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Who will keep buying bonds, so that we may continue to retain capital appreciation ???

WELL.......

Negative rates are supposed to stimulate the economy, incentivising investment by making it less attractive to hold cash and spurring demand by making credit cheaper. But evidence of the theory working in practice is far from conclusive. Certainly Europe’s bankers are squealing, as they feel margins squeezed by low rates on lending and a reluctance to pass on negative rates to depositors.

Why did Europe promote negative interest rates?


Our Federal Reserve system and Treasury may operate within boundaries that are not available to the ECB (European Central Bank) functions, as the euro area's fiscal and financial rules are not similar. I will not expand this difference here. One may readily discover facts of their choice.
Suffice to note that the U.S. moved to Quantitative Easing, while the Euro Zone remained with a policy of austerity after the market melt in 2008. Many here will recall the rough times in Europe for several years following the melt.

As to investment grade bonds today
. IMHO, one can not (yet) invest in bond funds that will allow for the steady eddy yield and pricing from the days of yesteryear; to take one's investment into the future without a care and the feeling of protection against the nasty's. Keeping in mind, that as long as there are buyers, don't be concerned with the yield; as your pricing/capital appreciation will out perform the yield expected.

My own question(s) to these type of bonds, is how long will purchases remain in place; IF the yields continue to trend to the negative zone??? Purchasers being the big investment houses, hedge funds, pension funds, insurance companies, sovereign wealth funds and individuals, etc.

With some of this in mind, this house has not been inclined to purchase investment grade bond fund(s) for any sake of yield; as this is third place in thought. First and second place belong to a cushion against the current political strains globally and what this may also bring for global equity(s). Yes, a protective place generating some yield and more so; since the mini melt in December of 2018, decent price appreciation. Early 2018 found a U.S. equity blip in February and a few rough patches until the mini melt in December. Early equity market tremors? I won't begin to suggest this knowledge; but money continues to run to IG bonds.

IF U.S. yields continue downward for whatever reason(s), what are the impacts?

--- CD's.....the folks who do not and/or will not invest in the markets, and maintain monies in CD's
--- financial institutions.....will they be able to maintain a proper spread (deposits/loans) to obtain a profit?
--- consumer loans.....mortgage, auto, etc.; would consumers take on too much cheap debt?
--- corporate bond issuance..... more or too much debt, and for what purpose?
--- private pension funding
--- insurance company(s) products, including annuities
and more.

I remain with the thought, as from 2009; This Time Is Different, at least for my investing period.
Your thoughts please.
Thank you for allowing my self therapy.:)
Catch

Comments

  • I don't believe it. This must be the first time in at least ten years that Ted has actually approved of a post by catch22!
  • Hi sir catch22... Good post... If you buy bonds what would you buy??... Equities maybe still too high imho.. If retirement already you need st least ~50s% in your portfolio otherwise loose too much w another crash
  • edited September 10
    Sounds like Catch has a case of Analysis Paralysis,


  • @johnN You noted: "Equities maybe still too high imho"

    From a technical view, and only one view type; as technical folks have their own favorite views of the numbers and what they mean, I offer two charts. These charts are set for 5 years of pricing data. One theory is that Relative Strength below 30 is oversold (buy, buy, buy) and over 70 is overbought (handle with caution). This RSI is shown near the top of the chart, and should appear as TEAL in color when over 70. BAGIX (a plain intermediate bond fund), in theory; should be sold, and at the least, not purchased at this point. BUT, what the heck do I/we know. The RSI is merely a gauge of buys and sells to obtain a price point over time. Obviously, the bond types in this fund have had folks buying for awhile, yes?

    As to ITOT (U.S. market etf), which is a twin of Vanguard's VTI for returns; one does not find at this time a RSI that suggests this market area is overbought (not too hot too handle at this time).

    I need to leave this as is for now..... other time commitments; but wanted to offer a view regarding your above statement.


    BAGIX , 5 year chart

    ITOT , 5 year chart
  • Hi @ hank
    Ah, yes. I'm familiar with this AD. We've been there and done that, eh?
  • Who knows. This maybe last uprise before 'double dip' happens
  • edited September 10
    catch22 said:

    Hi @ hank
    Ah, yes. I'm familiar with this AD. We've been there and done that, eh?

    Agree @Catch. Re the AD, I love it. Been looking for an occasion to toss it out here.

    Apparently there’s quite a few investors asking the same sorts of questions you are. But I guess the old adage to “buy good funds and hang on for the long run” is still true. Otherwise one’s likely to end up on some high-priced shrink’s couch.:)

    Regards
  • I suppose countries can offer negative yield bonds and they apparently do, but what if no one buys them? I would guess they would have to give up on that idea and up the yield. I see it as a current (experimental) knob to turn, but not a long term trend. On the other hand, what the hell do I know about global economics - nothing really.
  • edited September 10
    @MikeM,

    I don’t know if anyone saw or read it, but several days ago I posted a thread on the question of how nations and individuals might react in a world where virtually all rates were negative.

    In a nutshell (not to be confused with fruitcake), some are beginning to suggest that nations will do away with paper currencies completely, thus requiring all money to be invested or on deposit somewhere. This would prevent individuals from stockpiling loads of paper currency in order to preserve its face value.

    Interesting to think about.
  • @hank Yes, to your post. I've been running the roads and failed to respond. I will do a read again today and know that you spent some good thinking time with the post.
  • edited September 10
    @johnN

    You asked: "If you buy bonds what would you buy??"

    First note: We're full up here with our current allotment of investment grade bonds. With this in mind; and IF the equity markets begin a serious down trend, we would monitor the affect on U.S. government issues. Enough risk off money could still further buy these type of issues and provide decent capital appreciation via price performance.

    Second note: Our path with bonds and any other holdings will not match anyone else's investment path. Too many variables; as with your and your Mom's accounts. Without full knowledge of monetary positions and taxable statuses, tis impossible, even for an adviser, to imply suggestions. Our investment path is not fixed in stone and remains flexible. At some point in the near future, we will give up the "thinking" about what our composition should be for the portfolio. The composition, although still a conscious choice; may be as simple as FBALX.
  • "The Federal Reserve should get our rates down to zero or less".............

    POTUS tweet early this morning.


    Well, folks; this should boost your bond returns for a tiny bit, once it happens.
  • I think this was my favorite reply to the tweet:
    Replying to @realDonaldTrump
    Geez, no wonder you had to declare bankruptcy so many times.
  • PK tweet just now, and yes, the stupidity is most striking, and more important it is so from advisers:

    Quite aside from his demand that the Fed adopt emergency stimulus measures when the unemployment rate is 3.7%, Trump's tirade included the idea that the US should "refinance our debt." Why is that a stupid, ignorant remark? 1/

    The answer is that federal debt isn't like a mortgage you can prepay; it's bonds that promise a fixed yield until maturity. The government could issue new bonds and buy the old bonds back, but this wouldn't reduce interest payments at all ... 2/

    .. because while there are outstanding bonds yielding more than current rates — say, 10-year bonds yielding 3 percent — those bonds sell at a premium. So buying back, say, $1 trillion in debt wld cost more than $1 trillion — enough more that the interest wld be the same 3/
  • Callable vs. noncallable. Isn't that the second thing you learn about bonds after finding out that they're loans?

    If only the US could issue $1 trillion in bonds paying negative 3 percent, then we'd have $2 trillion in debt, but the net cost to service would be 3% x $1T - 3% x $1T = 0. Voila, problem solved. He just didn't demand a low enough interest rate to make it work.
  • edited September 11
    catch22 said:

    "The Federal Reserve should get our rates down to zero or less".............
    POTUS tweet early this morning.
    Well, folks; this should boost your bond returns for a tiny bit, once it happens.

    Wait a minute ... that would appear be a great time to refinance your home. With a negative rate mortgage, wouldn’t the bank have to start sending you monthly interest payments? What a deal.
  • Hi @hank
    Yes, part of the reason for the post. Aside from profits from IG bonds, where do all of these other areas of interest rate sensitive land ???
    msf's post about callable bonds is also very valid. I checked before I posted, but could not find any data for the percentage of bonds in issuance that are callable?
  • edited September 12
    Should interest rates pull back to where cash interest rates are paying next to nothing then I plan to reduce the amout of cash held within my portfolio from 20% to 15% and then raise my income area's allocation from 40% to 45%. Thus, I'll become a buyer of bonds because of the low yield environment for cash. My portfolio's equity allocation will remain at 40%.

    With this, I'll reduce the amount held in my CD Ladder (cash area) and increase the amount held in my bonds funds (income area). This could take place, for me, as early as December when I have a CD maturing within my CD Ladder and continue until I have reached the desired target asset allocation for my portfolio. Currently, my CD Ladder accounts for about 10% of my overall portfolio's value, savings at about 5% with the residual being in demand cash.
  • The ECB announced monetary policy this morning. Based upon what I think/see, is that having investments in IG bond funds should find a decent uptick in pricing (profit). Whether this holds for the day or the remainder of the week, I don't know, of course. I suspect that just when some folks think it is time to take big profits in the bond run from last year; that these changes come about and keep them scratching their heads.

    The below link is for multiple stories, if you choose to view/read to help sort out this complex policy; which is a combo rate cut for some areas and QE into broad areas, including private sector corporate bond purchases (this is not new, but extended).

    Catalog this continuing story of central banks and their actions under: Fun times in Bondland.

    ECB rate decision

    Note: POTUS had commented about the ECB policy. His tweet link is found a few comment boxes back in this thread.

    Smile on.
    Catch
  • edited September 12
    There has been a noticeable uptick in long bond yields recently and it continues today. With equities nearing all time highs and junk bonds at all time highs and investors all in on the negative rate scenario, I hope this blip up doesn’t become anything more - like 2% and more on the 10 year. Actually that might not be all bad and indicative of a much stronger economy than investors have priced in.
  • edited September 14
    @Catch22
    --- corporate bond issuance..... more or too much debt, and for what purpose?
    Looks to me like a lot of corporate debt is in the process of being recalled and replaced with cheaper debt compliments of hot money running from lower stock prices. Could this be possible?
  • edited September 13
    wrong about the fed, from a wrongheaded sense of emergency

    https://www.nytimes.com/2019/09/12/opinion/trump-economy.html

    plus comedy!

    Trump thinks that federal debt is like a business loan, which you can pay down early to take advantage of lower interest rates. He’s clearly unaware that federal debt actually consists of bonds, which can’t be prepaid (which is one reason interest rates on federal debt are always lower than, say, rates on home mortgages). That is, he imagines that the government’s finances can be managed as if the U.S. were a casino or a golf course, and it never occurred to him to ask anyone at Treasury whether that’s how it works.

    (Of course someone is going to point out that fed can repurchase some bonds.)
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