Why are you holding bonds

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Caduceus
Posts: 2319
Joined: Mon Sep 17, 2012 1:47 am

Re: Why are you holding bonds

Post by Caduceus » Wed Feb 12, 2020 9:33 am

gmaynardkrebs wrote:
Tue Feb 11, 2020 7:02 pm
Caduceus wrote:
Tue Feb 11, 2020 4:49 pm
pascalwager wrote:
Tue Feb 11, 2020 12:05 am
Caduceus wrote:
Sun Feb 09, 2020 6:56 pm
I recommend Warren Buffett's writings/interviews where he explains why the idea that bonds are "safe" investments is a pretty silly one. Bonds are not safe in the abstract independent of their pricing and valuation, and right now, they are not safe investments.
Yes, even Treasuries have interest rate risk. If interest rates rise, bond prices decrease. I assume that's what he means, but don't most bond investors already know this and still don't feel silly? (Some might feel silly because of the low yields.)
Actually, that's not what he means. But you can easily google his many interviews or read his writings on the subject to know what he thinks. And maybe bond investors don't feel silly because they are silly?
So prices in one of the largest, most efficient, and most liquid markets are silly?
Prices in trading of Tesla are extremely liquid and with high volume. I think that's a good example of the market not being very efficient at all.

If you look back even in recent history you can find moments where bond prices fluctuated wildly over the matter of days through obvious mis-pricing errors - Buffett has written about how he made a killing bidding for municipal bonds and other types of issues where the yields fluctuated between something like 10% to 40% in a metter of mere days.

But this is not an argument about EMH. All he's saying is that at current valuations, with a medium to long-term perspective, bonds do not offer any adequate return at all compared to other opportunities out there. Berkshire has massive amounts of cash that it would happily invest in longer-term notes - but instead he's basically keeping almost all of it in three-month Treasuries.

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gmaynardkrebs
Posts: 1851
Joined: Sun Feb 10, 2008 11:48 am

Re: Why are you holding bonds

Post by gmaynardkrebs » Wed Feb 12, 2020 9:44 am

Caduceus wrote:
Wed Feb 12, 2020 9:33 am
gmaynardkrebs wrote:
Tue Feb 11, 2020 7:02 pm
Caduceus wrote:
Tue Feb 11, 2020 4:49 pm
pascalwager wrote:
Tue Feb 11, 2020 12:05 am
Caduceus wrote:
Sun Feb 09, 2020 6:56 pm
I recommend Warren Buffett's writings/interviews where he explains why the idea that bonds are "safe" investments is a pretty silly one. Bonds are not safe in the abstract independent of their pricing and valuation, and right now, they are not safe investments.
Yes, even Treasuries have interest rate risk. If interest rates rise, bond prices decrease. I assume that's what he means, but don't most bond investors already know this and still don't feel silly? (Some might feel silly because of the low yields.)
Actually, that's not what he means. But you can easily google his many interviews or read his writings on the subject to know what he thinks. And maybe bond investors don't feel silly because they are silly?
So prices in one of the largest, most efficient, and most liquid markets are silly?
That's not a very impressive argument. Prices in trading of Tesla are extremely liquid and with high volume. I think that's a good example of the market not being very efficient at all.

If you look back even in recent history you can find moments where bond prices fluctuated wildly over the matter of days through obvious mis-pricing errors - Buffett has written about how he made a killing bidding for municipal bonds and other types of issues where the yields fluctuated between something like 10% to 40% in a metter of mere days.

But this is not an argument about EMH. All he's saying is that at current valuations, with a medium to long-term perspective, bonds do not offer any adequate return at all compared to other opportunities out there. Berkshire has massive amounts of cash that it would happily invest in longer-term notes - but instead he's basically keeping almost all of it in three-month Treasuries.
Due to the difficulty of borrowing its shares, Tesla has become extremely difficult and costly to short. That is not the case with Treasuries.

Admiral
Posts: 2790
Joined: Mon Oct 27, 2014 12:35 pm

Re: Why are you holding bonds

Post by Admiral » Wed Feb 12, 2020 9:49 am

Caduceus wrote:
Wed Feb 12, 2020 9:33 am
gmaynardkrebs wrote:
Tue Feb 11, 2020 7:02 pm
Caduceus wrote:
Tue Feb 11, 2020 4:49 pm
pascalwager wrote:
Tue Feb 11, 2020 12:05 am
Caduceus wrote:
Sun Feb 09, 2020 6:56 pm
I recommend Warren Buffett's writings/interviews where he explains why the idea that bonds are "safe" investments is a pretty silly one. Bonds are not safe in the abstract independent of their pricing and valuation, and right now, they are not safe investments.
Yes, even Treasuries have interest rate risk. If interest rates rise, bond prices decrease. I assume that's what he means, but don't most bond investors already know this and still don't feel silly? (Some might feel silly because of the low yields.)
Actually, that's not what he means. But you can easily google his many interviews or read his writings on the subject to know what he thinks. And maybe bond investors don't feel silly because they are silly?
So prices in one of the largest, most efficient, and most liquid markets are silly?
Prices in trading of Tesla are extremely liquid and with high volume. I think that's a good example of the market not being very efficient at all.

If you look back even in recent history you can find moments where bond prices fluctuated wildly over the matter of days through obvious mis-pricing errors - Buffett has written about how he made a killing bidding for municipal bonds and other types of issues where the yields fluctuated between something like 10% to 40% in a metter of mere days.

But this is not an argument about EMH. All he's saying is that at current valuations, with a medium to long-term perspective, bonds do not offer any adequate return at all compared to other opportunities out there. Berkshire has massive amounts of cash that it would happily invest in longer-term notes - but instead he's basically keeping almost all of it in three-month Treasuries.
If people are willing to pay $x for a share of Tesla, then that is what it is worth at this moment in time. Whether it will hold its value is another matter. But worth = what someone will pay. Completely dictated by the market.

MichCPA
Posts: 883
Joined: Fri Jul 06, 2018 9:06 pm

Re: Why are you holding bonds

Post by MichCPA » Wed Feb 12, 2020 10:06 am

Because I don't want to take the chance of losing all of my wage income and 50% of my assets in withing 6-9 months.

Am I giving up some return? Absolutely. Does that mean that my decision is sub-optimal? Not necessarily.

RAchip
Posts: 395
Joined: Sat May 07, 2016 7:31 pm

Re: Why are you holding bonds

Post by RAchip » Wed Feb 12, 2020 11:59 am

Because I built a portfolio of safe individual municipal bonds a number of years ago from my state that is completely state and federal tax free that produces $86k in income per year (about 3.4% return on my principal investment). I wish I had just bought stocks with this money but its a modest portion of my portfolio so I'm just going to hold them to maturity.

robphoto
Posts: 149
Joined: Tue Sep 25, 2018 12:42 pm

Re: Why are you holding bonds

Post by robphoto » Wed Feb 12, 2020 12:08 pm

We're 60/40 and it feels too conservative, which I think is the natural way to feel after stocks have been doing so well, so that seems about right.

Topic Author
stocknoob4111
Posts: 1061
Joined: Sun Jan 07, 2018 12:52 pm

Re: Why are you holding bonds

Post by stocknoob4111 » Wed Feb 12, 2020 2:14 pm

In today's testimony Fed chief Powell indicated that during the next recession he has no issues lowering rates close to zero after which he will aggressively use QE... so at least rates on the short end going to zero are a possibility

pascalwager
Posts: 1651
Joined: Mon Oct 31, 2011 8:36 pm

Re: Why are you holding bonds

Post by pascalwager » Wed Feb 12, 2020 8:59 pm

Admiral wrote:
Wed Feb 12, 2020 7:36 am
Would be interesting to hear from retirees (those 65+) who do not hold any bonds.

100/0 seems like a young person's game, or those who are hugely optimistic (and/or well resourced).
...or those retirees who are familiar with the Estrada studies.
Retired, pension, no SS | 55/45, S/B | 50/50, US/int'l | tilts: large value, small | cash 1%

JBTX
Posts: 5892
Joined: Wed Jul 26, 2017 12:46 pm

Re: Why are you holding bonds

Post by JBTX » Wed Feb 12, 2020 9:31 pm

Just as a thought exercise, given 10 years at 1.6%, would it make more sense to go:

1/3 higher yield cash and equivents- high yield bank deposits, cds, ibonds, money markets, etc
1/3 TIPS
1/3 ZROZ (only in a tax advantaged acct)

https://www.morningstar.com/etfs/arcx/zroz/quote

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gmaynardkrebs
Posts: 1851
Joined: Sun Feb 10, 2008 11:48 am

Re: Why are you holding bonds

Post by gmaynardkrebs » Wed Feb 12, 2020 11:56 pm

stocknoob4111 wrote:
Wed Feb 12, 2020 2:14 pm
In today's testimony Fed chief Powell indicated that during the next recession he has no issues lowering rates close to zero after which he will aggressively use QE... so at least rates on the short end going to zero are a possibility
No news there. If he had said no problem with "negative rates," would be newsworthy indeed.

edgeagg
Posts: 180
Joined: Tue Jan 23, 2018 1:27 pm
Location: WA-US

Re: Why are you holding bonds

Post by edgeagg » Thu Feb 13, 2020 10:22 am

1) I am subject to sequence of returns risk and a 50% drawdown will affect the lifestyle quite negatively. At 65/35 now but en-route to 60/40.
2) Bonds are a way of keeping some dry powder
3) Am I giving up returns? Absolutely. But do you know the future?

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Peculiar_Investor
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Re: Why are you holding bonds

Post by Peculiar_Investor » Thu Feb 13, 2020 10:41 am

One further thought. You never know when bonds will be the top returning asset class for any given year.

The Callan Periodic Table of Investment Returns shows a) it has happened three times in the past twenty years and b) there is no pattern and therefore diversification across asset classes makes sense.
Normal people… believe that if it ain’t broke, don’t fix it. Engineers believe that if it ain’t broke, it doesn’t have enough features yet. – Scott Adams

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