Bonds are getting stupid everywhere

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dnaumov
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Bonds are getting stupid everywhere

Post by dnaumov »

I am a semi-boglehead (my portfolio core is broad stock and bond index funds, but majority of portfolio is individual stocks, long-term holdings, paying attention to costs and taxes, etc) european investor and I would like to complain about bonds.

My perspective is european, but I am obviously following the US market as well and feel that it's seeing a very similar problem. Basically, as much as I would like to hold bonds in my portfolio to use as "dry powder" when stocks decline, they are becoming a stupid proposition everywhere, globally. I would divide goverment bonds into 3 categories:

1) Countries that are considered very safe, with yields driven into very low nominal rates or into outright negative territory. This is countries like US, Germany, Finland, Switzerland and Netherlands and they offer essentially "reward-free risk". What's the point of these bonds when you can just hold cash?
2) Countries that are still considered safe, with moderate yields, offering something along the lines of 2-4%. The problem is, most, if not all of these countries are massively (in my opinion) underestimating the risks. A great example of this would be France.
3) Emerging market countries that offer great yields, but seem to default on their debt every 10-20 years.

Another problem is that historically-looking, yields of 6-8% are really nothing special and nothing out of the ordinary at all for most developed countries. Yet, many countries are now so overdebted that if their debt yield reaches 6-7%, there is now panic on the streets because with the debt load so enormous, servicing the debt becomes a huge fiscal problem (see Spain and Italy).

What does one do in an environment like this?
chicagobear
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Re: Bonds are getting stupid everywhere

Post by chicagobear »

I only hold stocks, gold and cash at the present time. Long term bonds are not worth the risk of increasing rates which will happen at some point.
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LH
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Re: Bonds are getting stupid everywhere

Post by LH »

I stay the course.

I do not think one can time the bond market, or any market.

I think that by staying in bonds, yes, I may take a hit..... Interest rates may rise a lot.

I think that by staying in stocks, yes, I may take a hit..... Maybe Soviergn debt really explodes, and great depression II occurs, and I THANK G>D I have bonds as stocks plummet 90 percent and stay down for years.

I just do not see anything special now. Its always "special" its stagflation, its soviergn debt, its dot com, its whatever.....

Its the market.

I stay the course in response. I pick an asset mix that I think I can take the hit with on either side (stocks or bonds or emerging, or whatever sucks and does horribly), and also, and less thought of, one I could ride an 80s 90s type stock BOOM with without going higher stocks, lower bonds, just before a "dotcom II" 2000 type event (or whatever) hits..... As it inevitably will. Maybe bonds, maybe hyperinflation, maybe prolonged japan like deflation....

No one knows.

I stay the course. I will take hits, that is gauranteed. Those squiggly lines are brutal reality when one is actually at that point in time, the 1929-193x was brutally harsh, to us, looking at a dow chart, we have no clue, just a squiggle.

If you think you can time, (or pick) leverage up, become a billionaire : )

If your like me, and cannot time, cannot pick, you pick an "all weather" AA, you stay the course, and expectantly beat the heck out of the timers and pickers in the end.
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Re: Bonds are getting stupid everywhere

Post by dnaumov »

The only "expected" return of bonds is their yield, everything else is speculation. If yields were at say, 5%, and I would be making an investment decision based on my perception of what direction the yields are going, that would be market timing and speculation. By looking at the yield, you can essentially see what kind of deal you are getting (and you can't with stocks). It's not market timing if you are simply refusing to take a crap deal.
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LH
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Re: Bonds are getting stupid everywhere

Post by LH »

dnaumov wrote:The only "expected" return of bonds is their yield, everything else is speculation. If yields were at say, 5%, and I would be making an investment decision based on my perception of what direction the yields are going, that would be market timing and speculation. By looking at the yield, you can essentially see what kind of deal you are getting (and you can't with stocks). It's not market timing if you are simply refusing to take a crap deal.
Opportunity cost.

By not investing in bonds, say tips, you have to do something with the money. If you put it in stocks, instead, and they tank for 20 years.......

It is timing. Everything is relative. The so called "crap" deal of bonds may be what you wish you had after great depression ii.

Brings to mind a quote, and actually several quotes, from book " diary of great depression"

http://www.amazon.com/The-Great-Depress ... 158648799X

Great book, I think several times, he talks about just what holding some bonds would have meant.

Crap deal...... You know something the market doesn't?

Also reminds me of the canard that your not a currency trader until you have be against Japan and lost...rinse repeat, over so 20 years... If I have the canard right.


Also pimco, heck gross KNEW bonds were crap deal... Well..... Hmmmmm....

Markets can be tough.

Its return of principle (or most of it as some yields negative, manipulation caveats too) vs return on principle.

Bonds are crap.... So then, no bonds, now, then you must decide, bonds are no longer crap, then get back in?? Hmmmm... What is that?

That is timing.


If bonds are crap, or like 80 years ago,bonds are the best thing ever, time will tell.
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nisiprius
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Re: Bonds are getting stupid everywhere

Post by nisiprius »

dnaumov wrote:What does one do in an environment like this?
You say "sometimes it happens" and get on with life. Nobody promised you a rose garden. I am amazed by the feeling of entitlement people have, as if there were some guarantee that you could always have good investments.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
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Re: Bonds are getting stupid everywhere

Post by Johm221122 »

chicagobear wrote:I only hold stocks, gold and cash at the present time. Long term bonds are not worth the risk of increasing rates which will happen at some point.
Permanent portfolio?
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dnaumov
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Re: Bonds are getting stupid everywhere

Post by dnaumov »

Johm221122 wrote:
chicagobear wrote:I only hold stocks, gold and cash at the present time. Long term bonds are not worth the risk of increasing rates which will happen at some point.
Permanent portfolio?
1/4 of the Permanent Portfolio is precisely long term bonds.
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Re: Bonds are getting stupid everywhere

Post by rmelvey »

30 year Treasury bonds have saved my bacon enormously. People were saying what you said two years ago, and I am very glad that I stuck to my plan. My thoughts: the future is unknowable, hedge accordingly.
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Re: Bonds are getting stupid everywhere

Post by BlueEars »

dnaumov wrote:The only "expected" return of bonds is their yield, everything else is speculation. If yields were at say, 5%, and I would be making an investment decision based on my perception of what direction the yields are going, that would be market timing and speculation. By looking at the yield, you can essentially see what kind of deal you are getting (and you can't with stocks). It's not market timing if you are simply refusing to take a crap deal.
I think you may have a different perspective because you are European and have to consider currency risks there. Right now the Euro is a bit troubled but who knows the future.

One scenario, bond rates rise but not sharply. They rise gradually over several years. I was impressed that the IMF director wanted to tell the US Fed to let things go up very gradually -- I think she mentioned over 10 years. The Fed has definitely tried to manage a gradual rate rise expectation, I think. Who knows what will actually happen.

When we look at the US rates back in the 1950's and into the early 1970's they did rise, but gradually. By moving between cash and 5 year Treasuries in a controlled fashion, it was possible to get reasonable (but not great) real returns.
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Re: Bonds are getting stupid everywhere

Post by Johm221122 »

dnaumov wrote:
Johm221122 wrote:
chicagobear wrote:I only hold stocks, gold and cash at the present time. Long term bonds are not worth the risk of increasing rates which will happen at some point.
Permanent portfolio?
1/4 of the Permanent Portfolio is precisely long term bonds.
I thought OP may be market timing PP :D
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Re: Bonds are getting stupid everywhere

Post by sage_joch »

LH wrote:Crap deal...... You know something the market doesn't?
He was comparing bonds to cash. It seems like cash has nearly the same yield as bonds, without the rate risk. You can speculate with bonds and hope for capital gains, but their fundamental value is ultimately what they yield. So why does anyone buy bonds? Perhaps they're a safer place to store large amounts of money (if you're American, it might be safer to store money in bonds, once you surpass the FDIC threshold). If that's the case, cash might be a superior alternative to bonds for the vast majority of investors. Am I missing something?
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Re: Bonds are getting stupid everywhere

Post by TomatoTomahto »

BlueEars wrote:I think you may have a different perspective because you are European and have to consider currency risks there. Right now the Euro is a bit troubled but who knows the future.
Don't we all have currency risk of one sort or another, unless we have a very constricted portfolio?
I get the FI part but not the RE part of FIRE.
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Re: Bonds are getting stupid everywhere

Post by ilmartello »

nisiprius wrote:
dnaumov wrote:What does one do in an environment like this?
You say "sometimes it happens" and get on with life. Nobody promised you a rose garden. I am amazed by the feeling of entitlement people have, as if there were some guarantee that you could always have good investments.

i didn't think positive real yields are in the bill of rights either
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Re: Bonds are getting stupid everywhere

Post by steve roy »

nisiprius wrote:
dnaumov wrote:What does one do in an environment like this?
You say "sometimes it happens" and get on with life. Nobody promised you a rose garden. I am amazed by the feeling of entitlement people have, as if there were some guarantee that you could always have good investments.
With 72% bonds and 28% equities, here's Steve Roy & spouse's investment return from Vanguard:

1 year -- .6%

3 years -- 5%

5 years -- 2.7%

We're playing it conservative, we're still in the accumulation phase, and I don't sweat the day-to-day surface noise (although my wife does.) I strive to invest wisely and well, but I always remember the novelist Stephen King's words: "When you die, you die broke."
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Re: Bonds are getting stupid everywhere

Post by MWCA »

rmelvey wrote:30 year Treasury bonds have saved my bacon enormously. People were saying what you said two years ago, and I am very glad that I stuck to my plan. My thoughts: the future is unknowable, hedge accordingly.
For whatever reason people think they can time bonds. You are right people were sure as the sun would rise interest rates were going up. Sure, it will happen eventually let me know when.. :D
We are all worms. But I believe that I am a glow-worm.
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LH
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Re: Bonds are getting stupid everywhere

Post by LH »

sage_joch wrote:
LH wrote:Crap deal...... You know something the market doesn't?
He was comparing bonds to cash. It seems like cash has nearly the same yield as bonds, without the rate risk. You can speculate with bonds and hope for capital gains, but their fundamental value is ultimately what they yield. So why does anyone buy bonds? Perhaps they're a safer place to store large amounts of money (if you're American, it might be safer to store money in bonds, once you surpass the FDIC threshold). If that's the case, cash might be a superior alternative to bonds for the vast majority of investors. Am I missing something?
Well its unclear to me what he was comparing bonds to, but TIPS provides inflation protection, and if deflation occurs, nothing happens to TIPS versus cash.... So TIPS are expectationally superior to cash. I bonds are definitely superior, since they cannot give negative yeild, as some tips have recently.

Cash in a savings account or in a mattress is losing real value as we speak due to inflation. Humans all think in nominal unfortunately : ) Its not nominal yield, its real yield thats important.
plnelson
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Re: Bonds are getting stupid everywhere

Post by plnelson »

dnaumov wrote:I am a semi-boglehead (my portfolio core is broad stock and bond index funds, but majority of portfolio is individual stocks, long-term holdings, paying attention to costs and taxes, etc) european investor and I would like to complain about bonds.

My perspective is european, but I am obviously following the US market as well and feel that it's seeing a very similar problem. Basically, as much as I would like to hold bonds in my portfolio to use as "dry powder" when stocks decline, they are becoming a stupid proposition everywhere, globally. I would divide goverment bonds into 3 categories:

1) Countries that are considered very safe, with yields driven into very low nominal rates or into outright negative territory. This is countries like US, Germany, Finland, Switzerland and Netherlands and they offer essentially "reward-free risk". What's the point of these bonds when you can just hold cash?
2) Countries that are still considered safe, with moderate yields, offering something along the lines of 2-4%. The problem is, most, if not all of these countries are massively (in my opinion) underestimating the risks. A great example of this would be France.
3) Emerging market countries that offer great yields, but seem to default on their debt every 10-20 years.

Another problem is that historically-looking, yields of 6-8% are really nothing special and nothing out of the ordinary at all for most developed countries. Yet, many countries are now so overdebted that if their debt yield reaches 6-7%, there is now panic on the streets because with the debt load so enormous, servicing the debt becomes a huge fiscal problem (see Spain and Italy).

What does one do in an environment like this?
There's nothing you can do that isn't purely speculative. The advantage of bonds over cash are:

1. If things get even worse their value could go up. If you are holding 10 yr US Treasuries with a current nominal yield of 1.7% (or whatever it is - I haven't checked in the last few days) and things get so bad in a year that newly-auctioned Treasuries are yielding negative 5%, the ones you bought this year will go up in value and you can sell them at a profit. By contrast your cash won't go up.

2. Several governments issue inflation-adjusted securities (e.g., US TIPS). Their yield is still negative but at least you know by how much. I just bought 10 year TIPS at a negative .637% yield. But that sets a floor under my losses. Governments around the world are in hock up their ears, and there is a growing chorus of voices including prominent economists who are advocating inflating our way out of this mess. If that happens your cash ain't nothing but trash (as they say in the song) - better to have negative-yielding TIPS.

Of course all of this is speculative. American Bogleheads who think that by having a disciplined asset-allocation plan means they're not just gambling are fooling themselves. The ONLY difference between the stock and bond markets and Las Vegas is that in the latter they have free drinks and topless showgirls.
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Re: Bonds are getting stupid everywhere

Post by Sheepdog »

steve roy wrote:
With 72% bonds and 28% equities, here's Steve Roy & spouse's investment return from Vanguard:

5 year -- .6%

3 years -- 5%

1 years -- 2.7%

We're playing it conservative, we're still in the accumulation phase, and I don't sweat the day-to-day surface noise (although my wife does.) I strive to invest wisely and well, but I always remember the novelist Stephen King's words: "When you die, you die broke."
FYI
Your post made me curious. I looked at what Vanguard had as my rate of return in the same periods with my similar allocation at Vanguard of 71.1% bonds and 28.9% equities. The investments are in Wellesley and Target Income.
5 years.....4.3%
3 years.....11.2%
1 year......7.9%
(I also have I Bonds not included above bringing my stock allocation down to 22%)
It has been a good 5 years with this allocation. The future? Where else can a retiree go? Staying the course of course, of course!
Unless you try to do something beyond what you have already mastered you will never grow. (Ralph Waldo Emerson)
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Re: Bonds are getting stupid everywhere

Post by dyangu »

Short term US bonds are indeed return free risk, as investors like myself can find CDs and I-Bonds with higher yield. Extremely low yielding foreign bonds (Japanese, German, etc) are also return free risk for US investors, as the yield is priced by investors who are paying for a safe store of that particular currency.

Long term US bonds do offer return for risk. It is entirely possible that the 30 year will drop to 1% and when you renew your fixed deposits 7 years from now, the rates are even lower. You can also rebalance between long term bonds and stocks. The OP is an European investor, so maybe some long term German bonds will serve a similar purposed.

Emerging market bonds also offer return for risk. I don't think the default risk of emerging markets is that much higher than, say, France. The currency risk is high, but you can buy dollar denominated emerging market bonds with slightly lower yield.

Don't forget, the total bond market also includes corporate bonds and mortgage backed securities.

This part is truly troubling:
dnaumov wrote: Another problem is that historically-looking, yields of 6-8% are really nothing special and nothing out of the ordinary at all for most developed countries. Yet, many countries are now so overdebted that if their debt yield reaches 6-7%, there is now panic on the streets because with the debt load so enormous, servicing the debt becomes a huge fiscal problem (see Spain and Italy).
Inflation today is a bit lower than historical average but still, governments should not be crippled by a 7% interest rate.
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Re: Bonds are getting stupid everywhere

Post by plnelson »

Sheepdog wrote: Your post made me curious. I looked at what Vanguard had as my rate of return in the same periods with my similar allocation at Vanguard of 71.1% bonds and 28.9% equities. The investments are in Wellesley and Target Income.
5 years.....4.3%
3 years.....11.2%
1 year......7.9%
(I also have I Bonds not included above bringing my stock allocation down to 22%)
It has been a good 5 years with this allocation. The future? Where else can a retiree go? Staying the course of course, of course!
The returns of bond funds in recent years reflect steadily falling rates (hence higher bond prices). But current rates are at record lows so it's unrealistic to assume rates will continue to fall in the future and keep pushing bond prices up. But that doesn't mean rates will go up either - the Fed has promised to keep rates low for awhile. Obviously anything "could" happen but I'd like to see your (or someone's) plausible scenario for bond funds continuing to perform as they have in recent years.
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Re: Bonds are getting stupid everywhere

Post by sage_joch »

LH wrote:
sage_joch wrote:
LH wrote:Crap deal...... You know something the market doesn't?
He was comparing bonds to cash. It seems like cash has nearly the same yield as bonds, without the rate risk. You can speculate with bonds and hope for capital gains, but their fundamental value is ultimately what they yield. So why does anyone buy bonds? Perhaps they're a safer place to store large amounts of money (if you're American, it might be safer to store money in bonds, once you surpass the FDIC threshold). If that's the case, cash might be a superior alternative to bonds for the vast majority of investors. Am I missing something?
Well its unclear to me what he was comparing bonds to, but TIPS provides inflation protection, and if deflation occurs, nothing happens to TIPS versus cash.... So TIPS are expectationally superior to cash. I bonds are definitely superior, since they cannot give negative yeild, as some tips have recently.

Cash in a savings account or in a mattress is losing real value as we speak due to inflation. Humans all think in nominal unfortunately : ) Its not nominal yield, its real yield thats important.
Thanks for the info. If TIPS can have a negative yield then it seems like cash might be better in a deflationary environment? Also, my main aversion to I bonds is they can't (as far as I know) be purchased through Vanguard. Is it time-consuming to buy/manage those, or is it relatively painless? Can it all be done electronically?
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Re: Bonds are getting stupid everywhere

Post by NateW »

[/quote]The returns of bond funds in recent years reflect steadily falling rates (hence higher bond prices). But current rates are at record lows so it's unrealistic to assume rates will continue to fall in the future and keep pushing bond prices up. But that doesn't mean rates will go up either - the Fed has promised to keep rates low for awhile. Obviously anything "could" happen but I'd like to see your (or someone's) plausible scenario for bond funds continuing to perform as they have in recent years.[/quote]

I've noticed that VG Total Bond Market has been rising in price over the past few weeks. This is happening even though the interest rate (as measured on the 10-year treasury yield) is not falling any more. I imagine the rise in price is due to more and more people buying into the bond fund. I wonder how much longer this can go on and how high BND will go. It does seem to defy gravity. On the flip side, stocks don't seem to be falling in value, but are kind of stuck.

http://www.google.com/finance?q=NYSEARCA:BND#

--Nate
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Re: Bonds are getting stupid everywhere

Post by TomatoTomahto »

sage_joch wrote:Also, my main aversion to I bonds is they can't (as far as I know) be purchased through Vanguard. Is it time-consuming to buy/manage those, or is it relatively painless? Can it all be done electronically?
You can only buy I-bonds through Treasury Direct, which isn't a big hassle. The major drawback to I-bonds is the $10,000 annual limit. That said, it is relatively painless to open a TD account and to order bonds (including TIPS) there.
I get the FI part but not the RE part of FIRE.
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Re: Bonds are getting stupid everywhere

Post by wwhan »

Looking at the total bond market (VBMFX) from 1990 on, it looks like the Grand tetons.

http://finance.yahoo.com/echarts?s=VBMF ... undefined;

For total bond market, 5% drop happens quickly, 10% drop seems to take a little longer. It is definitely less rocky than the stock market.

http://finance.yahoo.com/echarts?s=VTSM ... undefined;
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Re: Bonds are getting stupid everywhere

Post by magellan »

NateW wrote:I've noticed that VG Total Bond Market has been rising in price over the past few weeks. This is happening even though the interest rate (as measured on the 10-year treasury yield) is not falling any more.
Plotting BND against VCIT (intermediate term corporate) might give at least a partial answer. I haven't been following things very closely lately, so maybe I'm wrong, but it might be that credit spreads are tightening and the increase in price has to do with something happening with corporates.

Jim
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Re: Bonds are getting stupid everywhere

Post by epilnk »

My long treasury fund has earned my gratitude. I expect it to take a hit, and I've been waiting for that for a couple of years now. But the stupid fund won't go down. At our last portfolio review I decided to adjust our average duration downward (I hadn't done this for years and we're getting older, after all), so I did all of our rebalancing out of the long funds. I don't recall the exact date (end of Feb or beginning of March) but in just the last few months I see that my long treasury fund is up about 11%. I'm pretty sure I read around that time that there was no sense in keeping this fund at all.

Stupid bonds.
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Re: Bonds are getting stupid everywhere

Post by plnelson »

sage_joch wrote: Thanks for the info. If TIPS can have a negative yield then it seems like cash might be better in a deflationary environment? Also, my main aversion to I bonds is they can't (as far as I know) be purchased through Vanguard. Is it time-consuming to buy/manage those, or is it relatively painless? Can it all be done electronically?

Series I are purchased through Treasury Direct - I have no idea how a foreign national would do it. But Series I are really for small investors - the most you can buy is $10K /year.
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