Will you buy Total Bond with a negative yield?

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strongboy2005
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Will you buy Total Bond with a negative yield?

Post by strongboy2005 » Sun Jul 14, 2019 7:10 pm

As the title suggests, would you consider including a negative yielding total bond fund in your asset allocation? If not, at what yield would you consider pulling the plug? Less than 1%? 0%. I ask because this is becoming reality in other parts of the world. My current AA is 50:50 per my IPS. It seems there is nothing stocks could do to shake that up, but paying money for the “opportunity” to hold bonds is so shocking that I would probably dump all my bonds and stay 50% cash if that ever happened. That got me thinking that maybe the yield doesn’t need to go negative to think that way, just sufficiently and ridiculously low. So, what would you do if BND goes to a negative yield?

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HomerJ
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Re: Will you buy Total Bond with a negative yield?

Post by HomerJ » Sun Jul 14, 2019 7:14 pm

Of course not.
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Thesaints
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Re: Will you buy Total Bond with a negative yield?

Post by Thesaints » Sun Jul 14, 2019 7:15 pm

Why would you get <0%, when you can get a CD at 2.50% and over ?
Wall Street can't buy FDIC insured CD's, but you can. The one time small retail investors have an advantage let's not throw it away, right ?

bluquark
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Re: Will you buy Total Bond with a negative yield?

Post by bluquark » Sun Jul 14, 2019 7:22 pm

Thesaints wrote:
Sun Jul 14, 2019 7:15 pm
Why would you get <0%, when you can get a CD at 2.50% and over ?
Wall Street can't buy FDIC insured CD's, but you can. The one time small retail investors have an advantage let's not throw it away, right ?
Those CDs won't be on offer anymore if yields go negative. I hear some bank accounts in Europe also charge negative interest rates. So it would really depend on the state of those alternatives in this hypothetical future.

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Re: Will you buy Total Bond with a negative yield?

Post by Thesaints » Sun Jul 14, 2019 7:24 pm

I have never seen CD at a negative rate. Not in the US, nor in Europe.

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Re: Will you buy Total Bond with a negative yield?

Post by lack_ey » Sun Jul 14, 2019 7:25 pm

I'd probably not use total bond at 0%, but it depends on what credit spreads are, what the composition of total bond is at the time, how steep the yield curve is, the relationship between term and equity risk, etc. And most importantly, what banks and maybe credit unions are offering on savings accounts and CDs.

So again it depends on all of those kinds of things as to whether it's worthwhile at 1% or anything else.


Back when short rates were basically zero, I suggested using savings accounts at ~1% rather than short-term bonds, and (for those who can be bothered and want to optimize very slightly), not using total bond but rather a combination of cash and then intermediate/long bonds. That's not because short bond yields were shocking, but that there was an opportunity for higher yield without higher risk, at least for retail investors who fit under FDIC insurance limits.

To be honest, even if yields are 4% let's say on a 5-year Treasury, and you were planning on holding a significant chunk of fixed income in an IRA or no-sales-tax state, if 5-year CD yields are 5% then there's an opportunity for investors.

This is all just fixed income, and cash is basically like zero-duration bonds without credit risk. It's not to me a big distinction between cash and bonds, particularly for allocations with non-trivial equity or other significant risk exposure, especially outside of the riskier parts of fixed income.

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Mountain Doc
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Re: Will you buy Total Bond with a negative yield?

Post by Mountain Doc » Sun Jul 14, 2019 7:38 pm

It would depend on what other options existed at the time. If banks were offering 0% or higher while Total Bond was negative, I would likely leave my entire bond position in savings accounts or CDs.

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Portfolio7
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Re: Will you buy Total Bond with a negative yield?

Post by Portfolio7 » Sun Jul 14, 2019 7:50 pm

The advice I received at this site convinced me to move most of our FI to a well structured and relatively high return Stable Value fund. I think that has worked out pretty well thus far.

Therefore we're already almost entirely out of typical total bond funds, and in what amounts to a very specialized insured bond fund. The exception is that DW has 90% VMNVX, 10% Bnd in her current employer 401K. This 'should' have the variability of a much more conservative portfolio with higher overall returns, higher sharpe ratio/sortino and much lower drawdowns. The 1Q results were very near expectations, at 9.4%... I haven't looked at 2Q nums yet.

If bond rates went negative, even SV; then I admit, we'd be likely to adjust. I suspect we'd strongly consider going 100% global min volatility (mostly VMNVX) but it depends on what other options were out there.
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columbia
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Re: Will you buy Total Bond with a negative yield?

Post by columbia » Sun Jul 14, 2019 8:02 pm

Folks were buying TIPS with negative yields, but I believe that their expected/actual return was positive.

The real question:

Would the US government ever issue nominal treasuries with negative yields. I don’t think it would, but...

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Svensk Anga
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Re: Will you buy Total Bond with a negative yield?

Post by Svensk Anga » Sun Jul 14, 2019 8:22 pm

columbia wrote:
Sun Jul 14, 2019 8:02 pm
Folks were buying TIPS with negative yields, but I believe that their expected/actual return was positive.

The real question:

Would the US government ever issue nominal treasuries with negative yields. I don’t think it would, but...
I imagine that at the bottom of the next recession, nominal yields could go negative. In a taxable account or an IRA, you might find better options. If most of your nut is in a 401k, you might be stuck with TBM.

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Re: Will you buy Total Bond with a negative yield?

Post by McGilicutty » Sun Jul 14, 2019 8:47 pm

The yield is already too low for me. I might invest in bonds if yields ever get above 4%.

Big Dog
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Re: Will you buy Total Bond with a negative yield?

Post by Big Dog » Sun Jul 14, 2019 8:50 pm

short answer is no, would not buy a bond fund with a negative yield.

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willthrill81
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Re: Will you buy Total Bond with a negative yield?

Post by willthrill81 » Sun Jul 14, 2019 8:51 pm

As long as savings accounts are paying 0% or more, I cannot fathom why you would do so.
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Re: Will you buy Total Bond with a negative yield?

Post by Trader Joe » Sun Jul 14, 2019 8:53 pm

strongboy2005 wrote:
Sun Jul 14, 2019 7:10 pm
As the title suggests, would you consider including a negative yielding total bond fund in your asset allocation? If not, at what yield would you consider pulling the plug? Less than 1%? 0%. I ask because this is becoming reality in other parts of the world. My current AA is 50:50 per my IPS. It seems there is nothing stocks could do to shake that up, but paying money for the “opportunity” to hold bonds is so shocking that I would probably dump all my bonds and stay 50% cash if that ever happened. That got me thinking that maybe the yield doesn’t need to go negative to think that way, just sufficiently and ridiculously low. So, what would you do if BND goes to a negative yield?
No, I would never do this. Best of luck.

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Re: Will you buy Total Bond with a negative yield?

Post by jeffyscott » Sun Jul 14, 2019 9:07 pm

bluquark wrote:
Sun Jul 14, 2019 7:22 pm
Thesaints wrote:
Sun Jul 14, 2019 7:15 pm
Why would you get <0%, when you can get a CD at 2.50% and over ?
Wall Street can't buy FDIC insured CD's, but you can. The one time small retail investors have an advantage let's not throw it away, right ?
Those CDs won't be on offer anymore if yields go negative. I hear some bank accounts in Europe also charge negative interest rates. So it would really depend on the state of those alternatives in this hypothetical future.
If some bank accounts actually did have negative interest, I would simply not put my money in those bank accounts. Some banks in the US currently pay 0.01% on savings accounts, I have no money in those accounts. If those banks made, what would really be a trivial change, to -0.01%, I would continue to have no money in those accounts.
Time is your friend; impulse is your enemy. - John C. Bogle

Dave55
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Re: Will you buy Total Bond with a negative yield?

Post by Dave55 » Sun Jul 14, 2019 9:08 pm

No, would never buy at 0% (or negative) and if they reach 0% I would sell it.

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arcticpineapplecorp.
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Re: Will you buy Total Bond with a negative yield?

Post by arcticpineapplecorp. » Sun Jul 14, 2019 9:08 pm

but international bonds (some countries of which have negative yields) have done better than U.S. total bond fund this year so far:

total U.S. bond index +5.72%
total international bond index +6.16%

source:

Image
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bhsince87
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Re: Will you buy Total Bond with a negative yield?

Post by bhsince87 » Sun Jul 14, 2019 9:28 pm

I'll never say never.

If deflation is say -5%, a government backed -1% might seem OK.

But as an individual, I hope I'll always have cash as an option.

Some businesses might not have that option.
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Re: Will you buy Total Bond with a negative yield?

Post by lack_ey » Sun Jul 14, 2019 9:36 pm

arcticpineapplecorp. wrote:
Sun Jul 14, 2019 9:08 pm
but international bonds (some countries of which have negative yields) have done better than U.S. total bond fund this year so far:

total U.S. bond index +5.72%
total international bond index +6.16%

source:

https://i.postimg.cc/VkpQMLYb/Capture.jpg
This doesn't have much to do with the topic, especially given that bond returns over short periods are dominated by yield changes (price movement) and not yield. Also, international bonds having negative yields returning a certain amount in USD after hedging returns back to USD is not like USD bonds having negative yields.

The yield after accounting for hedge return on those international bonds (owing to differences in short-term rates) is and I think was higher than that of total bond. That's if anything maybe evidence for investing where the yield curve is steeper, though I think the real moral of the story is that we shouldn't take anything from this, given that it's a short period and 5.72% is pretty close to 6.16% and we didn't even normalize for duration or anything else.

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Re: Will you buy Total Bond with a negative yield?

Post by Thesaints » Mon Jul 15, 2019 12:28 am

bhsince87 wrote:
Sun Jul 14, 2019 9:28 pm
I'll never say never.

If deflation is say -5%, a government backed -1% might seem OK.

But as an individual, I hope I'll always have cash as an option.

Some businesses might not have that option.
Yep, that's the key. A relatively small sum can be kept in cash. One million fits in a carry-on.

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Re: Will you buy Total Bond with a negative yield?

Post by fennewaldaj » Mon Jul 15, 2019 3:36 am

Thesaints wrote:
Mon Jul 15, 2019 12:28 am
bhsince87 wrote:
Sun Jul 14, 2019 9:28 pm
I'll never say never.

If deflation is say -5%, a government backed -1% might seem OK.

But as an individual, I hope I'll always have cash as an option.

Some businesses might not have that option.
Yep, that's the key. A relatively small sum can be kept in cash. One million fits in a carry-on.
Interestingly the magazine the economist has discussed the possibility of eliminating physical cash several times. One of the motivations would be to make negative rates more effective since one would not be able to just elect to hold physical cash.

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Re: Will you buy Total Bond with a negative yield?

Post by ryman554 » Mon Jul 15, 2019 4:29 am

McGilicutty wrote:
Sun Jul 14, 2019 8:47 pm
The yield is already too low for me. I might invest in bonds if yields ever get above 4%.
That is a strange threshold.

If yields are 4% and inflation 5%, you would invest, but when yields are 2.5-3% (today ish) and inflation 2% ish, you would not?

There must be a different underlying reason....

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Re: Will you buy Total Bond with a negative yield?

Post by averagedude » Mon Jul 15, 2019 4:45 am

SO FAR, negative rate bonds in some developed countries has been a profitable trade for investors. If you had told a bond manager 10 years ago that their would be negative rates in the future and investors would flock to them, they would have asked you what you have been smoking.

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Re: Will you buy Total Bond with a negative yield?

Post by mmcmonster » Mon Jul 15, 2019 5:17 am

jeffyscott wrote:
Sun Jul 14, 2019 9:07 pm
If some bank accounts actually did have negative interest, I would simply not put my money in those bank accounts. Some banks in the US currently pay 0.01% on savings accounts, I have no money in those accounts. If those banks made, what would really be a trivial change, to -0.01%, I would continue to have no money in those accounts.
Don't knock inertia.

I have significant cash in a checking account making a hair over 0% (I think it's currently at 0.01%). It's there for convenience, a place for cash that I may need in the next six months, and also as a landing pad for paychecks coming in from paycheck direct deposits.

The amount of work involved in moving the work paycheck direct deposits (and moving the contents of a safe deposit box linked to the account) means that I'll probably keep the account open until I quit my job and move out of the area.

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Re: Will you buy Total Bond with a negative yield?

Post by jeffyscott » Mon Jul 15, 2019 6:09 am

mmcmonster wrote:
Mon Jul 15, 2019 5:17 am
jeffyscott wrote:
Sun Jul 14, 2019 9:07 pm
If some bank accounts actually did have negative interest, I would simply not put my money in those bank accounts. Some banks in the US currently pay 0.01% on savings accounts, I have no money in those accounts. If those banks made, what would really be a trivial change, to -0.01%, I would continue to have no money in those accounts.
Don't knock inertia.

I have significant cash in a checking account making a hair over 0% (I think it's currently at 0.01%). It's there for convenience, a place for cash that I may need in the next six months, and also as a landing pad for paychecks coming in from paycheck direct deposits.

The amount of work involved in moving the work paycheck direct deposits (and moving the contents of a safe deposit box linked to the account) means that I'll probably keep the account open until I quit my job and move out of the area.
It took me a while to get mostly out of a 0.06% checking account and I always keep checking balance low, anyway.

But notice that I referred to savings, not checking. There was considerably less effort involved in moving from money market to savings account and now back to the money market, based on interest rates.
Time is your friend; impulse is your enemy. - John C. Bogle

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Re: Will you buy Total Bond with a negative yield?

Post by Chris K Jones » Mon Jul 15, 2019 6:56 am

I would never say never. It depends on what the alternatives are if that ever happens. If CDs, savings accounts are positive, I would go to them. I think this really might happen. If the government pays negative yields, it will owe less at the end of the year than it did at the beginning (assuming they don't borrow anymore :happy ). I think if the government figures out a way to make this happen, they will do it.

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Re: Will you buy Total Bond with a negative yield?

Post by Nate79 » Mon Jul 15, 2019 7:21 am

Like most people our largest retirement accounts and our bond holdings are in our 401k accounts so we do not have the luxury of savings account, CD, etc but have only few options like total bond market or stable value fund. Bonds are for safety so likely yes we would continue to use the funds even if their interest rate is negative.

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Re: Will you buy Total Bond with a negative yield?

Post by McGilicutty » Mon Jul 15, 2019 7:38 am

ryman554 wrote:
Mon Jul 15, 2019 4:29 am
McGilicutty wrote:
Sun Jul 14, 2019 8:47 pm
The yield is already too low for me. I might invest in bonds if yields ever get above 4%.
That is a strange threshold.

If yields are 4% and inflation 5%, you would invest, but when yields are 2.5-3% (today ish) and inflation 2% ish, you would not?

There must be a different underlying reason....
No, it's mainly just the low yield. The S&P 500 has performed so well over the last several years and bonds so terribly that I can't imagine how much less money I would have if I were in the classic 60/40 port espoused by many here.

Yes, bonds can help mitigate the damage during a severe downturn, but they can also be a huge drag on returns on the way up. If yields were higher, bonds wouldn't be such a drag and would be more investable. However, with the low yields of today, I stay away.

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Re: Will you buy Total Bond with a negative yield?

Post by Dandy » Mon Jul 15, 2019 7:41 am

If Total Bond has a negative yield that means most/all of fixed income choices are likely as bad or worse. Most back tested "safe" withdrawal ideas probably haven't taken negative yields into account. It is a mild concern as a retiree with a 57% allocation to fixed income with a decent allocation to cash, cash-like products and short term bond funds.

Brokerage CDs yields have already plunged and longer term rates are much lower also. So, don't know that there is a sure thing winning strategy to cope with negative interest rates. From what I gather those experiencing negative rates tended to choose bank products and accept a 1% or so negative rate. I'm sure many went extra long for a fraction of a percent.

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Re: Will you buy Total Bond with a negative yield?

Post by JoMoney » Mon Jul 15, 2019 7:47 am

Unless I was some sort of bank required to hold bonds, I couldn't imagine owning a negative yield bond.
Although, I would relish the idea of having a mortgage that paid me to be in "debt".
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Re: Will you buy Total Bond with a negative yield?

Post by jeffyscott » Mon Jul 15, 2019 8:02 am

Chris K Jones wrote:
Mon Jul 15, 2019 6:56 am
If the government pays negative yields, it will owe less at the end of the year than it did at the beginning (assuming they don't borrow anymore :happy ). I think if the government figures out a way to make this happen, they will do it.
This is not how things work. The Federal Reserve sets interest rates with the goals of 2% inflation and low unemployment rate, not with the goal of reducing government debt. The Fed is not going to say: "we're going to make short term rates -0.25%, just because", as some sort of convoluted way to reduce government debt.

If "the government" wanted to eliminate it's debt, no matter the consequences, it could just do it, by creating the money to pay off bonds as they mature and to cover the annual deficits. MMT says this could be done, to some extent, and would be an overall positive for the economy and society, while more standard economic theory says it would be disastrous.
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Re: Will you buy Total Bond with a negative yield?

Post by JoMoney » Mon Jul 15, 2019 8:02 am

On a whim I decided to take a look at the holdings of Vanguard's Total International Bond Index fund...
https://investor.vanguard.com/mutual-fu ... o-holdings

While I didn't see anything listed as having a negative coupon, I did notice quite a bit in bonds with a 0.000% coupon
Image

It "boggles" my mind, that people do own even these. Surprisingly the "market value" of these bonds is higher than their face value, as a result of negative rates... so the longer you hold these, the lower their value will be :confused
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Re: Will you buy Total Bond with a negative yield?

Post by Turbo29 » Mon Jul 15, 2019 8:47 am

columbia wrote:
Sun Jul 14, 2019 8:02 pm

Would the US government ever issue nominal treasuries with negative yields. I don’t think it would, but...
Aren't the rates set by auction? If the demand for treasuries drove the auction price above 100 there would be your negative rate.

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Re: Will you buy Total Bond with a negative yield?

Post by jdilla1107 » Mon Jul 15, 2019 8:48 am

willthrill81 wrote:
Sun Jul 14, 2019 8:51 pm
As long as savings accounts are paying 0% or more, I cannot fathom why you would do so.
There aren't savings accounts and CDs in most people's 401ks.

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Re: Will you buy Total Bond with a negative yield?

Post by willthrill81 » Mon Jul 15, 2019 8:53 am

jdilla1107 wrote:
Mon Jul 15, 2019 8:48 am
willthrill81 wrote:
Sun Jul 14, 2019 8:51 pm
As long as savings accounts are paying 0% or more, I cannot fathom why you would do so.
There aren't savings accounts and CDs in most people's 401ks.
True, but total bond isn't always an option in 401k plans either.
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Re: Will you buy Total Bond with a negative yield?

Post by jeffyscott » Mon Jul 15, 2019 9:00 am

jdilla1107 wrote:
Mon Jul 15, 2019 8:48 am
willthrill81 wrote:
Sun Jul 14, 2019 8:51 pm
As long as savings accounts are paying 0% or more, I cannot fathom why you would do so.
There aren't savings accounts and CDs in most people's 401ks.
There may be one or more of the following: stable value, money market, short term bond, brokerage window. Mine had all of these options but I think the brokerage window was limited to mutual funds. Now rolled over, so CDs are available.
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Re: Will you buy Total Bond with a negative yield?

Post by willthrill81 » Mon Jul 15, 2019 9:07 am

jeffyscott wrote:
Mon Jul 15, 2019 9:00 am
jdilla1107 wrote:
Mon Jul 15, 2019 8:48 am
willthrill81 wrote:
Sun Jul 14, 2019 8:51 pm
As long as savings accounts are paying 0% or more, I cannot fathom why you would do so.
There aren't savings accounts and CDs in most people's 401ks.
There may be one or more of the following: stable value, money market, short term bond, brokerage window. Mine had all of these options but I think the brokerage window was limited to mutual funds. Now rolled over, so CDs are available.
My current 401k offers both a stable value fund and a money market.
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Re: Will you buy Total Bond with a negative yield?

Post by ksleo » Mon Jul 15, 2019 9:53 am

I've thought about this as well. My answer is NO. I will not invest in any negative yielding bonds.

Let's make this a more actionable thread though.

Most people on this forum hold their bonds in 401k's or in other tax advantaged accounts. If you sold all the bonds in your tax advantaged account, then how would you maintain your asset allocation? Most people have said they would rather have their money in a savings account yielding 0% rather than a negative yielding bond fund, but there aren't always a lot of good options in some 401k's for redeploying that capital within the account. Also, one cannot simply move all of the money in a tax advantaged account to a simple savings account without incurring taxes and/or penalties.

Let's instead make the question: How will you avoid investing in negative yielding bonds?

I'll answer first. I would sell bonds and then begin buying back time in my state sponsored pension fund which guarantees a 4% yield. That would get me through several years of negative rates, if I had to do it.
Actions have consequences.

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Re: Will you buy Total Bond with a negative yield?

Post by stan1 » Mon Jul 15, 2019 9:57 am

ksleo wrote:
Mon Jul 15, 2019 9:53 am

I'll answer first. I would sell bonds and then begin buying back time in my state sponsored pension fund which guarantees a 4% yield. That would get me through several years of negative rates, if I had to do it.
A lot of people don't have an option to buy into such a plan. A lot of 401Ks don't have stable value funds either.

If it happens there will be a lot of hand wringing and in the end many employees won't have a lot of choices since their funds are locked into employer's 401K plan unless they change jobs. Stable value funds are generally not available in IRAs.

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Re: Will you buy Total Bond with a negative yield?

Post by welderwannabe » Mon Jul 15, 2019 10:27 am

In 2008/2009 there were stories of some banks not accepting deposits. I can't find the stories at the moment, but i do remember reading them. Banks have to pay FDIC insurance on their deposits, so at some point if rates go low enough the cant afford interest at all, or may deny deposits alltogether and close accounts. A bunch of money markets did that at the time by either closing to new investors, raising their minimums drastically, or liquidating and shutting down.

In 12/2008, the 4-week bill was sold at par at the treasury auction. On the secondary market bills were actually going for above par (negative yield) because the demand was so high.

Negative nominal yields are a real possibility. Im not sure what ill do if that happens. Im hoping I dont need to find out, but I can't keep hundreds of thousands under my bed.
I am not an investment professional, but I did stay at a Holiday Inn Express last night.

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Re: Will you buy Total Bond with a negative yield?

Post by Turbo29 » Mon Jul 15, 2019 11:06 am

welderwannabe wrote:
Mon Jul 15, 2019 10:27 am
In 2008/2009 there were stories of some banks not accepting deposits. I can't find the stories at the moment, but i do remember reading them. Banks have to pay FDIC insurance on their deposits, so at some point if rates go low enough the cant afford interest at all, or may deny deposits alltogether and close accounts. A bunch of money markets did that at the time by either closing to new investors, raising their minimums drastically, or liquidating and shutting down.
I recall that too. Some banks would not allow their customers to hold over $5000 in savings accounts. After paying their FDIC premiums, it was a net loss for the bank.

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Re: Will you buy Total Bond with a negative yield?

Post by jeffyscott » Mon Jul 15, 2019 11:42 am

welderwannabe wrote:
Mon Jul 15, 2019 10:27 am
Negative nominal yields are a real possibility.
Negative nominal yields existing are a possibility. This possibility has been realized in a few countries. But negative yields on everything? That seems doubtful.

Is there anywhere in the world where there is nothing but negative yields available to ordinary individuals with the equivalent of a few 10s or 100s of thousands of dollars for which they prefer to take little to no risk? If so, how much risk is required to be taken in order escape the negative yields?

Does currency in a safety deposit box count as negative yield, due to the cost of the box?
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aj76er
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Re: Will you buy Total Bond with a negative yield?

Post by aj76er » Mon Jul 15, 2019 12:04 pm

I’d probably consider short-term investment grade corporate bonds, short-term brokered CD’s, I-bonds, and short term municipals.
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Re: Will you buy Total Bond with a negative yield?

Post by Grt2bOutdoors » Mon Jul 15, 2019 12:14 pm

bluquark wrote:
Sun Jul 14, 2019 7:22 pm
Thesaints wrote:
Sun Jul 14, 2019 7:15 pm
Why would you get <0%, when you can get a CD at 2.50% and over ?
Wall Street can't buy FDIC insured CD's, but you can. The one time small retail investors have an advantage let's not throw it away, right ?
Those CDs won't be on offer anymore if yields go negative. I hear some bank accounts in Europe also charge negative interest rates. So it would really depend on the state of those alternatives in this hypothetical future.
Bank: what can I do for you?
Me: give me ALL of my money in cash, today.
Bank: Wha? wha?
Me: I’ll take it in hundreds.
Bank: Don’t you want to leave some in your account for safekeeping, we have a special rate.
Me: What is the rate?
Bank: Negative 0.0005%, compounded daily
Me: Give me my money in cash now!
Bank: but it won’t be safe
Me: It won’t be losing value with me.
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robertmcd
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Re: Will you buy Total Bond with a negative yield?

Post by robertmcd » Mon Jul 15, 2019 12:42 pm

What a lot of bogleheads don't understand, is that US treasuries, and even some of the US corporate bonds in total bond, are lower yielding for a US dollar investor than these negative issues denominated in euros or yen that people are talking about

So in that regard, you are already buying some of the lowest yielding debt in the world with total bond

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Re: Will you buy Total Bond with a negative yield?

Post by bhsince87 » Mon Jul 15, 2019 12:56 pm

How exactly would a negative yield bond fund work?

I understand how a negative rate checking (for example) account works.

And how a zero coupon negative bond would work.

I'm a little fuzzy on bonds with coupons (interest payments). They still pay a periodic interest payment, but the payments and final "return of capital" payout net to less than the original purchase price. Is that correct?

But I can't wrap my head around how a fund of such bonds would work.

Would there still be a stream of interest payments, but the value of the fund would continuously drop over time?
"If ye love wealth better than liberty, the tranquility of servitude better than the animating contest of freedom, go home from us in peace." Samuel Adams

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Re: Will you buy Total Bond with a negative yield?

Post by alpine_boglehead » Mon Jul 15, 2019 12:57 pm

It's a reality where I live.

Anyone investing in total international bond index also holds German bonds, which according to Bloomberg currently has these yields:

2y -0.75%
5y -0.60%
10y -0.26%
30y 0.32%

One of my online brokerage accounts pays -0.4% on the associated cash account. You can (so far) escape negative bond yields by using normal bank accounts that pay 0.001% and CDs (if you shop around, you can still get like 1% on 3-year CDs, but rates have been falling during the last few months). I don't want to imagine what yields will be in Europe if a major recession hits. In the US rates can at least go from 2.1% to zero.

Normal people won't invest in bonds any more, but institutions can be prevented by law from holding cash.
On the other hand, what's worse? 0% inflation and -1% yield, or 12% inflation and 9% yield?

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Re: Will you buy Total Bond with a negative yield?

Post by stlutz » Mon Jul 15, 2019 7:16 pm

Which is worse:

a) 0% inflation, bond yields -.5%.
b) 3% inflation, bond yields 2%.

The scenario that will generate the most angst is the not the one that is financially worse.

bhsince87
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Re: Will you buy Total Bond with a negative yield?

Post by bhsince87 » Mon Jul 15, 2019 8:06 pm

stlutz wrote:
Mon Jul 15, 2019 7:16 pm
Which is worse:

a) 0% inflation, bond yields -.5%.
b) 3% inflation, bond yields 2%.

The scenario that will generate the most angst is the not the one that is financially worse.
Another question.

In case "a", can the 0.5% loss be written off for tax purposes?
"If ye love wealth better than liberty, the tranquility of servitude better than the animating contest of freedom, go home from us in peace." Samuel Adams

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JoMoney
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Re: Will you buy Total Bond with a negative yield?

Post by JoMoney » Mon Jul 15, 2019 8:13 pm

robertmcd wrote:
Mon Jul 15, 2019 12:42 pm
What a lot of bogleheads don't understand, is that US treasuries, and even some of the US corporate bonds in total bond, are lower yielding for a US dollar investor than these negative issues denominated in euros or yen that people are talking about

So in that regard, you are already buying some of the lowest yielding debt in the world with total bond
:confused
I think an explanation is in order. I can't make any sense of what you're saying, unless it's supposed to be a pun on the word "yield" also meaning to submit/surrender opposed rather than the meaning to produce/give a return.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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