It's Equity Beta!

On Monday's ETF IQ on Bloomberg there was a segment that looked at weighing out whether adding bond market duration makes sense or not. They mentioned the SPDR Portfolio Long Term Treasury ETF  (SPTL). Here are the portfolio characteristics.

I highlighted that the bonds held are trading at an average price of 72 cents on the dollar. Here's a chart of the last couple of years compared to the S&P 500 and the iShares Aggregate Bond ETF (AGG) which has a much shorter duration.

Obviously the 38% decline is noteworthy but so too is the sawtoothing of SPTL's chart. It looks like an equity. Here are some portfolio stats to compare the three going back to the start of 2021.

Yes, SPTL has a lower standard deviation than the S&P 500 but not that much lower and it is more than double than AGG. 

The above zooms in on the Yahoo chart and reiterates a point we've been repeating for ages. Long duration bonds have become a source of unreliable volatility. 

Forgetting the ETFs for a minute. If you chose to speculate on some 15 or 20 year bond trading at 75 cents on dollar, or lower, what is it you're actually doing? It'd be down a lot and has to make it's way back to par over the next 15 or 20 years and it would be volatile for much of that time, as volatile as equities potentially, until it got very close to maturity. 

Look back 15 years ago and 20 years ago. Where was the S&P 500 back then? So you could buy the bond and take on equity beta with the promise of only a 33% return over that 15 or 20 years, plus the coupon or you could buy equities, take on what I would argue is very similar beta for a potentially much larger return. I don't see where buying long duration bonds with all the volatility, getting a yield that is less than from a one year bill, makes any sense. 

The drawback to my position is of course reinvestment risk. That is important to weigh out and understand but it is still the case that long bonds have a lot of volatility, sort of capped upside and the yield isn't so hot. Oh and they could go down a lot further if yields keep rising. Let's check back though if the market gets up to 7-8% for long duration.