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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35357  
Subject: Re: "Long Bond" - buying and rolling Date: 2/12/2006 9:07 PM
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The 30-year Bond's peak yield was about 14.68% in October '81 (monthly date). It got down as low as 4.2% (legacies) last May and July. So, ignoring taxes and the huge amounts of compounding (although at much less than 14.68 for most of the time), you'd have gotten that much yield the whole time, and had you chosen to sell at the low yield, you'd have averaged over 18% for 25 years (or so), once you factored in your sales price (of course, then you'd be reinvesting at a pittance)—please, not, I didn't cruch the numbers for the sale, just approximating.

Barring another bout of hyperinflation followed by fiscal responsibility, this isn't going to happen again.

There's a big difference between being a commonsense contrarian, like ignoring Wall Street hype about why valuations don't matter anymore when the NASDAQ is out of control, and pushing decisions linked to misleading history, in this case suggesting that these past returns on long bonds have anything to do with what might come in the future.

Most of us on this board are contrarians in the sense that we don't buy into the what me worry claims that the economy is fine and personal and government debt don't matter—this time is different. I don't take charting seriously in the stock market, but I have no doubt that it can trace short term patterns and tipping points in a market dominated by momentum traders. Treasury bonds are different. There is certainly a huge amount of trading in bonds, but there are many non-trading forces that determine supply and demand for debt securities (like the Chinese government and the Social Security surplus). And the economic forces, notably internationalization of the labor market, that have strong deflationary implications, are countered by the trade imbalance, which could lead to dollar devaluation (inflationary on imports) and the inevitable increases in energy costs. Most of us are being contrarian by being cautious in all our investment decisions, since predicting is probably harder than ever. Buying 30-years on the premise that 3% is likely is bad guesswork.
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