Time to lock in 4.7% returns on your savings for 10 years?
- Thread starter Daal
- Start date
Daal,
I have a Fidelity IRA account. Currently doing a 15yr mortgage locked in at 2.5%. Right now about 4 years into mortgage. If I can get a 4.65% 10yr note, I have a guaranteed 2.1% gain. I would just be buying the same amount as the remaining mortgage.
What are you buying? New to treasury buying. I see secondary market on Fidelity but is the current bid/ask price an additional cost?
2% gain is currently less than inflation, so would this make sense for cash? I mean just pay off the mortgage right now rather than lock into a treasury. In this case, IRAs have an early 10% penalty so it might a good idea to lock in the gain.
FYI, my current leanings are toward "safer" ETFs like VTI (Total market 11% annual return 10yr), SCHD (Dividends, 10% annual return 10yr)
AFAIK, mortage payments can be deducted from taxes so the gap might be even higher. only thing im buying right now is FNMA shares (betting on a Trump victory and reprivatization), i was buying those treasuries at 4.7%, Im not buying them here, also dunno how fidelity iras work
Your gain on this fixed income arb will be inflation neutral. Short leg (mortgage) will be eroded by the inflation print just the same as your long leg and it will net out to a post inflation gain of 2.1%. Erosion of liability = +PnL denominated in buying power. The 2.1% will be multiplied against the inflation print to convert to real return; it's not additive. Don't pay off the mortgage.
If you want to be long the inflation print (and reduce capital requirement), replicate the cash flows of the interest portion of the mortgage, not the face value. So buy like 55% of your mortgage in the 10y. Your actual interest expense is covered in all scenarios. But imagine if hyperinflation occurs, the value of both legs will be $0 and you essentially net 45% of the mortgage value in PnL. On the flip side if deflation occurs your PnL is bounded at zero because the expense portion of the mortgage still nets out and you're just passing cash -> equity to yourself on the other portion.
Re: allocating to macro assets. Deeply liquid markets are extremely well-priced almost all the time. So strategy usually ends up adding no increase in expected return, it just adds variance. And if you add variance without adding expected return, you're lowering your mean geometric return (CAGR).
Daal actually did a bunch of studies on macro portfolios years ago, the discussions are worth reading. Imo, unless you're willing to really go into the weeds and trade / spread mispriced stuff, you're not going to [meaningfully] outperform a 70% equity / 30% intermediate fixed income risk portfolio. Just lever that up/down depending on your risk tolerance and don't go above 25%-30% vol. If you're still in your high income earning phase you should definitely push above the unlevered 10% std dev. People leave a lot of money on the table not levering at least a little bit against their income in high earning period of life.
I fully agree with this!
Thanks. Looking like we may have hit the top of the yield. Consensus is that next Fed action is a cut.
Thanks llIHeroic. Strong response. Lot to chew on.
Dont forget 10-15% in gold also
Dont forget 10-15% in gold also
Yeah, can’t argue against a small allocation there. 10%+ is a little rich for me, although I am aware of the historical performance. But probably that high is still appropriate if you are denominated in a non-major currency.
I was almost going to mention metals but always hard to know where to draw the line re: optimization. Equity / Fixed Income gets you most of the way there. Successfully running higher volatility without going overboard is more of a terminal wealth driver than anything else past that point imo.
Although if we are on the topic of optimizing beta I am a big fan of investment real estate allocation. Has similar inflation hedge properties, you get a degree of optionality on the debt structure (refinance to capture falling yields and just collect equity / income gains against under market debt during rising inflation). The leverage isn’t marked to market like securities are, so drawdowns don’t have the full destructive effect of volatility drag. Lots of benefits there but if you just use a REIT or allocate to a third party you end up giving away almost all of the excess premium. So it takes some work.
Exactly, SPY has gone up by 11% since this thread was created.