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Asset allocation strategies like this used to work because the components like stocks and bonds were negatively correlated. When stocks crash, bonds gain value

Asset allocation strategies like this used to work because the components like stocks and bonds were negatively correlated. When stocks crash, bonds gain value and reduce the variation and risk of the portfolio as a whole. But that doesn't always happen. Sometimes the correlations flip, and everything becomes positively correlated, and everything crashes at the same time. Today, there's about $20 trillion in the global government bond market that actually has a negative yield, which means the borrower gets paid to borrow. And in the remainder of the government bond market where rates are still positive, rates are the lowest they've been for 1000 years. When interest rates are near zero or even negative, it's unclear whether historic correlations will continue, so the concept behind the "permanent portfolio" may not continue to work in this environment.

vonmoltke 7y ago
> Today, there's about $20 trillion in the global government bond market that actually has a negative yield, which means the borrower gets paid to borrow. Not really. The yields are negative, but the coupon rates are positive. Most of those were initially sold with a positive rate, then went negative as buyers bid up the prices. The issuing governments don't get that appreciation, and are still obligated to pay the coupon rate. If the yield is positive at auction, the borrower is still paying to borrow the money. The only way the "borrower gets paid to borrow" is if the initial auction sees bonds sell at negative yields. That's quite possible when coupon yields are 0.100% or less (which has been common in Europe and Japan lately).
- whatok 7y ago
  There have been quite a few recent issues at negative yields and coupons do not need to be low (they usually are though) for yields to be negative; bonds can also be issued at a premium to par. Recent 30 year Bunds were issued with a 0 coupon at EUR103.61 for a yield of -0.11.
ericd 7y ago
IIRC, the permanent portfolio is 25% stock index, 25% long term bonds (which do great in low inflation, dropping interest rates), 25% gold, and 25% cash/short term debt. Bonds doing terribly means interest rates spiking, and potentially defaults, or massive inflation. Which are all possibilities. In those cases, you’re probably going to be very happy for the gold portion of the permanent portfolio. And it has been on a bit of a tear, recently, rising ~15% vs USD.

vonmoltke 7y ago

> Today, there's about $20 trillion in the global government bond market that actually has a negative yield, which means the borrower gets paid to borrow. Not really. The yields are negative, but the coupon rates are positive. Most of those were initially sold with a positive rate, then went negative as buyers bid up the prices. The issuing governments don't get that appreciation, and are still obligated to pay the coupon rate. If the yield is positive at auction, the borrower is still paying to borrow the money. The only way the "borrower gets paid to borrow" is if the initial auction sees bonds sell at negative yields. That's quite possible when coupon yields are 0.100% or less (which has been common in Europe and Japan lately).

whatok 7y ago
There have been quite a few recent issues at negative yields and coupons do not need to be low (they usually are though) for yields to be negative; bonds can also be issued at a premium to par. Recent 30 year Bunds were issued with a 0 coupon at EUR103.61 for a yield of -0.11.

ericd 7y ago

IIRC, the permanent portfolio is 25% stock index, 25% long term bonds (which do great in low inflation, dropping interest rates), 25% gold, and 25% cash/short term debt. Bonds doing terribly means interest rates spiking, and potentially defaults, or massive inflation. Which are all possibilities. In those cases, you’re probably going to be very happy for the gold portion of the permanent portfolio. And it has been on a bit of a tear, recently, rising ~15% vs USD.