Grappling with the New Reality of Zero Bond Yields Virtually Everywhere

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irrationalexuberance
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Grappling with the New Reality of Zero Bond Yields Virtually Everywhere

Post by irrationalexuberance »

I'm curious what you guys make of this:

https://www.bridgewater.com/grappling-w ... everywhere

In particular, this passage jumped out at me:

"Every portfolio is unique, but most have equities and bonds, and the traditional 60/40 mix is a reasonable starting point for considering the impact of zero bond yields. Taking this as a prototype, there is the bond portion and there is the equity portion, and both are impacted by zero bond yields. Obviously, at near-zero yields, the bond portion has a near-zero expected return. And because there is a limit to how much yields can fall and no limit to how much they can rise, the bond portion has a limited upside return and an unlimited downside return. A zero bond yield also raises the risk related to the equity portion. In economic downturns, the bond portion can no longer provide capital gains to offset losses in the equity portion. And lacking the ability for interest rates to fall, there is less ability for an interest rate cut to stabilize a decline in economic growth and earnings, as well as less ability for a decline in the discount rate to cushion a decline in prices due to a decline in earnings. The net of it is that zero bond yields reduce the return of the traditional 60/40 portfolio while raising its downside risk relative to its upside potential."
L82GAME
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Re: Grappling with the New Reality of Zero Bond Yields Virtually Everywhere

Post by L82GAME »

irrationalexuberance wrote: Thu Aug 13, 2020 7:37 pm I'm curious what you guys make of this:

https://www.bridgewater.com/grappling-w ... everywhere

In particular, this passage jumped out at me:

"Every portfolio is unique, but most have equities and bonds, and the traditional 60/40 mix is a reasonable starting point for considering the impact of zero bond yields. Taking this as a prototype, there is the bond portion and there is the equity portion, and both are impacted by zero bond yields. Obviously, at near-zero yields, the bond portion has a near-zero expected return. And because there is a limit to how much yields can fall and no limit to how much they can rise, the bond portion has a limited upside return and an unlimited downside return. A zero bond yield also raises the risk related to the equity portion. In economic downturns, the bond portion can no longer provide capital gains to offset losses in the equity portion. And lacking the ability for interest rates to fall, there is less ability for an interest rate cut to stabilize a decline in economic growth and earnings, as well as less ability for a decline in the discount rate to cushion a decline in prices due to a decline in earnings. The net of it is that zero bond yields reduce the return of the traditional 60/40 portfolio while raising its downside risk relative to its upside potential."
These concerns were voiced recently by Burton Malkiel in the Bogleheads’ Podcast. Associated forum comments here: viewtopic.php?t=319252
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Re: Grappling with the New Reality of Zero Bond Yields Virtually Everywhere

Post by ralph124cf »

This is why I don't invest in bonds. CDs, money market, and "high yield" savings accounts fill that space.

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Re: Grappling with the New Reality of Zero Bond Yields Virtually Everywhere

Post by 000 »

Low yields are increasing the correlations of the major liquid asset classes: stocks, bonds, gold, commodities.

How will it end??
7eight9
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Re: Grappling with the New Reality of Zero Bond Yields Virtually Everywhere

Post by 7eight9 »

It won't be useful for rebalancing but one might consider multi-year guaranteed annuities (MYGAs) in lieu of part of their fixed income allocation.

Example --- Fixed Annuity Rates for August 2020 ---https://www.blueprintincome.com/fixed-annuities

Five year rates as high as 3.45% per above link.
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columbia
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Re: Grappling with the New Reality of Zero Bond Yields Virtually Everywhere

Post by columbia »

I suppose it depends on whether one values having an asset bucket with an expected real return above 0 and still have a low enough correlation to equity funds.Right now, one is hard pressed to find that in bonds; maybe junk bonds?

If one does, there are certainly options for that bucket (but many won't like the choices).
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Re: Grappling with the New Reality of Zero Bond Yields Virtually Everywhere

Post by gasman »

Cash/short term high quality fixed income has three purposes:

1. Dampen the volatility of an equity portfolio.
2. Provide a store of value when equities sell off to purchase them.
3. Provide a positive real return for that part of a portfolio.

#3 is gone. #2 is diminished. #1 is still there. :annoyed

Don't like it. But sticking with cash and very short term fixed income. (CDs and high yield savings)
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Nate79
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Re: Grappling with the New Reality of Zero Bond Yields Virtually Everywhere

Post by Nate79 »

YTD total bond market return is about 7% and 1 year return about 10.5%.
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Re: Grappling with the New Reality of Zero Bond Yields Virtually Everywhere

Post by gasman »

Nate79 wrote: Thu Aug 13, 2020 9:31 pm YTD total bond market return is about 7% and 1 year return about 10.5%.
Future expected returns are somewhat lower.
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Re: Grappling with the New Reality of Zero Bond Yields Virtually Everywhere

Post by Nate79 »

gasman wrote: Thu Aug 13, 2020 9:33 pm
Nate79 wrote: Thu Aug 13, 2020 9:31 pm YTD total bond market return is about 7% and 1 year return about 10.5%.
Future expected returns are somewhat lower.
How many years in a row do people need to repeat this before it comes true? In the mean time TBM keeps churning out great returns year after year.

People can not predict the future no matter their confidence in their ability.
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Stinky
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Re: Grappling with the New Reality of Zero Bond Yields Virtually Everywhere

Post by Stinky »

7eight9 wrote: Thu Aug 13, 2020 8:02 pm It won't be useful for rebalancing but one might consider multi-year guaranteed annuities (MYGAs) in lieu of part of their fixed income allocation.

Example --- Fixed Annuity Rates for August 2020 ---https://www.blueprintincome.com/fixed-annuities

Five year rates as high as 3.45% per above link.
This ^^^^^

Just bought a few of them myself. Through Blueprint Income, which is giving me great service.
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Re: Grappling with the New Reality of Zero Bond Yields Virtually Everywhere

Post by TheTimeLord »

Nate79 wrote: Thu Aug 13, 2020 9:38 pm
gasman wrote: Thu Aug 13, 2020 9:33 pm
Nate79 wrote: Thu Aug 13, 2020 9:31 pm YTD total bond market return is about 7% and 1 year return about 10.5%.
Future expected returns are somewhat lower.
How many years in a row do people need to repeat this before it comes true? In the mean time TBM keeps churning out great returns year after year.

People can not predict the future no matter their confidence in their ability.
10 year return is 3.68% annually.
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Re: Grappling with the New Reality of Zero Bond Yields Virtually Everywhere

Post by fatcoffeedrinker »

Stinky wrote: Thu Aug 13, 2020 9:42 pm
7eight9 wrote: Thu Aug 13, 2020 8:02 pm It won't be useful for rebalancing but one might consider multi-year guaranteed annuities (MYGAs) in lieu of part of their fixed income allocation.

Example --- Fixed Annuity Rates for August 2020 ---https://www.blueprintincome.com/fixed-annuities

Five year rates as high as 3.45% per above link.
This ^^^^^

Just bought a few of them myself. Through Blueprint Income, which is giving me great service.
This is very interesting, as I had not heard of these before. I usually avoid direct bank CDs because I have a 54% marginal tax bracket, so the after tax rate is fairly low. I can buy brokered CDs through my 401k, but those rates are much worse than direct bank CDs. But I intend to retire within 3 years, and will move to a much lower tax bracket. I wonder whether MYGAs would be worth it since I wouldn't have to pay the tax until I was in the lower brackets. I'll need to do some further research on these.
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Re: Grappling with the New Reality of Zero Bond Yields Virtually Everywhere

Post by Stinky »

fatcoffeedrinker wrote: Thu Aug 13, 2020 10:59 pm
Stinky wrote: Thu Aug 13, 2020 9:42 pm
7eight9 wrote: Thu Aug 13, 2020 8:02 pm It won't be useful for rebalancing but one might consider multi-year guaranteed annuities (MYGAs) in lieu of part of their fixed income allocation.

Example --- Fixed Annuity Rates for August 2020 ---https://www.blueprintincome.com/fixed-annuities

Five year rates as high as 3.45% per above link.
This ^^^^^

Just bought a few of them myself. Through Blueprint Income, which is giving me great service.
This is very interesting, as I had not heard of these before. I usually avoid direct bank CDs because I have a 54% marginal tax bracket, so the after tax rate is fairly low. I can buy brokered CDs through my 401k, but those rates are much worse than direct bank CDs. But I intend to retire within 3 years, and will move to a much lower tax bracket. I wonder whether MYGAs would be worth it since I wouldn't have to pay the tax until I was in the lower brackets. I'll need to do some further research on these.
Wow! A 54% marginal tax bracket is absolutely brutal!

Here's a good recent thread on MYGAs. See especially the post by gjlynch17, which has an excellent summary of the product. About the 10th post in the thread.

viewtopic.php?f=1&t=313935
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Re: Grappling with the New Reality of Zero Bond Yields Virtually Everywhere

Post by fredflinstone »

irrationalexuberance wrote: Thu Aug 13, 2020 7:37 pm I'm curious what you guys make of this:

https://www.bridgewater.com/grappling-w ... everywhere

In particular, this passage jumped out at me:

"Every portfolio is unique, but most have equities and bonds, and the traditional 60/40 mix is a reasonable starting point for considering the impact of zero bond yields. Taking this as a prototype, there is the bond portion and there is the equity portion, and both are impacted by zero bond yields. Obviously, at near-zero yields, the bond portion has a near-zero expected return. And because there is a limit to how much yields can fall and no limit to how much they can rise, the bond portion has a limited upside return and an unlimited downside return. A zero bond yield also raises the risk related to the equity portion. In economic downturns, the bond portion can no longer provide capital gains to offset losses in the equity portion. And lacking the ability for interest rates to fall, there is less ability for an interest rate cut to stabilize a decline in economic growth and earnings, as well as less ability for a decline in the discount rate to cushion a decline in prices due to a decline in earnings. The net of it is that zero bond yields reduce the return of the traditional 60/40 portfolio while raising its downside risk relative to its upside potential."
There's a lot here to unpack.

"Obviously, at near-zero yields, the bond portion has a near-zero expected return." People have been saying this for a long time, but bonds have returned far more than zero in recent years. Long-term treasuries, for example, have had a compound annual growth rate of 26.1% since the beginning of 2019. I am old enough to remember the beginning of 2019 and I remember people saying that "interest rates can't fall much further" etc. They've been saying it for years, and they have been proven wrong over and over and over again.

"And because there is a limit to how much yields can fall and no limit to how much they can rise..." This is false. Theoretically, there is no lower limit. Consider any yield of X%, where X is some number in your head that you consider to be an interest rate that is low but realistically possible. Now ask yourself if X-0.01 percent is theoretically possible. The answer will always be yes, because there is no law of nature or economics that says X is the lower limit. It's the same thing on the upside.

"In economic downturns, the bond portion can no longer provide capital gains to offset losses in the equity portion." This is false. I and others have had enormous capital gains in recent years and if there is an economic downturn this is likely to continue if not accelerate.

"And lacking the ability for interest rates to fall." Interest rates can always fall.

In summary, there are a lot of false or at least highly questionable assertions here presented as inviolate laws of economics. My recommendation: If you're really worried about bonds, swap out your bonds for CDs. But interest rates can continue to fall and in the event of a deep recession, those of us who own bonds (particularly long-term treasuries) may be handsomely rewarded.
Stocks 28 / Gold 23 / Long-term US treasuries 19 / Cash (mainly CDs) 22 / TIPS 8
dkturner
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Re: Grappling with the New Reality of Zero Bond Yields Virtually Everywhere

Post by dkturner »

Nate79 wrote: Thu Aug 13, 2020 9:31 pm YTD total bond market return is about 7% and 1 year return about 10.5%.
I thought this thread was about bond “yield”?
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Re: Grappling with the New Reality of Zero Bond Yields Virtually Everywhere

Post by jeffyscott »

TheTimeLord wrote: Thu Aug 13, 2020 9:48 pm
Nate79 wrote: Thu Aug 13, 2020 9:38 pm
gasman wrote: Thu Aug 13, 2020 9:33 pm
Nate79 wrote: Thu Aug 13, 2020 9:31 pm YTD total bond market return is about 7% and 1 year return about 10.5%.
Future expected returns are somewhat lower.
How many years in a row do people need to repeat this before it comes true? In the mean time TBM keeps churning out great returns year after year.

People can not predict the future no matter their confidence in their ability.
10 year return is 3.68% annually.
VBTLX SEC yield:
Aug. 13, 2020 = 1.14%
Dec. 31, 2019 = 2.26%
Aug 13, 2019 = 2.38%
Aug 13, 2010 = 2.76%

current duration = 6.4 years

For 10 years, the yield dropped by 1.62%. Based on the duration, this would be expected to create a gain of a bit over 10% as a first approximation. So about 1% per year and the actual return was pretty close to 1% above the starting yield 2.76%. This rough approximation worked pretty well over that long time frame.

Now with the yield at 1.14%, it might take a decline of about 0.5% in the SEC yield to get a total return of about 1.5% over the next 10 years. It could happen, but I would not bet on the SEC yield falling to 0.64% for the fund as it is currently constituted.

In one year the yield fell by 1.24%, expected gain due to this would be around 7.9% adding the starting annual yield of 2.38% to that would give a total return of about 10.3%. Now M* has the 1 year at 7.75%, so that one is off by quite a bit. Vanguard had it at 10.4% for 1 year as of the end of July and SEC yield change from 7/31/19 to 7/31/20 was to 2.5% to 1.16%, which leads to estimate of 11% total return based on duration. So pretty close the the actual 10.4% for that one year.

YTD change in yield is 1.12%, which gives an estimated gain of a bit over 7% and adding about 60% of annual yield to that would give estimated total return of about 8.6%, so a little higher than actual 7.16%. But note that at recent high on 8/6 the YTD was 7.92%, so a bit closer to estimated at that time.
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Re: Grappling with the New Reality of Zero Bond Yields Virtually Everywhere

Post by Anon9001 »

The only way they could drag this out further is by banning physical cash. If they do that there is no barrier. There was a article by IMF discussing this possibility if I remember correctly. Will have to see. In the mean-time this is going to create problems for people who think the Bitcoin "Bubble" will burst. Interest rates are gravity and due to them being zero-negative the valuations of everything goes up to insane levels compared to the past.
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Re: Grappling with the New Reality of Zero Bond Yields Virtually Everywhere

Post by Day9 »

Bogleheads always say don't time the market but it could be even harder to time interest rates than the stock market and some posters may be attempting to do just that. Stay the course. The solution to low bond yields is to save more and work longer.

But I love the suggestion earlier of annuities paid over a fixed time frame rather than the rest of your life, I did not expect those to have ~3.45% yields for 5 years. This reminds me of EE bonds which double in 20 years which amounts to 3.53% compounded return. I wish someone would compile a quick list of fixed income options available to the little guy or individual investor, that large institutions cannot use. I-Bonds is another example with currently negative TIPS yields
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Re: Grappling with the New Reality of Zero Bond Yields Virtually Everywhere

Post by Nowizard »

Personally, I feel that the angst about bonds is related to two factors, one obvious, one not so obvious. 1. Legitimate concern about the "predicted" reduction in bond returns, the impact on portfolios, etc.; 2. Since bonds have been producing so well for a considerable period of time, people have had it both ways in the sense of providing all things bonds typically provide but also providing substantially higher returns often equal to stocks. This may fuel an expectation of greater returns and the search for them. There is a tremendous disparity in recommendations regarding how to proceed. My view is that major portfolio changes are premature and significant moves can be compared to market timing. Just an opinion of a Nowizard, but one that is leading us to stay with TBM and short term corporate bond fund.

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Re: Grappling with the New Reality of Zero Bond Yields Virtually Everywhere

Post by fatcoffeedrinker »

Stinky wrote: Fri Aug 14, 2020 3:48 am
fatcoffeedrinker wrote: Thu Aug 13, 2020 10:59 pm
Stinky wrote: Thu Aug 13, 2020 9:42 pm
7eight9 wrote: Thu Aug 13, 2020 8:02 pm It won't be useful for rebalancing but one might consider multi-year guaranteed annuities (MYGAs) in lieu of part of their fixed income allocation.

Example --- Fixed Annuity Rates for August 2020 ---https://www.blueprintincome.com/fixed-annuities

Five year rates as high as 3.45% per above link.
This ^^^^^

Just bought a few of them myself. Through Blueprint Income, which is giving me great service.
This is very interesting, as I had not heard of these before. I usually avoid direct bank CDs because I have a 54% marginal tax bracket, so the after tax rate is fairly low. I can buy brokered CDs through my 401k, but those rates are much worse than direct bank CDs. But I intend to retire within 3 years, and will move to a much lower tax bracket. I wonder whether MYGAs would be worth it since I wouldn't have to pay the tax until I was in the lower brackets. I'll need to do some further research on these.
Wow! A 54% marginal tax bracket is absolutely brutal!

Here's a good recent thread on MYGAs. See especially the post by gjlynch17, which has an excellent summary of the product. About the 10th post in the thread.

viewtopic.php?f=1&t=313935
Thanks Stinky, I'll take a read through. Yup, 54% is brutal thanks to California and NIIT. Both of which will go away after I retire and we move.
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Re: Grappling with the New Reality of Zero Bond Yields Virtually Everywhere

Post by jeffyscott »

Day9 wrote: Fri Aug 14, 2020 9:20 am Bogleheads always say don't time the market but it could be even harder to time interest rates than the stock market and some posters may be attempting to do just that. Stay the course. The solution to low bond yields is to save more and work longer.

But I love the suggestion earlier of annuities paid over a fixed time frame rather than the rest of your life, I did not expect those to have ~3.45% yields for 5 years. This reminds me of EE bonds which double in 20 years which amounts to 3.53% compounded return. I wish someone would compile a quick list of fixed income options available to the little guy or individual investor, that large institutions cannot use. I-Bonds is another example with currently negative TIPS yields
It seems you transitioned from just continuing to buy and hold bonds to let's look for options with better yields in the space of two paragraphs. :D

I don't know enough about the MYGAs, a few posters have recently been bringing these up a lot, never heard of them before that. But other than that (which I don't think can really be called risk-free), the risk-free ways to escape low treasury yields are the EE and I-Bonds that you already mentioned and "high" yield saving accounts and direct CDs. You can get something like 0.8-1% from a savings account and maybe at least 1.3% and maybe as much as 1.5-2% from the best CDs available to you.

Another one that's not quite risk-free, but is at least low-risk like MYGAs may be, would be a stable value fund if available in employer-sponsored account.
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Re: Grappling with the New Reality of Zero Bond Yields Virtually Everywhere

Post by nedsaid »

Nate79 wrote: Thu Aug 13, 2020 9:38 pm
gasman wrote: Thu Aug 13, 2020 9:33 pm
Nate79 wrote: Thu Aug 13, 2020 9:31 pm YTD total bond market return is about 7% and 1 year return about 10.5%.
Future expected returns are somewhat lower.
How many years in a row do people need to repeat this before it comes true? In the mean time TBM keeps churning out great returns year after year.

People can not predict the future no matter their confidence in their ability.
"Geometric progressions eventually forge their own anchors," Warren Buffett.
A fool and his money are good for business.
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Re: Grappling with the New Reality of Zero Bond Yields Virtually Everywhere

Post by columbia »

If someone here has experience with owning 5 year treasuries at 0.32%, I'd like to know what they did the last time. ;)
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Re: Grappling with the New Reality of Zero Bond Yields Virtually Everywhere

Post by milktoast »

Nate79 wrote: Thu Aug 13, 2020 9:31 pm YTD total bond market return is about 7% and 1 year return about 10.5%.
Does anyone know the math for computing TBM SEC yield if it returns another 7% next year?

I’m serious. I feel like I don’t understand the prospects on 25% of my portfolio. And that makes me nervous.
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Re: Grappling with the New Reality of Zero Bond Yields Virtually Everywhere

Post by jeffyscott »

milktoast wrote: Fri Aug 14, 2020 10:01 am
Nate79 wrote: Thu Aug 13, 2020 9:31 pm YTD total bond market return is about 7% and 1 year return about 10.5%.
Does anyone know the math for computing TBM SEC yield if it returns another 7% next year?

I’m serious. I feel like I don’t understand the prospects on 25% of my portfolio. And that makes me nervous.
As a first approximation, a 0.9% decline in yield would produce a 5.76% capital gain and adding the current yield to that gets you to about 7%.

Chances that the current holdings of total bond have a yield of about 0.25% in one year may not be 0, but it is close to that.
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Re: Grappling with the New Reality of Zero Bond Yields Virtually Everywhere

Post by Explorer »

milktoast wrote: Fri Aug 14, 2020 10:01 am
Nate79 wrote: Thu Aug 13, 2020 9:31 pm YTD total bond market return is about 7% and 1 year return about 10.5%.
Does anyone know the math for computing TBM SEC yield if it returns another 7% next year?

I’m serious. I feel like I don’t understand the prospects on 25% of my portfolio. And that makes me nervous.
So 25% of your portfolio is TBM? Assuming so, your comment on "prospects" is interesting.. do you feel you understand the prospect of the 75% which probably is stocks?

Bonds continue to serve a single purpose - be shock absorbers for your portfolio. The days of also getting yield in bonds are gone. The real question is: do you see a need for shock absorbers in your portfolio? I personally do and I have close to a 50/50 portfolio.
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Re: Grappling with the New Reality of Zero Bond Yields Virtually Everywhere

Post by milktoast »

jeffyscott wrote: Fri Aug 14, 2020 10:07 am As a first approximation, a 0.9% decline in yield would produce a 5.76% capital gain and adding the current yield to that gets you to about 7%.
Thank you.

So at 0.25% yield on TBM, the treasury rates are all negative (or the risk premium on corporate bonds has collapsed).

Hmm. Yeah, seems unlikely. But possible if the fed is buying bonds.
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Re: Grappling with the New Reality of Zero Bond Yields Virtually Everywhere

Post by Bluce »

dkturner wrote: Fri Aug 14, 2020 8:59 am
Nate79 wrote: Thu Aug 13, 2020 9:31 pm YTD total bond market return is about 7% and 1 year return about 10.5%.
I thought this thread was about bond “yield”?
If a Treasury bond fund yielded 1% and you said you weren't interested, but it had a YTD total return of 20% would you still reject it because the yield was so low?
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Re: Grappling with the New Reality of Zero Bond Yields Virtually Everywhere

Post by milktoast »

Explorer wrote: Fri Aug 14, 2020 10:09 am So 25% of your portfolio is TBM? Assuming so, your comment on "prospects" is interesting.. do you feel you understand the prospect of the 75% which probably is stocks?
Yes. Not to drag this thread off topic, but I do have a rough understanding of the forces that can cause stocks to go down or up from here.

But that doesn’t mean I understand the forces that can change the return on bonds. Especially as nominal yields approach zero. Sometimes math gets odd near 0.
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Re: Grappling with the New Reality of Zero Bond Yields Virtually Everywhere

Post by Stinky »

jeffyscott wrote: Fri Aug 14, 2020 9:54 am
I don't know enough about the MYGAs, a few posters have recently been bringing these up a lot, never heard of them before that.
A major reason to consider MYGAs now is that their interest rates are attractive compared to bank CDs.

Anyone considering them needs to be aware of their heavy surrender charges and lack of FDIC insurance coverage.
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Re: Grappling with the New Reality of Zero Bond Yields Virtually Everywhere

Post by jeffyscott »

milktoast wrote: Fri Aug 14, 2020 10:13 am
jeffyscott wrote: Fri Aug 14, 2020 10:07 am As a first approximation, a 0.9% decline in yield would produce a 5.76% capital gain and adding the current yield to that gets you to about 7%.
Thank you.

So at 0.25% yield on TBM, the treasury rates are all negative (or the risk premium on corporate bonds has collapsed).

Hmm. Yeah, seems unlikely. But possible if the fed is buying bonds.

A mix of intermediate treasury, mortgage backed, and corporate basically make up total bond. And coincidentally the current SEC yield for intermediate treasury is 0.25%.

Mortgage backed and intermediate corporate are about 1.5% or so, depending on what fund you look at. So -0.9% across the board would be intermediate treasury at -0.65% and the other components at around 0.6%.
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Re: Grappling with the New Reality of Zero Bond Yields Virtually Everywhere

Post by jeffyscott »

Stinky wrote: Fri Aug 14, 2020 10:24 am
jeffyscott wrote: Fri Aug 14, 2020 9:54 am
I don't know enough about the MYGAs, a few posters have recently been bringing these up a lot, never heard of them before that.
A major reason to consider MYGAs now is that their interest rates are attractive compared to bank CDs.

Anyone considering them needs to be aware of their heavy surrender charges and lack of FDIC insurance coverage.
Also their state guarantee organization's limits and policies.

For example, the guarantee may be only for the cash value, net of those heavy surrender charges, at the time of the failure (the usual guarantee language seems to indicate that that is what is covered, unless I have misunderstood). The state limits seem to typically be $250K or $300K and, in addition, if you are in CA, you only get 80% under the guarantee.
The two greatest enemies of the equity fund investor are expenses and emotions. ― John C. Bogle
fatcoffeedrinker
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Re: Grappling with the New Reality of Zero Bond Yields Virtually Everywhere

Post by fatcoffeedrinker »

fatcoffeedrinker wrote: Fri Aug 14, 2020 9:35 am
Stinky wrote: Fri Aug 14, 2020 3:48 am
fatcoffeedrinker wrote: Thu Aug 13, 2020 10:59 pm
Stinky wrote: Thu Aug 13, 2020 9:42 pm
7eight9 wrote: Thu Aug 13, 2020 8:02 pm It won't be useful for rebalancing but one might consider multi-year guaranteed annuities (MYGAs) in lieu of part of their fixed income allocation.

Example --- Fixed Annuity Rates for August 2020 ---https://www.blueprintincome.com/fixed-annuities

Five year rates as high as 3.45% per above link.
This ^^^^^

Just bought a few of them myself. Through Blueprint Income, which is giving me great service.
This is very interesting, as I had not heard of these before. I usually avoid direct bank CDs because I have a 54% marginal tax bracket, so the after tax rate is fairly low. I can buy brokered CDs through my 401k, but those rates are much worse than direct bank CDs. But I intend to retire within 3 years, and will move to a much lower tax bracket. I wonder whether MYGAs would be worth it since I wouldn't have to pay the tax until I was in the lower brackets. I'll need to do some further research on these.
Wow! A 54% marginal tax bracket is absolutely brutal!

Here's a good recent thread on MYGAs. See especially the post by gjlynch17, which has an excellent summary of the product. About the 10th post in the thread.

viewtopic.php?f=1&t=313935
Thanks Stinky, I'll take a read through. Yup, 54% is brutal thanks to California and NIIT. Both of which will go away after I retire and we move.
So I took a quick look at blueprintincome.com. There is a company, Americo rated A, that is offering 3.2% for 5 years. One would have to ask, what is Americo investing in to guaranty 3.2% to me? Unlike lifetime annuities, there are no mortality credits here because the entire cash value is returned upon death without charge. To be sure, there is a pretty stiff surrender charge structure of 9/8/7/6/5. Are they making that much on surrender charges? I would assume that most people that invest in these are pretty certain they don't need the money during the term, so I wouldn't think Americo is making that much extra on surrender charges. I guess they are probably investing somewhat in non-securities, such as commercial real estate loans, that pay higher yields.
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Re: Grappling with the New Reality of Zero Bond Yields Virtually Everywhere

Post by RomeoMustDie »

irrationalexuberance wrote: Thu Aug 13, 2020 7:37 pm I'm curious what you guys make of this:

https://www.bridgewater.com/grappling-w ... everywhere

In particular, this passage jumped out at me:

"Every portfolio is unique, but most have equities and bonds, and the traditional 60/40 mix is a reasonable starting point for considering the impact of zero bond yields. Taking this as a prototype, there is the bond portion and there is the equity portion, and both are impacted by zero bond yields. Obviously, at near-zero yields, the bond portion has a near-zero expected return. And because there is a limit to how much yields can fall and no limit to how much they can rise, the bond portion has a limited upside return and an unlimited downside return. A zero bond yield also raises the risk related to the equity portion. In economic downturns, the bond portion can no longer provide capital gains to offset losses in the equity portion. And lacking the ability for interest rates to fall, there is less ability for an interest rate cut to stabilize a decline in economic growth and earnings, as well as less ability for a decline in the discount rate to cushion a decline in prices due to a decline in earnings. The net of it is that zero bond yields reduce the return of the traditional 60/40 portfolio while raising its downside risk relative to its upside potential."
Really the true hands off investment ETF is RPAR or even better an international version of RPAR if it ever comes into existence.

You'll notice nobody in this forum can sufficiently answer the broader global macro questions so the question falls to you. Listen to some guys on the internet or prepare for all possible outcomes.

I choose the latter.
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Re: Grappling with the New Reality of Zero Bond Yields Virtually Everywhere

Post by jeffyscott »

fatcoffeedrinker wrote: Fri Aug 14, 2020 10:44 amTo be sure, there is a pretty stiff surrender charge structure of 9/8/7/6/5.
Is that the percent by year, e.g if you pull the money out in year one (or the company fails in that year), you lose 9% and in year 5 it would be 5%?
The two greatest enemies of the equity fund investor are expenses and emotions. ― John C. Bogle
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Re: Grappling with the New Reality of Zero Bond Yields Virtually Everywhere

Post by columbia »

RomeoMustDie wrote: Fri Aug 14, 2020 11:45 am
irrationalexuberance wrote: Thu Aug 13, 2020 7:37 pm I'm curious what you guys make of this:

https://www.bridgewater.com/grappling-w ... everywhere

In particular, this passage jumped out at me:

"Every portfolio is unique, but most have equities and bonds, and the traditional 60/40 mix is a reasonable starting point for considering the impact of zero bond yields. Taking this as a prototype, there is the bond portion and there is the equity portion, and both are impacted by zero bond yields. Obviously, at near-zero yields, the bond portion has a near-zero expected return. And because there is a limit to how much yields can fall and no limit to how much they can rise, the bond portion has a limited upside return and an unlimited downside return. A zero bond yield also raises the risk related to the equity portion. In economic downturns, the bond portion can no longer provide capital gains to offset losses in the equity portion. And lacking the ability for interest rates to fall, there is less ability for an interest rate cut to stabilize a decline in economic growth and earnings, as well as less ability for a decline in the discount rate to cushion a decline in prices due to a decline in earnings. The net of it is that zero bond yields reduce the return of the traditional 60/40 portfolio while raising its downside risk relative to its upside potential."
Really the true hands off investment ETF is RPAR or even better an international version of RPAR if it ever comes into existence.

You'll notice nobody in this forum can sufficiently answer the broader global macro questions so the question falls to you. Listen to some guys on the internet or prepare for all possible outcomes.

I choose the latter.
For those wondering and I was, RPAR is (per Financial Times):


US bond 57.04%
Non-US stock 16.83%
US stock 12.40%
Cash 0.17%
Non-US bond 0.00%
Other 13.55%


https://markets.ft.com/data/etfs/tearsh ... AR:PCQ:USD
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Re: Grappling with the New Reality of Zero Bond Yields Virtually Everywhere

Post by RomeoMustDie »

columbia wrote: Fri Aug 14, 2020 11:54 am
RomeoMustDie wrote: Fri Aug 14, 2020 11:45 am
irrationalexuberance wrote: Thu Aug 13, 2020 7:37 pm I'm curious what you guys make of this:

https://www.bridgewater.com/grappling-w ... everywhere

In particular, this passage jumped out at me:

"Every portfolio is unique, but most have equities and bonds, and the traditional 60/40 mix is a reasonable starting point for considering the impact of zero bond yields. Taking this as a prototype, there is the bond portion and there is the equity portion, and both are impacted by zero bond yields. Obviously, at near-zero yields, the bond portion has a near-zero expected return. And because there is a limit to how much yields can fall and no limit to how much they can rise, the bond portion has a limited upside return and an unlimited downside return. A zero bond yield also raises the risk related to the equity portion. In economic downturns, the bond portion can no longer provide capital gains to offset losses in the equity portion. And lacking the ability for interest rates to fall, there is less ability for an interest rate cut to stabilize a decline in economic growth and earnings, as well as less ability for a decline in the discount rate to cushion a decline in prices due to a decline in earnings. The net of it is that zero bond yields reduce the return of the traditional 60/40 portfolio while raising its downside risk relative to its upside potential."
Really the true hands off investment ETF is RPAR or even better an international version of RPAR if it ever comes into existence.

You'll notice nobody in this forum can sufficiently answer the broader global macro questions so the question falls to you. Listen to some guys on the internet or prepare for all possible outcomes.

I choose the latter.
For those wondering and I was, RPAR is (per Financial Times):


US bond 57.04%
Non-US stock 16.83%
US stock 12.40%
Cash 0.17%
Non-US bond 0.00%
Other 13.55%


https://markets.ft.com/data/etfs/tearsh ... AR:PCQ:USD
Yeah and the breakdown of the bond portion holds TIPS I'm not sure in which ratios.
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Re: Grappling with the New Reality of Zero Bond Yields Virtually Everywhere

Post by columbia »

RomeoMustDie wrote: Fri Aug 14, 2020 12:00 pm
columbia wrote: Fri Aug 14, 2020 11:54 am
RomeoMustDie wrote: Fri Aug 14, 2020 11:45 am
irrationalexuberance wrote: Thu Aug 13, 2020 7:37 pm I'm curious what you guys make of this:

https://www.bridgewater.com/grappling-w ... everywhere

In particular, this passage jumped out at me:

"Every portfolio is unique, but most have equities and bonds, and the traditional 60/40 mix is a reasonable starting point for considering the impact of zero bond yields. Taking this as a prototype, there is the bond portion and there is the equity portion, and both are impacted by zero bond yields. Obviously, at near-zero yields, the bond portion has a near-zero expected return. And because there is a limit to how much yields can fall and no limit to how much they can rise, the bond portion has a limited upside return and an unlimited downside return. A zero bond yield also raises the risk related to the equity portion. In economic downturns, the bond portion can no longer provide capital gains to offset losses in the equity portion. And lacking the ability for interest rates to fall, there is less ability for an interest rate cut to stabilize a decline in economic growth and earnings, as well as less ability for a decline in the discount rate to cushion a decline in prices due to a decline in earnings. The net of it is that zero bond yields reduce the return of the traditional 60/40 portfolio while raising its downside risk relative to its upside potential."
Really the true hands off investment ETF is RPAR or even better an international version of RPAR if it ever comes into existence.

You'll notice nobody in this forum can sufficiently answer the broader global macro questions so the question falls to you. Listen to some guys on the internet or prepare for all possible outcomes.

I choose the latter.
For those wondering and I was, RPAR is (per Financial Times):


US bond 57.04%
Non-US stock 16.83%
US stock 12.40%
Cash 0.17%
Non-US bond 0.00%
Other 13.55%


https://markets.ft.com/data/etfs/tearsh ... AR:PCQ:USD
Yeah and the breakdown of the bond portion holds TIPS I'm not sure in which ratios.
Are you retired?
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Re: Grappling with the New Reality of Zero Bond Yields Virtually Everywhere

Post by Northern Flicker »

I have sympathy with the position, but it also uses language that is designed to instill fear of bonds and fear of traditional portfolios that investors can manage themselves.

For instance, consider this quote from the article:
And because there is a limit to how much yields can fall and no limit to how much they can rise, the bond portion has a limited upside return and an unlimited downside return.
Saying that bonds have unlimited downside (which is technically true at any yield level) is synonymous with saying that hyperinflation is possible. Hyperinflation is a bigger risk at times when treasury rates are are already going to be in double digits, not when rates are near zero.

If your high quality bond investment loses 40% of its value due to rising rates (extremely unlikely), the fact that the yield started at 3% and not 0.5% is not much consolation.

So, yes, low rates are a problem. But the problem is low expected return for both bonds and equities. Alternatives do not have a high expected return at the same time.
Risk is not a guarantor of return.
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Re: Grappling with the New Reality of Zero Bond Yields Virtually Everywhere

Post by fatcoffeedrinker »

jeffyscott wrote: Fri Aug 14, 2020 11:49 am
fatcoffeedrinker wrote: Fri Aug 14, 2020 10:44 amTo be sure, there is a pretty stiff surrender charge structure of 9/8/7/6/5.
Is that the percent by year, e.g if you pull the money out in year one (or the company fails in that year), you lose 9% and in year 5 it would be 5%?
Yes, by year, for voluntary withdrawals. But I don't think it applies if the company fails. If that happened, you would have to rely on the state guaranty. That all said, I'm basing this solely off of the blueprintincome website. If I were to buy, I'd read the entire annuity contract to make sure I understood all of the nuances.
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Re: Grappling with the New Reality of Zero Bond Yields Virtually Everywhere

Post by Always passive »

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Re: Grappling with the New Reality of Zero Bond Yields Virtually Everywhere

Post by Day9 »

Northern Flicker wrote: Fri Aug 14, 2020 12:31 pm I have sympathy with the position, but it also uses language that is designed to instill fear of bonds and fear of traditional portfolios that investors can manage themselves.

For instance, consider this quote from the article:
And because there is a limit to how much yields can fall and no limit to how much they can rise, the bond portion has a limited upside return and an unlimited downside return.
Saying that bonds have unlimited downside (which is technically true at any yield level) is synonymous with saying that hyperinflation is possible. Hyperinflation is a bigger risk at times when treasury rates are are already going to be in double digits, not when rates are near zero.

If your high quality bond investment loses 40% of its value due to rising rates (extremely unlikely), the fact that the yield started at 3% and not 0.5% is not much consolation.

So, yes, low rates are a problem. But the problem is low expected return for both bonds and equities. Alternatives do not have a high expected return at the same time.
I also noticed that phrasing. Normally when people say "unlimited downside" they are referring to short selling stocks, or naked options, where it is possible to lose more than you started with. With bonds, putting aside default risk, as the interest rate approaches infinity the current value of your bond approaches zero. And as you point out nominal bonds can lose value in real terms by hyper inflation.

I think a less fear-mongering way to make the point would be to consider how much you would lose if rates rise to some unlikely but not impossible levels like 3%, 5%, 10%. You wouldn't be able to make the bold claim "limited upside and unlimited downside" and would have to settle for something like "If yields go as low as 0% or -1% your maximum return is 10% or 20%, but if they go up to 3%, 5%, or 10% you can lose up to X% of your investment.

Furthermore you can always hold the bond to maturity to get your principal back intact (in nominal dollars) but of course the loss was real because of the opportunity cost of missing out on investing in higher yielding bonds after you locked in the low rate
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Re: Grappling with the New Reality of Zero Bond Yields Virtually Everywhere

Post by Stinky »

fatcoffeedrinker wrote: Fri Aug 14, 2020 12:46 pm
jeffyscott wrote: Fri Aug 14, 2020 11:49 am
fatcoffeedrinker wrote: Fri Aug 14, 2020 10:44 amTo be sure, there is a pretty stiff surrender charge structure of 9/8/7/6/5.
Is that the percent by year, e.g if you pull the money out in year one (or the company fails in that year), you lose 9% and in year 5 it would be 5%?
Yes, by year, for voluntary withdrawals. But I don't think it applies if the company fails. If that happened, you would have to rely on the state guaranty. That all said, I'm basing this solely off of the blueprintincome website. If I were to buy, I'd read the entire annuity contract to make sure I understood all of the nuances.
In practice, what almost always happens in an insolvency is that the guaranty fund will find another insurer to take over the policy administration. In the overwhelming majority of insolvencies, the policies terms are fully honored by the assuming company, up to the per-policy limits of the guaranty fund.

The guaranty fund’s role is to provide whatever funding is necessary to make up the shortfall in the original insurer’s assets that led to the insolvency.
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Re: Grappling with the New Reality of Zero Bond Yields Virtually Everywhere

Post by jeffyscott »

Day9 wrote: Fri Aug 14, 2020 12:51 pm
Northern Flicker wrote: Fri Aug 14, 2020 12:31 pm I have sympathy with the position, but it also uses language that is designed to instill fear of bonds and fear of traditional portfolios that investors can manage themselves.

For instance, consider this quote from the article:
And because there is a limit to how much yields can fall and no limit to how much they can rise, the bond portion has a limited upside return and an unlimited downside return.
Saying that bonds have unlimited downside (which is technically true at any yield level) is synonymous with saying that hyperinflation is possible. Hyperinflation is a bigger risk at times when treasury rates are are already going to be in double digits, not when rates are near zero.

If your high quality bond investment loses 40% of its value due to rising rates (extremely unlikely), the fact that the yield started at 3% and not 0.5% is not much consolation.

So, yes, low rates are a problem. But the problem is low expected return for both bonds and equities. Alternatives do not have a high expected return at the same time.
I also noticed that phrasing. Normally when people say "unlimited downside" they are referring to short selling stocks, or naked options, where it is possible to lose more than you started with. With bonds, putting aside default risk, as the interest rate approaches infinity the current value of your bond approaches zero. And as you point out nominal bonds can lose value in real terms by hyper inflation.

I think a less fear-mongering way to make the point would be to consider how much you would lose if rates rise to some unlikely but not impossible levels like 3%, 5%, 10%. You wouldn't be able to make the bold claim "limited upside and unlimited downside" and would have to settle for something like "If yields go as low as 0% or -1% your maximum return is 10% or 20%, but if they go up to 3%, 5%, or 10% you can lose up to X% of your investment.

Furthermore you can always hold the bond to maturity to get your principal back intact (in nominal dollars) but of course the loss was real because of the opportunity cost of missing out on investing in higher yielding bonds after you locked in the low rate
Yes, I don't see the unlimited downside, due to rising interest rates. If I own 10 year treasury today and on Monday, investors suddenly start demanding a 10, 20, 30% or whatever unrealistic YTM you want to pick, the value of the bond certainly drastically declines, but it never goes to $0 because the bond will still pay it's coupons and will someday mature.
The two greatest enemies of the equity fund investor are expenses and emotions. ― John C. Bogle
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Re: Grappling with the New Reality of Zero Bond Yields Virtually Everywhere

Post by Blender »

fatcoffeedrinker wrote: Fri Aug 14, 2020 10:44 am So I took a quick look at blueprintincome.com. There is a company, Americo rated A, that is offering 3.2% for 5 years. One would have to ask, what is Americo investing in to guaranty 3.2% to me? Unlike lifetime annuities, there are no mortality credits here because the entire cash value is returned upon death without charge. To be sure, there is a pretty stiff surrender charge structure of 9/8/7/6/5. Are they making that much on surrender charges? I would assume that most people that invest in these are pretty certain they don't need the money during the term, so I wouldn't think Americo is making that much extra on surrender charges. I guess they are probably investing somewhat in non-securities, such as commercial real estate loans, that pay higher yields.
Don't forget the 1.5% commission they pay out to blueprintincome bringing it up to 4.7%. You're asking the same question my wife just asked me when discussing this option.
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Re: Grappling with the New Reality of Zero Bond Yields Virtually Everywhere

Post by mbizzle »

I read the article and I think it provides some compelling points that I want to reiterate below for those that didn't read the whole thing.

TLDR: Overall I find their thesis of a potential for significant inflation to be fairly compelling. I also understand and am largely in agreement with their point regarding the limited total returns available to a bond market that has almost zero yields across the entire term structure given their view that -1% is the upper limit to rates (due to an arbitrage to cash).

As a result I'm contemplating moving some of my 20% nominal bonds portfolio to TIPS. I'm not necessarily a big fan of gold given its volatility and non yielding aspect. Instead I'm contemplating allocating a portion of the bonds to real assets such as infrastructure which should provide some yield as well as an inflation hedge. In the piece they discuss creating an equity portfolio of durable cash flows, which I think infrastructure would qualify while providing the benefits of an inflation hedge. Specifically, I'm looking at the Brookfield Infrastructure and Renewable funds.


1) A common point made in this thread is that we've heard this before and rates have continued to drop and provided a bulwark in downturns, and that we can continue to expect the same going forward. The research piece explicitly addresses this point in two ways:

The first is up until recently we have not had a near zero interest rate AND a flat term structure. The upward sloping yield curve is what has allowed bonds to provide a strong total return in response to the latest round of Fed balance sheet expansion. Given the flat yield curve investors can no longer bank on this providing any more juice.

The second point is that in their estimation there is an upper bound to rates of approximately -1% as the arbitrage to cash past -1% becomes fairly enticing. The total return potential is demonstrated in the following image. It is the combination of this low potential total return in the high inflationary environment described below that has them worried about nominal bounds.

Image

2) The US has moved through two phases of Monetary Policy and is moving onto a third. MP1 (lowering short end interest rates), MP2 (QE to lower longer term interest rates), and now MP3 (fiscal expansion). Their thesis is that in the face of any economic wavering with no more room to go on MP1 and MP2 in terms of stimulus we are facing a new era of fiscal spending which should ultimately lead inflation.

Image

Crucially it is this expectation for high inflation in the face of either a sideways economy (staglation) or reflation that they are expecting. They are of the opinion that a government that can print its own money will indeed to do so avoid a major depression, and as a result their base case is an expectation of higher inflation. Marrying their expectation for higher inflation to a zero interest rate environment with a flat term structure is why they are rotating out of nominal bonds into inflation linked bonds and gold.

Image
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Re: Grappling with the New Reality of Zero Bond Yields Virtually Everywhere

Post by Stinky »

Blender wrote: Fri Aug 14, 2020 8:40 pm
fatcoffeedrinker wrote: Fri Aug 14, 2020 10:44 am So I took a quick look at blueprintincome.com. There is a company, Americo rated A, that is offering 3.2% for 5 years. One would have to ask, what is Americo investing in to guaranty 3.2% to me? Unlike lifetime annuities, there are no mortality credits here because the entire cash value is returned upon death without charge. To be sure, there is a pretty stiff surrender charge structure of 9/8/7/6/5. Are they making that much on surrender charges? I would assume that most people that invest in these are pretty certain they don't need the money during the term, so I wouldn't think Americo is making that much extra on surrender charges. I guess they are probably investing somewhat in non-securities, such as commercial real estate loans, that pay higher yields.
Don't forget the 1.5% commission they pay out to blueprintincome bringing it up to 4.7%. You're asking the same question my wife just asked me when discussing this option.
The commission is a one time expense. It would be amortized over the 5 year guarantee period.

If the commission is 1.5%, that would equal 0.3% additional “cost” per year.
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Re: Grappling with the New Reality of Zero Bond Yields Virtually Everywhere

Post by JBTX »

It amazes me how people will ignore basic math in the defense of stay the course dogma. Bond yields are zero, but others respond "but ytd return is xxx!". "I've been hearing bond rates wouldn't go down for years"

Ok great. But now bond yields are zero, and expected returns are zero. Period. Zero. Yes, yields could go negative, and you could best case scenario eek out a small positive return.

Also, as the article states, at zero expected return, the "ballast" effect will be much less, and almost nothing.

The article is correct, a 60/40 portfolio will have lower exoected return due to zero bond yields, and higher risk due to muted ballast, as well as additional downside risk if rates were to go up.
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Re: Grappling with the New Reality of Zero Bond Yields Virtually Everywhere

Post by rockstar »

JBTX wrote: Fri Aug 14, 2020 8:58 pm It amazes me how people will ignore basic math in the defense of stay the course dogma. Bond yields are zero, but others respond "but ytd return is xxx!". "I've been hearing bond rates wouldn't go down for years"

Ok great. But now bond yields are zero, and expected returns are zero. Period. Zero. Yes, yields could go negative, and you could best case scenario eek out a small positive return.

Also, as the article states, at zero expected return, the "ballast" effect will be much less, and almost nothing.

The article is correct, a 60/40 portfolio will have lower exoected return due to zero bond yields, and higher risk due to muted ballast, as well as additional downside risk if rates were to go up.
We're going to have to become more like Japan rate wise. If rates go up, asset values will get crushed. It's in the Fed's interest to keep rates range bound for the foreseeable future. And I doubt we'll see significant inflation in the future. Labor unions aren't driving up wages. Minimum wages barely budged over the last twenty years. So unless we start to see some version of basic income in the future, prices will remain pretty stagnant. What's more likely is that we'll see taxes go up, which should suppress consumer spending. I don't think our Congress thinks that debt can go up without any constraints. Given this I don't see see US bonds a viable component. You're going to have to go EM or HY to obtain a high enough yield to make this component make sense. But these bonds are likely more correlated with equities.
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