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Safety in Bonds? How to Screw Up Returns The Easy Way

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  • Avatar Tim 
    Participant
    Status: Accountant
    Posts: 3030
    Joined: 09/18/2018

    With all the pundits screaming about stocks being over valued, the first behavioral finance reaction is Flight to Safety. Inverted yield and focus on the pending market collapse. Interest rates and the Fed! Why is no one screaming about bonds being overpriced? Treasuries are safe? Really? The bond trade is a different game.
    What if:
    • Treasuries were the safe haven and foreign investors (including sovereign funds and governments) piled into treasuries and bid the prices up.
    • The China/US tariffs squabbles became old news and a smoother path. WAR is really an emotional trigger.
    • People realized that all the political headline claims were just that. Let’s just say “read my lips” was a claim made that is not valid investment advice.

    So treasuries at 2% just might be an over reaction. If the market price takes a 20% dive, congrats. Yield inversion was cured. Treasuries are at 3%! Yep, safety is secure with a 20% loss of principal in treasuries.

    Just how high do you think bond prices will go? Buying high is not my idea of principal safety, it’s a risk changing AA due to volatility and might just be jumping out of the frying pan into the fire. Flight to safety at the wrong time leads to crowded trading that disappoints.
    Do you think bonds are overpriced?

    https://www.barrons.com/articles/treasury-bonds-are-now-riskier-than-stocks-51567816370?mod=past_editions

    #244678 Reply
    Avatar jacoavlu 
    Moderator
    Status: Physician, Small Business Owner
    Posts: 2374
    Joined: 03/01/2018

     it’s a risk changing AA due to volatility and might just be jumping out of the frying pan into the fire. Flight to safety at the wrong time leads to crowded trading that disappoints.

    Click to expand…

    Changing AA due to volatility suggests one didn’t put enough consideration into the AA in the first place. That’s why choosing ones AA is step one. “Flight to safety” shouldn’t come into play, because one shouldn’t be market timing. Bond prices, stock prices, I’ve no idea. Stay the course. Rebalance occasionally.

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

    #244687 Reply
    Liked by SLC OB, Tim
    Avatar Peds 
    Moderator
    Status: Physician
    Posts: 4405
    Joined: 01/08/2016

    Overpriced? No they are correctly priced.
    I have my allocation. No rebalance band yet.

    #244702 Reply
    Avatar Infinity 
    Participant
    Status: Physician
    Posts: 91
    Joined: 05/25/2019

    The more people run for safety, the more I am comfortable with stocks.

    Currently, there are so much money in cash, bonds, or gold comparing to stocks. The dumb money has already left the market.

    If they want to continue following the herds and go to bonds or gold, it is their choices.

    I would not put my long-term investment on asset that earns 2% yield.

    #244729 Reply
    Liked by PhotonsRGR8, Tim
    Avatar Dont_know_mind 
    Participant
    Status: Physician
    Posts: 944
    Joined: 11/21/2017

    My guess, which could be completely wrong:

    1. I feel government bonds are more overvalued than stocks and risk assets in general here. US government bonds less overvalued than European or Japanese

    2. I think the idea that US LT bonds will appreciate in a bear market will prove to be correct

    3. In the meantime, there is still time for a late stage melt-up and a pickup in inflation. In the short term, there is still time for the market to infuriate and I suspect it will.

    4. My safe funds are completely in MMF. I am completely averse to taking duration risk here. I feel the risk/reward is not acceptable.

    But different people will have different opinions and different strategies will work for different people.

    To me it depends on what can you hold comfortably hold under different conditions.

    Peds and Jacoavlu maybe able to hold their strategy, but I would find it difficult.

    I have a % devoted to non-risk assets in my portfolio, but they are not in LT bonds. Nor is it in gold or anything speculative with significant risk of loss of capital.

    #244733 Reply

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