Yeah, that was the eye-opener for me in the blog post as well. Of course, I understood hypothetically that higher coupon yields reduce duration, but I hadn't actually sat down and calculated what 1980's rates do to long term bond duration. The idea that you could get the term premium of a 30-yr on a normal yield curve with what we would think of as "intermediate" duration / interest rate risk exposure is crazy.The total return paradigm was formulated when rates were double digit. Gross noted in his blog that with a 15% yield, the duration of a 30-year bond was down to 6-7 years. This means that rates could rise 250 basis points, and the yield would offset 15% or so drop in bond price if the rate increase were instantaneous. This was taken to mean that a 30-year treasury was low risk with a 15% yield.
It also implies that a lot of these backtests you see on Bogleheads of a 60/40 with "intermediate" Treasuries back then had a duration that was functionally more like that of a 2020 T-bill.
Statistics: Posted by Walkure — Fri May 10, 2024 9:35 am — Replies 81 — Views 8749