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Negative bond yield?

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  • Avatar gasdoc86 
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    There is some speculation (I know, I know, nobody knows anything) that negative bond yields will come to the USA.

     

    What exactly are the implications? Does this mean you buy a bond for $1K and get paid $995 back? What’s the point of that? I don’t get it.

     

    I don’t have any bonds right now but if yields are still negative when it’s time for me to add bonds to my AA, should I look for an alternative? Is that market timing? What do you all think?

    #238826 Reply
    Liked by RocDoc
    Avatar FCP 
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    I also wanted to ask this.  If this happens, would this mean one would have to invest in a money market fund instead of a bond fund (for their bond allocation) or would that be considered market timing?

    #238837 Reply
    Avatar jacoavlu 
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    I think it’s not worth worrying about

    The Finance Buff's solo 401k contribution spreadsheet: https://goo.gl/6cZKVA

    #238841 Reply
    Avatar molar roller 
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    Earnest refinancing bonus

    I remember in the late 90s people discussing how because of budget surpluses, the gov’t is likely to issue less bonds and how that there will be nothing for pension funds to invest in.

    The issue worked itself out, almost by itself 🙂

    #238850 Reply
    Zaphod Zaphod 
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    I also wanted to ask this.  If this happens, would this mean one would have to invest in a money market fund instead of a bond fund (for their bond allocation) or would that be considered market timing?

    Click to expand…

    The money market fund would likely not be paying anything at all so you wouldnt want to be doing it.

     

    This whole thread is like how “reach for yield” begins.

    If you believe below zero bonds are a relatively large probability, you’d be best off buying bonds now while they are not below zero.

    #238882 Reply
    Liked by Craigy, CM, Lordosis, Peds
    Avatar gasdoc86 
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    But what is even the purpose of owning a bond with a negative yield? Why would you put money in an investment that will be sure to lose value?

    #238949 Reply
    Liked by RocDoc
    Avatar octopus85 
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    But what is even the purpose of owning a bond with a negative yield? Why would you put money in an investment that will be sure to lose value?

    Click to expand…

    EDIT: nevermind, I misunderstood the question

    #238951 Reply
    Avatar DCdoc 
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    If rates fall further (more negative) you sell the bonds for a higher price. Bonds are far more complex than simply looking at the yield. Few people are buying negative bonds to hold to maturity. The bund (as an example) is somewhere around -.6%. If you had bought that at -.2% you can sell it for a profit.

    #238955 Reply
    Liked by gasdoc86
    Avatar jacoavlu 
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    when it’s time for me to add bonds to my AA

    so you’re 100% equities now. When do you plan to add bonds to your AA, or do you have a plan?

    The Finance Buff's solo 401k contribution spreadsheet: https://goo.gl/6cZKVA

    #238958 Reply
    Zaphod Zaphod 
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    But what is even the purpose of owning a bond with a negative yield? Why would you put money in an investment that will be sure to lose value?

    Click to expand…

    Owning it before the negative yield. Also, it can go negativerer. If it comes to that and theres the ability, you borrow of course.

    #238960 Reply
    Zzyzx Zzyzx 
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    yield is a function of price.  when prices go up, yields go down, and when prices go down, yields go up.  the yield curve inverted today because investors have been seeking safety in 10 year notes, thus driving the price up and, in turn, the yield down … down below the current yield on a 2-year note.

    It’s psychosomatic. You need a lobotomy. I’ll get a saw.

    #238970 Reply
    Avatar gasdoc86 
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    I’m kind of 100% equities. All my tax deferred accounts are stock index funds. But the reality is I’m more like 40% stock, 60% cash due to saving for a house purchase. I’m 32, so I didn’t want to decrease my equity allocation even further by buying bonds at this time. I was thinking I would buy bonds around 40 years old.

    #238989 Reply
    Liked by RosieQ, Lordosis
    CM CM 
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    The 30-year just hit another record low after hours: 1.996%. Very nice for owners of the long bond. 🙂

    https://www.wsj.com/market-data/bonds

    The 10-year is very low, albeit not at a record low, yet our yield is higher than other developed economies, several of them negative.

    1.625 U.S. 1.572 -0.009
    0.000 Germany -0.650 -0.044 -221.8
    1.625 U.K. 0.448 -0.050 -112.0
    0.100 Japan -0.239 -0.019 -180.7
    3.250 Australia 0.897 -0.052 -66.4
    3.290 China 3.027 -0.005 145.8
    3.000 New Zealand 1.048 -0.064 -51.5
    0.500 France -0.366 -0.054 -193.5
    3.000 Italy 1.514 -0.105 -5.4
    0.600 Spain 0.141 -0.071 -142.7

    Edit: The format didn’t transfer, but the table is available at the link above.

    Erstwhile Dance Theatre of Dayton performer cum bellhop. Carried bags for Cyd Charisse (gracious). Hosted epic company parties after Friday night rehearsals.

    #239015 Reply
    Liked by gasdoc86, Zaphod
    CM CM 
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    But what is even the purpose of owning a bond with a negative yield? Why would you put money in an investment that will be sure to lose value?

    Click to expand…

    If you’ve held cash equivalents (e.g., T-bills or bank deposits) in recent years then you’ve been losing real (i.e., inflation-adjusted) value most of the time because cash yields have usually been lower than inflation, and after-tax real yields have been even lower, this despite positive nominal yields.

    On the other hand, if you hold a bond with a slightly negative nominal yield, but the rate of deflation (not inflation) is even greater, then you may still earn a positive real return.

    Erstwhile Dance Theatre of Dayton performer cum bellhop. Carried bags for Cyd Charisse (gracious). Hosted epic company parties after Friday night rehearsals.

    #239021 Reply
    Liked by gasdoc86
    MPMD MPMD 
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    i will also happily add to this to say that i have no idea what this means.

    the last few months watch the market have been very instructive to me. one day it’s a historic sell-off, the next it all comes rushing back.

    the trajectory has had plenty of grist for whatever mill you prefer to visit, steady upward trajectory with some incredible dips based on nothing more than tweets.

    i basically think what i’ve always thought that the long term market is reacting to things that no one really understands, not even buffet. we don’t have a single person on earth who we believe can actually predict what is going to happen.

    #239022 Reply
    Liked by Lordosis

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