https://www.fa-mag.com/news/3-reasons-assets-are-flooding-into-bond-etfs-45758.html3 Reasons Assets Are Flooding Into Bond ETFs
July 3, 2019 • Ron DeLegge
This year’s robust performance for the global stock market has stoked so much attention that it has distracted focus from other strong performing assets. Look no further than bonds, where fixed-income exchange-traded funds recently surpassed the $1 trillion mark in assets.
Comments
Conventional wisdom says the markets and the economy won’t go into the tank before the election. Conventional wisdom is often wrong. My best guess? Look out below!
NOTE: I didn't read the linked article, just my 2 cents worth.
Here is a one year chart for a decent intermediate term bond fund. The fund consists of investment grade corps and some government stuff. The fund moves long term in the upper 10% of its category.
One can view the bonds moves since the equity market whack Dec. 24, 2018. This fund's performance is typical of the better managed similar funds. The average return YTD runs about +7%.
I'm not surprised by either the equity or bond runs; as money is cheap. Also to the bond favor side currently is safe haven monies, not knowing what may come from DC land at any given "tweet". I also suspect bonds are being purchased, whether management really wants to or not; by pension funds and insurance companies to cross their fingers they'll have enough money to pay future obligations.
This very same play has taken place before; during a few periods after the market melt.
LOW yields, higher prices. This is where the bond money is being made, I personally don't care what the yield is, AS LONG as it is going down for price performance return. As with equities, this bond price run will have its life span, too.
And to the delight of the balanced funds that hold both the right equity and bonds; WELL, the best of both worlds right now, for full support of these type of funds, YES?
Peek through the trees, you're near a wonderful fire workers display tonight, eh?
Take care,
Catch
Hi Catch. I didn’t read the linked article either. I’m not into ETFs at all and have little interest in bonds - except to notice (accidentally) tonight the very low 10-year yield. Bonds generally do well (better than their coupon would suggest) in a declining rate environment, which they’ve had now going back 20-30 years - or about half our investing lifetimes! And, of course, lower rated bonds tend to track the equity market more than the investment grade bond market - so they’re not a reliable indicator on their own.
You may be right. On both the bond side and equity side it could be a case of “hold your nose” and plunge ahead as you would under normal circumstances. However, I think it begs credulity to think a savvy pension manager or insurance company portfolio manager would willingly forgo 20% equity returns to lock in 1.94% fixed on a 10 year note just because that’s how they’re supposed to invest.
Strikes me as a really unusual and unsustainable situation at the moment. But what do I know? The world turns over completely every 24 hours.
I feel, my asset allocation of 20% cash, 40% income and 40% equity affords me the flexability necessay to navagiate the current investment climate as it provides me sufficient inome, enough equity to hedge against inflation, and enough cash, if needed, for the unexpected along with ample cash to play a stock market pullback and it's rebound.
If you are investing in bonds for “income” than you (or your fund managers) are probably not holding a lot of U.S. government paper. My initial comment pertained to the U.S. 10 year, which if held 10 years to maturity should generate about 2% per year. I suspect you’re banking on a much healthier income stream than that 2%. There are bonds that produce much more than 2% of course. However, the lower you go on the credit scale the more closely linked to the fortunes of equities those bonds become. And the less immune to carnage during a steep stock market slide they become.
No other single investment class that I can think of so permeates the financial markets as do bonds. They affect mortgage rates and thus the affordability of housing. They affect auto loans and thus the automotive industry. They’re intrinsically linked to the dollar’s value in the foreign exchange markets which affects the prices we pay for everything from clothing and smart phones to gas and oil. And, for older investors, bond rates affect the ability to grow their assets and maintain a decent standard of living during the retirement years.
Regards,
Ted
I had to go back and check, but U.S. Treasury notes do not compound. Here’s an explanation:
“A $10,000 treasury note with a seven percent coupon rate pays an investor $700 per year interest in two semi-annual payments of $350 each. The interest from notes and bonds paid out to investors is simple and does not compound.”. https://www.sapling.com/8173138/interest-government-bonds-simple-compounded
So a 2% 10-year Treasury over its lifetime would yield only 20% total return. Had you bought the S&P index on January 1 and sold it at the end of June you’d already be farther ahead than had you purchased the 10-year Treasury on the same date but held it until June of 2029.
I realize that many invest in bonds of lower credit quality and having higher yields. And likely not many on the board hold their bonds to maturity. However, in terms of relative value (the 10 year bond vs. equities) something just doesn’t add up. If equities are supposed to offer a growth premium over safer government backed paper based on their added risk (known as risk premium) than that would suggest that either: (1) equity valuations are greatly overextended or interest rates are absurdly low.
(I suppose there’s a third possibility: that stocks were severely underpriced going into 2019 on a relative value basis. Does anyone seriously believe that?)
Is a 2% 10-year Treasury that you buy for $10K and that puts $100 into your pocket every six months, instead of your waiting 10 years to get any interest, really no better?
Consider a bank that pays monthly interest on a savings account. Its APY is greater than its APR; the calculation assumes you'll reinvest the interest though you're under no obligation to do so. Now consider a second bank that pays annual interest. Its APY is equal to its APR, because you've got only one payment per year. There's no opportunity to compound within the year.
That's the same as the situation with coupon bonds. The hypothetical total return (yield to maturity or YTM), is calculated like APY - it assumes that you'll reinvest the coupons (interest) at the same rate until maturity. Of course if you don't, then you'll only get the coupon rate (analogous to APR). But you'll have that cash in your pocket, cash that could be earning more interest.
Of course, looking at the situation I was trying to illustrate, at the end of 6 months the equity investor had a 20% gain in his pocket and the guy with the Treasury bond had a 1% gain.
Now, if the equity investor decides to reinvest his 20% gain back into equities (in effect seek to compound his return) there’s no guarantee he’ll make any money on the reinvested proceeds. He might even loose money. To the contrary, however, the bond investor’s 2% yearly return (*on his original investment only) is guaranteed by the government.
I’m not sure what all this proves - if anything. But thanks for the explanation.
-
P.S. To answer your question ... Reinvesting that 2% payout on your own might be a “better” deal (if rates were to rise) but it might not be better (if rates were to falll even lower and you had to reinvest for less than a 2% yield.)
You noted: "looking at the situation I was trying to illustrate, at the end of 6 months the equity investor had a 20% gain in his pocket and the guy with the Treasury bond had a 1% gain"
>>> Uh, no on the 1% gain for 6 months (unless one is holding an individual bond and viewing yield only).
investment grade bonds LQD vs SPY 6 month chart
Many bond fund investors for the past 6 months have had decent returns, as yields have decreased.........meaning prices moving up, yes?.
A few selected choices for total returns for the past 6 months:
--- LTPZ, Pimco long term TIPS = +11.6%
--- ZROZ, Zero coupon bonds = +14,8%
--- LQD, corp. bond etf = +11.8%
--- EDV, Vanguard extended duration Treasury = +13.5%
--- IEF, intermediate duration Treasury = +6.4%
***bonds having a good start this Monday morning, July 8
Take care,
Catch