comparison.  So much for equities always >> bonds.  Moreso, if you bought 30 yr Treasuries in the 90's, in fact, not even the 80's, but any point in the 90's, and rolled duration over yoy till now, you would have STOMPED the S&P on a compounded basis.  It wouldn't even be close.  It's something like 20+% CAGR.

 

Finally, more nice nuggets from Meb:

 

 

I think the next decade brings a significant amount of U.S. equity under performance.

 

We've had falling interest rates essentially that entire period.  Can that happen again over the next 30-40 years?  That would imply, what, -10% yield on the 30-year?

[TwoCitiesCapital]

US Treasuries have outperformed domestic US Stocks over the past 40 years:

 

 

On a risk adjusted basis, it's no comparison.  So much for equities always >> bonds.  Moreso, if you bought 30 yr Treasuries in the 90's, in fact, not even the 80's, but any point in the 90's, and rolled duration over yoy till now, you would have STOMPED the S&P on a compounded basis.  It wouldn't even be close.  It's something like 20+% CAGR.

 

Finally, more nice nuggets from Meb:

 

 

I think the next decade brings a significant amount of U.S. equity under performance.

 

We've had falling interest rates essentially that entire period.  Can that happen again over the next 30-40 years?  That would imply, what, -10% yield on the 30-year?

 

Agreed. If anything, it shows how expensive bonds are at this point and not how poorly equities have returned relative to them.

 

I generally agree with Dalio's assessment that we're probably entering a new paradigm in the 2020s.

 

Aging population will become less of a drag in a few years, millennials are moving into the stages of their careers where they're more highly compensated and student loans are less of a drag, commodities have been in and out of bear markets since 2011 disrupting investment and future supply, etc. Not to mention the level of debt will NEED to be inflated away.

 

I'm not saying hyper-inflation. Just that a number for things that have been constraining inflation impulses are likely to disappear over the next few years and it won't be kind to bonds @ 1-2%.

[ERICOPOLY]

You think US equities will underperform treasuries over the next 10 years?

 

Some will.

[opihiman2]

No, I think US equities will under perform compared to long term performance.  Not under perform US Treasuries.  But, who knows at this point.  I never thought the 10 yr would get to almost 0% like it did just recently.  Now, I can see it go more negative.  If you understand bond convexity, bonds can way out perform stocks.  It's something I never understood or paid attention too because of value investor neophytes like Warren Buffett claiming, "why would anyone hold a 2% yielding Treasury?"  Well, no bond trader holds a bond for the yield.  Bond traders hold bonds to anticipate interest rate movements.  And, that's what I do nowadays.  If I think there's going to be an incoming recession, I switch everything to Treasuries.  And it's been paying off in spades.

 

BTW, do you know what was one of the best performing assets in 2017 and 2018?  It was the Austrian 100 YR bond yielding something like <1% before prices dived.  Annualized, it was up 50% yoy for 2 years when the equities markets basically went no where. 

[james22]

In that light, the proposed 50-year treasury might be attractive.

[elliott]

You think US equities will underperform treasuries over the next 10 years?

 

Exactly my feeling. But then I wonder...

 

Did someone in the 90s?

[stahleyp]

You think US equities will underperform treasuries over the next 10 years?

 

Some will.

 

haha well, yeah, I meant like an index fund!

[stahleyp]

You think US equities will underperform treasuries over the next 10 years?

 

Exactly my feeling. But then I wonder...

 

Did someone in the 90s?

 

Treasuries were yielding up to 8%+ in the 90s. Could treasuries outperform over the next 10 years? Sure...but the odds are not in your favor.

[Cigarbutt]

Thought experiment with some assumptions.

Note: Stock picking is the goal; this is just to gauge the 'environment'. And, curiously, avoiding the losers may be just as (or more) important than spotting the winners.

 

Assumptions:

-time is your friend

-beginning yield will be the leash around bonds (10-yr and 30-yr treasuries)

-low rates will persist for a while and i pick a 2% dividend yield for the S&P 500

-SP 500 on Feb 19 2020: 3387.33    SP 500 on Feb 19 2037: 3387.33

 

Results:

-expected returns from today's levels:

bonds: 0.85 to 1.42%

stocks: 4.3%

 

Conclusion:

Take your pick.

PS This will likely to be my only contribution in this thread but i'm willing to revisit it in 2037.

[Packer16]

The problem with this line of thinking is it all time dependent & we do not as investors have big globs of money to invest this way.  Most of us have money to invest over time.  If you look at the DCA results, I think you will get a more realistic expectation of how people invest not theoretically what we could have made if we timed the markets correctly.

 

Packer

[Cigarbutt]

The problem with this line of thinking is it all time dependent & we do not as investors have big globs of money to invest this way.  Most of us have money to invest over time.  If you look at the DCA results, I think you will get a more realistic expectation of how people invest not theoretically what we could have made if we timed the markets correctly.

 

Packer

You may remember exchanges on another thread that had "S&P 500" and "moronic" in the title (possibility of negative ERPs etc). I do (I learned from your wisdom). This was 2.3 years ago.

For interest, comparative compound annual returns since then, SP dividends and TLT "dividends" excluded (and +/- comparable)

S&P 500:  (4.0%)

TLT:          10.6%

There is an element of cherry-picking and this is short term but it is what it is.

I think we can agree that the "forward" ERP has improved (whatever its absolute level) and the times, they are changin'.

-----)Back to the treasured thread

 

[opihiman2]

I hate to say it, but reading through some of the comments through this thread, I realize why the bond folks look down on the equity folks.  Bond people can do equity math, but for some reason equity people can't do bond math. 

 

It actually almost doesn't matter what date you pick for bonds since the 90's -- well, maybe not in the past year, but even then, read my final comment.  I just picked anytime in the 90's, because anytime I say since the 80's, people invariably look at the double digit yields and say, "OF COURSE IT OUTPERFORMED!"  I mean, yeah, in hindsight, we could have bought 30 YR treasuries and held on for 12% coupons and not even have done things like roll over duration YOY.  It would have seemed like a no brainer trade in hindsight. But even then, including inflation, it was close to negative real yields.  So, not exactly no brainer!  But, my point is, you could have even bought 3 to 4% yielding treasuries, and rolled over duration YOY for the past 10 years all the way till when the 30 yr dipped under 1%, and you would have STOMPED the S&P on an annualized and compounded basis.  It's even worse when you look at the Sharpe Ratios. 

 

Hell, even before the 30 YR treasury rallied to the point where yields dipped under 1%, I was looking at the 30 YR a month and a half ago thinking, "SHIT, 30 YR is now 1.5%!  Oh well, can't buy 30 YR zero coupon treasuries, the bonds have rallied already."  WoW!  Little did I know the shit was going to hit the fan since then.  I had no idea 30 YR's were going to dip to nearly 0.5%.  When the 30 YR hit 1% in fact, ZERO coupon 30 YR Treasuries were up nearly 30%.

 

 

 

 

[scorpioncapital]

To those who say inflation will make bonds underperform vs last 40 years , I also say Inflation makes stocks underperform. But maybe bonds get creamed less than stocks and make up the difference?

[stahleyp]

I hate to say it, but reading through some of the comments through this thread, I realize why the bond folks look down on the equity folks.  Bond people can do equity math, but for some reason equity people can't do bond math. 

 

It actually almost doesn't matter what date you pick for bonds since the 90's -- well, maybe not in the past year, but even then, read my final comment.  I just picked anytime in the 90's, because anytime I say since the 80's, people invariably look at the double digit yields and say, "OF COURSE IT OUTPERFORMED!"  I mean, yeah, in hindsight, we could have bought 30 YR treasuries and held on for 12% coupons and not even have done things like roll over duration YOY.  It would have seemed like a no brainer trade in hindsight. But even then, including inflation, it was close to negative real yields.  So, not exactly no brainer!  But, my point is, you could have even bought 3 to 4% yielding treasuries, and rolled over duration YOY for the past 10 years all the way till when the 30 yr dipped under 1%, and you would have STOMPED the S&P on an annualized and compounded basis.  It's even worse when you look at the Sharpe Ratios. 

 

Hell, even before the 30 YR treasury rallied to the point where yields dipped under 1%, I was looking at the 30 YR a month and a half ago thinking, "SHIT, 30 YR is now 1.5%!  Oh well, can't buy 30 YR zero coupon treasuries, the bonds have rallied already."  WoW!  Little did I know the shit was going to hit the fan since then.  I had no idea 30 YR's were going to dip to nearly 0.5%.  When the 30 YR hit 1% in fact, ZERO coupon 30 YR Treasuries were up nearly 30%.

 

 

So does that mean you're loading up on treasuries?

 

I still don't see where you're getting your numbers from. Perhaps I missed it but I didn't see where Faber mentioned 40 years?

 

Jan 1990-Feb 2020 (March numbers aren't out yet)

 

US Stocks: 9.47%

LT Treasuries: 7.88%

 

Jan 1995-Feb 2020

US Stocks: 9.67%

LT Treasuries 7.91%

 

Jan of 1999:

US Stocks: 6.58%

LT Treasuries: 6.90%

 

Let's look at the 80s:

 

Jan 1980-Feb 2020:

US Stocks: 11.09%

LT Treasuries: 9.30%

 

Jan 1985:

US Stocks: 10.68%

LT Treasuries: 9.19%

[LC]

I feel like I am waiting for the big reveal. Yes, going long duration is an incredible strategy if you know interest rates would decline for 35, 40 years.

 

The question is who the hell knows that? I mean, you tell me: what will interest rates do over the next 40 years?

[KJP]

I hate to say it, but reading through some of the comments through this thread, I realize why the bond folks look down on the equity folks.  Bond people can do equity math, but for some reason equity people can't do bond math. 

 

It actually almost doesn't matter what date you pick for bonds since the 90's -- well, maybe not in the past year, but even then, read my final comment.  I just picked anytime in the 90's, because anytime I say since the 80's, people invariably look at the double digit yields and say, "OF COURSE IT OUTPERFORMED!"  I mean, yeah, in hindsight, we could have bought 30 YR treasuries and held on for 12% coupons and not even have done things like roll over duration YOY.  It would have seemed like a no brainer trade in hindsight. But even then, including inflation, it was close to negative real yields.  So, not exactly no brainer!  But, my point is, you could have even bought 3 to 4% yielding treasuries, and rolled over duration YOY for the past 10 years all the way till when the 30 yr dipped under 1%, and you would have STOMPED the S&P on an annualized and compounded basis.  It's even worse when you look at the Sharpe Ratios. 

 

Hell, even before the 30 YR treasury rallied to the point where yields dipped under 1%, I was looking at the 30 YR a month and a half ago thinking, "SHIT, 30 YR is now 1.5%!  Oh well, can't buy 30 YR zero coupon treasuries, the bonds have rallied already."  WoW!  Little did I know the shit was going to hit the fan since then.  I had no idea 30 YR's were going to dip to nearly 0.5%.  When the 30 YR hit 1% in fact, ZERO coupon 30 YR Treasuries were up nearly 30%.

 

I understand you're rolling duration, not holding your initial purchase for 30 years.  But would you want to roll duration for the next 30 years starting from where 30-year treasuries are now?

[opihiman2]

I hate to say it, but reading through some of the comments through this thread, I realize why the bond folks look down on the equity folks.  Bond people can do equity math, but for some reason equity people can't do bond math. 

 

It actually almost doesn't matter what date you pick for bonds since the 90's -- well, maybe not in the past year, but even then, read my final comment.  I just picked anytime in the 90's, because anytime I say since the 80's, people invariably look at the double digit yields and say, "OF COURSE IT OUTPERFORMED!"  I mean, yeah, in hindsight, we could have bought 30 YR treasuries and held on for 12% coupons and not even have done things like roll over duration YOY.  It would have seemed like a no brainer trade in hindsight. But even then, including inflation, it was close to negative real yields.  So, not exactly no brainer!  But, my point is, you could have even bought 3 to 4% yielding treasuries, and rolled over duration YOY for the past 10 years all the way till when the 30 yr dipped under 1%, and you would have STOMPED the S&P on an annualized and compounded basis.  It's even worse when you look at the Sharpe Ratios. 

 

Hell, even before the 30 YR treasury rallied to the point where yields dipped under 1%, I was looking at the 30 YR a month and a half ago thinking, "SHIT, 30 YR is now 1.5%!  Oh well, can't buy 30 YR zero coupon treasuries, the bonds have rallied already."  WoW!  Little did I know the shit was going to hit the fan since then.  I had no idea 30 YR's were going to dip to nearly 0.5%.  When the 30 YR hit 1% in fact, ZERO coupon 30 YR Treasuries were up nearly 30%.

 

 

So does that mean you're loading up on treasuries?

 

I still don't see where you're getting your numbers from. Perhaps I missed it but I didn't see where Faber mentioned 40 years?

 

Jan 1990-Feb 2020 (March numbers aren't out yet)

 

US Stocks: 9.47%

LT Treasuries: 7.88%

 

Jan 1995-Feb 2020

US Stocks: 9.67%

LT Treasuries 7.91%

 

Jan of 1999:

US Stocks: 6.58%

LT Treasuries: 6.90%

 

Let's look at the 80s:

 

Jan 1980-Feb 2020:

US Stocks: 11.09%

LT Treasuries: 9.30%

 

Jan 1985:

US Stocks: 10.68%

LT Treasuries: 9.19%

 

StahleyP, just read up on bond convexity.  Maybe it'll make more sense later.  Also, for me, it's not about buying and holding Treasuries.  It's about TRADING Treasuries.  And no, I've already loaded up on Treasuries.  I actually posted on this forum in late 2018 saying I think we're heading into the final innings of this thing, and I went completely to cash equivalents AKA Treasuries and money markets.  Since then TLT is up like 30+%.  I actually just unloaded all of my Treasury holdings when prices were around the 160's.  So, I'm up almost 40% on the trade.  The next time I do this, I'm using a leveraged Treasury ETF to really milk the gains.

 

And, I'm a bit of a hypocrite.  I don't detest equities.  I'm looking to go back long on equities.  But, I've seen this for myself, and have read about it from others, it seems after every decade or so after some recession or blow up, there is a rotation in leaders.  The past decade we saw the FANGs completely outperform.  Next decade, I highly doubt that will happen.  Previous decade it was the BRICs and commodities.  The decade before that, US equities in general, especially the dot coms.  Next decade, we'll see.  I personally think inflation is going to make a come back. 

[opihiman2]

To all other folks, I actually am quite new to understanding the bond market.  I, like you folks, was heavily into equities before.  How stupid was I?  Anyways, I have not done the roll over trade.  It was actually something I read about a long time ago from Gary Shilling, and I never paid much attention to it because of "equity people can't do bond math".  But, when I broke down the trade a while ago, I was shocked.  It was so stupid not to see in hindsight, but also, I agree with some of you that no one would know back then that interest rates would be where they are today.  And hell, even NOW, people are saying no way the U.S. goes negative on rates.  But if we're in a deflationary cycle, negative rates might still equal positive yields -- I for one think we're going to see a comeback in inflation, but who knows. 

 

Anyways, I really don't know where Treasuries go from here.  But we're at the ZLB pretty much, and If I were being honest, I would say the trade is probably done.  However!  That still doesn't change my views on my tactics.  I'm timing markets, and I'm using Treasuries as the hedge.  Actually, more of a hedge, more like all my asset allocations is in it.  Worst case scenario, I just come out unscathed.  Likely scenario, my hedge is up 10 to 30+%

 

 

[LC]

The problem with this trade or trading down the curve in general is that it is essentially a bet on interest rates. You have 1 way to win. I prefer equity investing because it is not as much of a one-dimensional trade - even if one factor goes against you, you can still make money.

 

If you know where interest rates will be, then yes taking a 20 or 30x leveraged vehicle and hitting that spot will be an incredible trade.

[opihiman2]

For sure.  Again, even at double digit interest rates, a Treasury bet was NOT a no brainer thing like I constantly hear on these inane investing forums.  You have to remember that inflationary rates were even HIGHER than Treasury yields.  No one back then could have predicted inflation rates to be where they are today. 

 

But, from here on out, I use Treasuries as a big hedge.  I side stepped the financial crisis by going into cash in 2007.  But, I kick myself in the ass by not learning about the Treasury trade.  I would have been up 30+% by going to Treasuries vs money markets.

 

[LC]

As a hedge it does make some sense. The underlying assumption is that in crisis (ie where you need the hedge), governments will drop rates. So your long duration hedge will pay off. The flip side is that if they don’t and rates rise, now your hedge is working against you as well. Am I understanding it right?

[TwoCitiesCapital]

As a hedge it does make some sense. The underlying assumption is that in crisis (ie where you need the hedge), governments will drop rates. So your long duration hedge will pay off. The flip side is that if they don’t and rates rise, now your hedge is working against you as well. Am I understanding it right?

 

It doesn't require lower rates - it requires a positive sloping yield curve. Lower rates just accelerate it.

 

The biggest risk is an inflationary environment - and you'll get creamed. But probably not as much as you'd get creamed by owning stocks at 21x earnings in such an environment.

 

I still prefer the barbell or ladder approach to bonds, but having a slug in long-dated zero coupons that you roll in addition to that probably provides some excitement to the trade.

[LC]

That is only if you are selling short duration and buying long duration, correct? That leverages the trade even more unless I am misunderstanding