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Negative bond yield?

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  • CM CM 
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    should I look for an alternative

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    There aren’t any attractive investment options today (that I can identify), but I increased my gold allocation to 5% this week. Gold becomes more attractive as real yields become more and more negative, and/or when sh*t hits the fan, and global bond yields suggest that sh*t may hit the fan before long.

    Despite this, I don’t like investing in gold and wouldn’t recommend a big allocation. Dalio has suggested a 10% allocation in the past and I wouldn’t exceed that in the absence of major upheavals in the way the world operates.

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

    #239025 Reply
    Liked by gasdoc86
    Avatar StarTrekDoc 
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    Bitcoin anyone?!?

    At least we’ve raised interest rates over the past years enough to have SOMETHING to lower to stimulate once recession really hits.

    Europe has nothing to lower and really at risk of the Japan deflation ‘lost decade’ scenario.

    #239061 Reply
    Zaphod Zaphod 
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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.

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    Volatile markets are in general not a great thing, even if it happens to be volatile in the direction you want it to be. Shows a bit of lack of understanding all around (for the market) and chasing.

    I think the market has no problem understanding things, but they just change continually. Its hard to predict something out too far because you essentially have to be right about too many things. I’d be comfortable saying we’re at a point in the economy we can nearly talk ourselves into a recession if not careful. If trump just laid in to tariffs 09/1, it would be bad all else equal. However it never is. Fed may drastically adjust, congress might fund infrastructure or some other stimulatory measure you forgot to take into account developing your thesis.

    The world is currently slowing down, no doubt about that. Only doubt is does it continue or is it a dip? You have to have an ability to not fixate on your thesis and put your ego into it and dismiss reality. If data changes you have to change. Harder to follow and not as flashy but more correct.

    If data starts coming in hot, all recession theories busted for now, if its middling, speculation will run wild, it is rough…well it will be rough.

    #239078 Reply
    Avatar Dont_know_mind 
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    Splash Refinancing Bonus

    My thoughts:
    1. Bonds are terrible value. To me they are worse value than stocks currently.
    Perhaps they’ll do well. Buying at these yields seems to me predicated on further CB buying. In fact, yields cannot be negative without CB buying because negative yields are pretty irrational. There should be a risk premium even for CB stuff as governments do sometimes default.
    2. Gold sounds interesting except that I would not buy it except when there is clearly going to be a period of dollar weakness. I’m not sure about this. It might do well on a 10 year timeframe, but in a meltdown, it is just a risk asset. It will likely get caned in a downturn before recovering.
    3. I actually think EM/ROW is starting to recover. After a recession last 2 years, it looks to have bottomed. The areas I’m looking at for resource related property have early signs of recovery. I am hoping they get whacked again so I have another chance to get something. My guess(and I could be wrong), is mild recovery in EM for the rest of the cycle until end of cycle when it gets whacked with other assets, but for what I’m looking at, I’m not convinced it will be lower with an end of cycle blow up. It might just revisit lows from last year.

    The value investor part of me can’t stand buying into bubbles, so my bond component is cash. I might miss out on some return, but I don’t mind. I don’t buy stuff I don’t believe in. I tried that in the past, it doesn’t work for me. Maybe get work for others.

    #239080 Reply
    Zaphod Zaphod 
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    ROW could be starting to recover, but you’d have to be not prone to the usual human desire to extrapolate from current data going forward. Europe just had a terrible print yesterday, and this amid a trade war that it should be a prime benefactor of.

    However, as one of the things that are unforeseen I mentioned in my post above, WMTs strong q2 and guidance just saved the premarket after more trade war stuffs had crushed premarket (SP futures were 2817). Hard to not only forecast that kind of thing but how it will be interpreted in the larger scheme of things.

    #239089 Reply
    aelliscpacfa aelliscpacfa 
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    This is a fascinating question.  I have been thinking about reasons to include bonds in diversified portfolio.  I have been pondering if bonds can still fulfill these stated purposes if the rate on the 10 Year Treasury drops from 1.58% to Negative .005%.

    1  Government bonds are a safe place to park money for near-term expenses.  A good example would be a retired person who needs cash to pay their bills for the next five years.  Bonds could still fulfill this purpose (even if the negative interest rate charged did amount to small “storage fee”).  A checking or savings account would work just as well.  In a negative interest rate environment, the banks may also institute a small fee to store your money.  Regardless, I believe the bank account is a better option.

    2  Bonds can also help protect investors from making bad investing decisions during volatile equity markets.  The comfort of knowing an investor has a certain percentage of their assets in a safe place can make him/her less prone to “panic” selling during a downturn.  I believe the negative interest rate bonds could still fulfill this purpose.  A bank account could do the same thing.  The bank account wins again here, too.

    3  Higher duration bonds do provide some speculative value during volatile markets.  Bond prices tend to go up during large equity sell-offs.  I do think the bonds will still serve this purpose even if the interest rates are negative.  I can’t decide if this is “hedging” your investment in equities or “speculating” on the price of bonds.  I guess it does serve some purpose, although it is hard to get excited about.

    I would not discourage any person from looking for reasonable alternative.  That said, I can think of more than a few occasions where an investor would have been better off settling for a slightly negative return of around negative 1%.  I agree with the person who said “this is how the reach for yield begins”.

    Andrew B. Ellis, CPA, CFA, CFP

    #239103 Reply
    Liked by Craigy
    Avatar jacoavlu 
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    Remember what happens with your total bond fund in this setting. The fund already holds bonds which have a rate and maturity years in the future. Falling yields means rising prices means share price of bond fund goes up. The yield is not the only contributor to the total return.

    In other words, allocating fixed income to a total bond fund remains an excellent option for most long term investors.

    BND was below $78 in the fall, now above $84.

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

    #239105 Reply
    Zzyzx Zzyzx 
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    3. I actually think EM/ROW is starting to recover. After a recession last 2 years, it looks to have bottomed. The areas I’m looking at for resource related property have early signs of recovery. I am hoping they get whacked again so I have another chance to get something. My guess(and I could be wrong), is mild recovery in EM for the rest of the cycle until end of cycle when it gets whacked with other assets, but for what I’m looking at, I’m not convinced it will be lower with an end of cycle blow up. It might just revisit lows from last year.

     

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    eh?  we have yet to enjoy the wonders of Brexit

    • Japan and three of Europe’s four largest economies — Germany, Italy and the U.K. — are heading toward recession by year-end, with China growing at its slowest pace in 27 years.
    • The IMF cut its global growth forecast again last month after warning in April that this was a “delicate moment” for the world.

    https://markets.businessinsider.com/news/stocks/germany-italy-uk-are-headed-for-recession-and-ecb-is-out-of-tools-2019-8-1028435638?utm_source=newsletter&utm_medium=email&utm_campaign=sendto_newslettertest&stream=top

     

    A recession is always coming — it’s just that no one knows when.

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

    #239117 Reply
    Liked by Hank, Zaphod
    Zaphod Zaphod 
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    People also forget there seems to be demand for “safe” assets not just yielding ones, and the spread to the real rate which may indeed make a “negative” yielding bond positive real rate. Lots of ways to skin this cat.

    #239133 Reply
    Liked by gasdoc86
    MPMD MPMD 
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    eh?  we have yet to enjoy the wonders of Brexit

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    I’m not personally trying to time this or making decisions on it but a no-deal Brexit seems likely at this point and I have a hard time seeing how something like this hitting London will fail to shake the global markets to their core.

    There seems to be no will or plan within the UK* to stop this and in fact the momentum is all towards the purely idiotic. I put an asterisk by UK b/c I think the Scots will get out if Brexit really happens.

    Interesting times for sure. We’ll see how resilient the economy really is I guess. The long term effect of this madness (Brexit, trade wars etc) will just be to shift the global centers of power from New York and London to Beijing and Moscow. But then again I think that’s the point and that those most intimately involved are doing good work for the people who ultimately control them.

    #239136 Reply
    Avatar burritos 
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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?

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    Where else would you put a pile of money. Bank(would probably have worse terms)? Stock market? Some other market which could lose more money? Under a mattress?

    #239142 Reply
    Avatar gasdoc86 
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    Remember what happens with your total bond fund in this setting. The fund already holds bonds which have a rate and maturity years in the future. Falling yields means rising prices means share price of bond fund goes up. The yield is not the only contributor to the total return.

    In other words, allocating fixed income to a total bond fund remains an excellent option for most long term investors.

    BND was below $78 in the fall, now above $84.

    Click to expand…

    Good point. I guess I’m just concerned that when I start to be interested in adding bonds they will already be at extremely low or negative rates, which will expose me to a lot of interest rate risk and hence price drops. In which case, it would seem that adding bonds to one’s portfolio doesn’t really add the ballast one would hope to achieve by adding bonds.

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    Where else would you put a pile of money. Bank(would probably have worse terms)? Stock market? Some other market which could lose more money? Under a mattress?

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    Not really sure, which is why I’m asking the question. I’d maybe take a closer look at real estate but my interest in RE is low. Or maybe I’d just add to my stock allocation.

    #239146 Reply
    Zzyzx Zzyzx 
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    Remember what happens with your total bond fund in this setting. The fund already holds bonds which have a rate and maturity years in the future. Falling yields means rising prices means share price of bond fund goes up. The yield is not the only contributor to the total return.

    In other words, allocating fixed income to a total bond fund remains an excellent option for most long term investors.

    BND was below $78 in the fall, now above $84.

    Click to expand…

    Good point. I guess I’m just concerned that when I start to be interested in adding bonds they will already be at extremely low or negative rates, which will expose me to a lot of interest rate risk and hence price drops. In which case, it would seem that adding bonds to one’s portfolio doesn’t really add the ballast one would hope to achieve by adding bonds.

    Click to expand…

    Where else would you put a pile of money. Bank(would probably have worse terms)? Stock market? Some other market which could lose more money? Under a mattress?

    Click to expand…

    Not really sure, which is why I’m asking the question. I’d maybe take a closer look at real estate but my interest in RE is low. Or maybe I’d just add to my stock allocation.

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    The inclusion of bonds has always primarily been for stock crash insurance.  You’re seeing a lot of rebalancing into bonds because of a weak market with falling interest rates so bond prices are rising which lowers their yields.  gold and REITs may be worth looking at for a small % of your portfolio but most would keep more in bonds.

     

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

    #239155 Reply
    The White Coat Investor The White Coat Investor 
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    For the individual investor, one would probably just put the money in a bank account paying 0% rather than a bond paying -1%, but for an institution with too much money for FDIC insurance, the treasury might be safer.

    Site/Forum Owner, Emergency Physician, Blogger, and author of The White Coat Investor: A Doctor's Guide to Personal Finance and Investing
    Helping Those Who Wear The White Coat Get A "Fair Shake" on Wall Street since 2011

    #239165 Reply
    Liked by Craigy, Zaphod
    CM CM 
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    Just checked the after hours market and saw that the yield curve is now inverted from 30 days to 30 years: 1.968% to 1.965%.

    That’s not a good omen.

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

    #239257 Reply

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