# Bond rates



## BilliamD75

It's the start of 2019 and the ntma have sold 4 billion 10 year bonds at 1.123. 
Remember the rate at the start of the year. Now if you are a bond/hedge or pension fund manager would you lock up 4 billion of 10 year notes at 1.123 rate which is less than inflation when you can deposit it at the fed for a better rate with easy access 
We know European banks are depositing excess cash through subsidiaries at the fed as the over night deposit rate is negative at the ecb. Who bought the debt., now I am a bit of the wall and it's just an option but did the ntma repurchase the debt with its excess cash waiting for an external enemy like brexit to blame for raising rates. Answers on the back of an envelope please.


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## RedOnion

BilliamD75 said:


> when you can deposit it at the fed for a better rate with easy access


I didn't realise the FED took Euro deposits?...


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## Gordon Gekko

RedOnion said:


> I didn't realise the FED took Euro deposits?...



It’s the pillar of Trump’s push for a second term; Make Europe Great Again


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## BilliamD75

The ntma has said that the interest payments on the 200 billion debt will be 5 billion this year and 4.5 billion next year, they spoke about debt chimneys and that 90% of the debt was international among other things. I always ask the question what are they not saying and it's Italy. 
Irish bonds held by the ecb are no big deal in the grand scheme of things however Italian government and bank bonds could be worth up to a trillion euros, now that is a big deal, a very big deal and we are joined at the hip. Draghi has been wearing the blue Jersey for Italy as Head of the ecb and its coming to the end with Lagarde as the new chief not that it makes a difference. Its like changing the captain of the titanic with the captain of the Costa cordia as the bonds are already taking on water . Irish debt to gdp/gnp or even gni makes no difference or does the inflation rate. The spread between Italian and German bonds is the real indication of where things are in the bond markets, 
The first meeting of the ecbs new chief will determine when the rates rise. Listen out for shrinking of the ecb balance sheet, this is when rates will rise and fast, anything between 5 and 10% to cover the spread between what it receives and has to pay out on the bonds. If it doesn't it will need a bailout as it can go bankrupt. It may just consolidate all the bonds (euro bond) and the conversation is irrelevant, we are polar opposites in our oppions, I wonder which way it goes, a sure it will be grand.


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## WolfeTone

Is the underlying point here, that the euro is goosed?


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## NoRegretsCoyote

This stuff is tedious.

European banks have their problems but are better capitalised than five years ago.

The ECB blinked in 2012. Since then it has kept up a low-for-long policy. Runaway inflation is nowhere to be seen and most countries are back reducing debt-to-GDP ratios.


There is actually lending power in the ESM to bail out Italy if needs be.


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## Protocol

We live in strange times.

German 10 yr bond yields have fallen this week, as have other bond yields.

German 10yr yields nearing -0.40%, Irish at under 0.10%.

Just imagine that - *savers are willing to lend to the State over 10 years for a 0.10% pa return.*


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## WolfeTone

NoRegretsCoyote said:


> European banks have their problems but are better capitalised than five years ago.



Isnt Deutsche Bank effectively bankrupt? Being held together by ECB supports? 
The banking system in Europe is still far from a clear bill of health. Balance sheets have been pumped to give effect of adequate capital, but debt is still pervasive.


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## Andrew365

No...DB has a strong capital position they reported a 14% CET1 ratio at end of 2018. The issue is their business model cannot meet their targets in this economic environment.


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## WolfeTone

Andrew365 said:


> No...DB has a strong capital position they reported a 14% CET1 ratio at end of 2018. The issue is their business model cannot meet their targets in this economic environment.



Yes, on paper they have a strong capital position. But isnt that capital supported via ECB interventions? At least indirectly?*

*im no expert in these matters so if im way off kilter here I will add no more.


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## Andrew365

WolfeTone said:


> Yes, on paper they have a strong capital position. But isnt that capital supported via ECB interventions? At least indirectly?*
> 
> *im no expert in these matters so if im way off kilter here I will add no more.



No, the ratio is essentially assets that the bank own themselves and CET1 is essentially cash or highly liquid assets the bank have at hand, in this case for DB the 14% equates to 61.5 bln. The EBA / ECB / FED sets a regulatory minimum CET1, banks then maintain a higher ratio as the regulators perform stresses tests against the banks. These stress tests mimic severe macroeconomic downturns (Severely Adverse) and the banks show they can maintain their capital ratios above reg minimums. This theoretically means that banks would not need financial support from the governments i.e. bail outs.



			https://eba.europa.eu/documents/10180/2419188/EBA_ST_DE_7LTWFZYICNSX8D621K86.pdf
		


Post the financial crisis the capital requirements have increased for banks, previously the capital that is now tied up would have been used directly in the business now it is held in trust almost. This is one of the main reasons many banks have restructured and closed business lines.


Edit: *Nothing is ever 100% guaranteed that they would not need financial support from outside


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## WolfeTone

BilliamD75 said:


> Irish debt to gdp/gnp or even gni makes no difference or does the inflation rate. The spread between Italian and German bonds is the real indication of where things are in the bond markets,



If Irish debt to gdp makes no difference, nor the inflation rate, then why not borrow at 0% to build to the things we need, houses, broadband, hospitals, schools etc?
If the euro blows, it blows, not much we can do about it either way. But if the euro blows up, I would rather have an economic infrastructure that is more capable of rebounding than one that has been laid to waste and left derelict.


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## BilliamD75

It's very simple gdp/gnp or the inflation rate will  not make a difference on the debt owed its still 200 billion and we will not be able to afford the interest payment's going forward, now that aside when we borrowed the money a few years back why not build the hospital then, it would cost less than today instead of paying wages/pensions ect, we have been through dereliction of property before and had to knock it down. I could build the hospital on the same site and design for half the costs. We all know there are so many hanger ons who produce nothing and cost a fortune when government build infrastructure projects, if it were private sector capital do you think there would be overruns and overbudget the answer is no way, we have an amazing appetite for borrowing money in this country. We can borrow at 0% as the ecb is buying. The private sector premium is 425 basis points on average on the balance of the bonds held in the private sector. The ecb has been funding the government indirectly and that is going to change. My opinion has been no more borrowing and stay within budgets, let the private sector with there capital build infrastructure projects.​


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## WolfeTone

BilliamD75 said:


> now that aside when we borrowed the money a few years back why not build the hospital then, it would cost less than today



Im sure if you look closely enough, most things were cheaper to build in the past than they are to build today.



BilliamD75 said:


> instead of paying wages/pensions ec



God forbid people should get paid for working or receive a pension in retirement.



BilliamD75 said:


> I could build the hospital on the same site and design for half the costs.



Did you submit a tender? If not then no disrespect this is all bluster and has no basis in reality.



BilliamD75 said:


> if it were private sector capital do you think there would be overruns and overbudget the answer is no way



Im sure without thinking too hard there are plenty of examples of large-scale production costs being overrun in the private sector too.



BilliamD75 said:


> let the private sector with there capital build infrastructure projects.



So a commercial for profit children's hospital? I dont think that is what the government is mandated to do. 
Thank God for democracy!


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## BilliamD75

I was in that game, no way would we get away with 100/200% overruns.yes public sector wages and pensions should be paid, however from borrowed money? We all know that there is to much gouging going on with public monies and then passing the bill on to the private sector, I will explain another day how to build infrastructure projects in a democratic way for the benefits of society. As a nation we have to live within are means going forward, thats just my opinion.


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## WolfeTone

BilliamD75 said:


> I was in that game, no way would we get away with 100/200% overruns.yes public sector wages and pensions should be paid, however from borrowed money? We all know that there is to much gouging going on with public monies and then passing the bill on to the private sector, I will explain another day how to build infrastructure projects in a democratic way for the benefits of society. As a nation we have to live within are means going forward, thats just my opinion.



A simple Google search will lead anyone to conclude that the bigger the building project, the more likely some overruns will occur. 
Regardless of all that, the reality is that these overruns, no matter how much they cost, will find their way into the economy. Yes, it is misallocated capital that could be used to train nurses or equip schools, but instead finds its way to developers or planners or legal professionals or whatever. So we end up with structural deficits in the long-term - too few nurses and too many construction workers and overcrowded classrooms. Nevertheless, none of that is a reason not to borrow. 
The time to stop, or reduce borrowing is when inflation starts to heat up. To cool demand in the economy. 
There are indicators and warnings of overheating in the economy. Certainly, house price inflation is a strong indicator that capacity is near full in that sector - unless borrowed capital is used to build more houses, extending capacity to meet demand.

Ireland has effectively been through a lost decade. A decade of underdevelopment, decay, income stagnation. It is now out of that phase. 
For sure we are still highly indebted and ideally it would be great if that debt could reduce. But in order to do that it requires taking money out of the economy. There is already another thread about specific spending cuts or tax increases. If you go through that you find that there is very little uniformity about what should be cut, or where taxes should be raised. And even if there was agreement, it is dubious to what impact any of it would have on reducing the national debt by any significant amount.


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## BilliamD75

Sum overruns are not the issue or the money recycled in the domestic economy. The issue facing us and its a big one is the interest costs going forward, forget inflation its irrelevant in this case. 
The ntma has stated recently that interest costs were 33 billion for the last 5years and 60 billion over the last 10 years and that 90% is international, now at the present rate over the next 10 years that's 120 billion going out the back door. The multiplier effect of the money in the domestic economy can be 5 fold depending on the choices made. I can tell you that interest rates are going to rise as the ecb will offload the bonds back to the private sector at some stage as they are costing them a fortune in nominal terms to hold them. This will hurt the domestic economy with tax increases as the government has no way to cover the increasing interest costs.if we had our own currency we could inflate the debt over time


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## WolfeTone

BilliamD75 said:


> if we had our own currency we could inflate the debt over time



You are proposing we leave the eurozone? 

To begin with, I agree that the euro is a flawed and badly conceived idea. But to unilaterally leave the eurozone is not a realistic proposition. 
What would we replace it with? Punt Nua? 
Unilaterally leaving the eurozone would precipitate us leaving the EU. Our bond yields would shoot up as we would not have protection of the ECB. The exchange rate of Punt Nua to the euro would collapse, transferring the €200bn into, perhaps IR£400bn punt nua debt. It would collapse the economy.
Our only option would be to peg our Punt Nua to Sterling. 
None of this is economically viable let alone politically viable. 
We are tied to the euro. We have cheap money. Best we exploit this to the max (notwithstanding cock-ups and overruns which incidentally occur in every developed economy), build the most efficient, environmentally sustainable economy that we can. 
When the poop hits the fan, we will be better placed than most to rebound quickly.


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## BilliamD75

I am not purposing to leave the euro, it is doomed anyway in my opinion.there are two ways of looking at this, firstly the ecb is buying 40 % government debt and they are losing billions on the bonds at a eurozone level. If they buy all the bonds (political) it will need a bailout as it is effectively bankrupt. Secondly when it offloads its existing bonds at a eurozone level back to the private sector interest rates are going to rise very quickly causing government budgets to explode and the currency  will be the problem . We have to stay in budget whatever the currency (fiscal policy) going forward. This is my opinion.


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## WolfeTone

I agree that I think the euro is set for failure. Two things may keep it alive, full political integration into a United States of Europe (we are closer to human colonies on Mars than that), or, a Japanese, US system  perpetual debt issuance. In which case interest rates will not rise. They have been promised to rise for over 15yrs. They have sunk instead. The ECB will keep buying government debt. 
Its why I recommended Stephanie Keltons talk on YT. The ECB is caught in a debt trap, like the US and Japan, and the USSR before it. 
Only that there are no economic sanctions imposed by any serious trading partner against this flagrant manipulation of currency valuation, then the fiat magic-money tree prevails. 
The US, Eurozone, Japan, UK are all caught in a debt trap. But they are all too big to fail. Even after UK leaves EU its economy has long tentacles. 
Now that I think about it, we should party up!


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## joe sod

BilliamD75 said:


> Now if you are a bond/hedge or pension fund manager would you lock up 4 billion of 10 year notes at 1.123 rate which is less than inflation


 
thats whats mind blowing why are they still rushing to buy these bonds when interest rates are almost nothing ??, it doesn't make sense. The money invested in bonds is increasing while interest rates are falling , this should not be happening !!. At the same time little new money is flowing into european stock markets they have been range bound since 2015. 
Normal financial theory says that when interest rates are falling money flows from bonds to stocks, in europe its almost the reverse now.


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## Sarenco

joe sod said:


> Normal financial theory says that when interest rates are falling money flows from bonds to stocks, in europe its almost the reverse now.


I'm sure you're right but can you point me to anything at all that backs this up?

By interest rates I assume you mean bond yields.

I agree that it would seem odd that money would flow from equities to bonds (if that is, in fact, the case in Europe) when bond yields are falling.  Although, to be fair, equities are pretty richly valued at the moment by historic standards.

Maybe regulators are requiring banks to load up on government bonds?

Either way, I'm pretty sure the smart folks that make up the bond market have it pretty much right.


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## WolfeTone

Excellent post @joe sod , World turned upside down. 
The USSR did the same thing, except they managed their economy from a political ideological perspective rather than a purely "cash is king", "money talks" perspective. 
The US, EU, UK, Japan and others are all caught in debt trap. China is caught too, because it is too interlinked with US. 
Trump is trying to break Chinese as Reagan did the USSR. He may have some success, as China is still a broadly underdeveloped economy as the USSR was. For sure it has centres of high value capital, but there are still large underdeveloped rural regions with large populations. 
There are some significant differences. China holds alot of US debt and China is quite technologically developed - Huawei, for instance. 

In the end, the monetary system is now broken. The normal rules dont apply. It is a debt based system. To stay ahead, developed economies need to borrow more and more. Notions of paying off debt are fanciful.


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## BilliamD75

joe sod said:


> thats whats mind blowing why are they still rushing to buy these bonds when interest rates are almost nothing ??, it doesn't make sense. The money invested in bonds is increasing while interest rates are falling , this should not be happening !!. At the same time little new money is flowing into european stock markets they have been range bound since 2015.
> Normal financial theory says that when interest rates are falling money flows from bonds to stocks, in europe its almost the reverse now.


The only people buying government bonds in Europe is the ecb or entities mandated (pension funds) to buy. Nobody in the private sector would buy as its a guaranteed loss at those rates even if its just to park money.


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## Firefly

BilliamD75 said:


> The ntma has stated recently that interest costs were 33 billion for the last 5years and 60 billion over the last 10 years



Wow...wouldn't that have built some much needed infrastructure?!!!

If only we didn't borrow to pay the wages from the years 2009 - 2012 we'd have plenty room to borrow for much needed infrastructure now that rates are so low. Ah well...."_Eaten bread is soon forgotten_" and all that!

Advocating that we borrow now just because interest rates are low is IMO reckless. Many people are still paying for doing just that during the Celtic Tiger.

Our national debt is enormous.
Our economy is flying.
Pro-cyclical economics is a bad idea.

We should be running a surplus, saving money for a rainy day & paying down our national debt.

Thank God for those fiscal rules!


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## Sarenco

BilliamD75 said:


> The only people buying government bonds in Europe is the ecb or entities mandated (pension funds) to buy. Nobody in the private sector would buy as its a guaranteed loss at those rates even if its just to park money.


The FTSE EMU Government Bond Index has returned over 6% YTD.  

Plenty of gurus were also predicting "guaranteed losses" at the start of the year...


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## WolfeTone

Firefly said:


> Wow...wouldn't that have built some much needed infrastructure?!!!



It would of course. Only we borrowed money so we owe the interest on it. If we renege on our debt obligations then that is economic suicide. 
You cant have it both ways, we can either choose to pay down debt and forgoe much needed infrastructure, or build much needed infrastructure to sustain economic development over the time ahead instead of paying down debt. 
Paying down the debt is theoretically prudent. But the needs of the economy to sustain economic development far outweigh the benefits of shaving a few billion off the national debt.
I mean, how much national debt needs to be paid off before we should start borrowing for much needed infrastructure? €10bn, €20bn, €30bn??


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## BilliamD75

Sarenco said:


> The FTSE EMU Government Bond Index has returned over 6% YTD.
> 
> Plenty of gurus were also predicting "guaranteed losses" at the start of the year...


Yes that's right, they are bonds held in the private sector with average yields of 4.25% depending on value and maturities.


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## WolfeTone

Its being reported on RTE that the ECB is open to more rate cuts. 









						ECB opens door to rate cuts, more bond buys
					

European Central Bank President Mario Draghi said the bank's all-important inflation target should not be viewed as a 2% cap.




					www.rte.ie
				




"Expectations of new ECB stimulus have already driven down borrowing costs for euro zone governments, with the yield on Germany's 10-year bond delving deeper into negative territory at -0.41% today - close to a record low." 


"Draghi has just three months left of his eight-year tenure, giving him only a handful of opportunities to secure his legacy"


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## BilliamD75

Yes hardly a surprise however  what is a very important statement is inflation should not be viewed as a 2% cap (Draghi). I have been saying inflation is irrelevant. Without the ecb intervention we would be paying 9 billion minimum on our debt. The ecb is half pregnant with almost 40% government debt. The tipping point is Lagarde, does she go like boj and buy all the bonds (euro bond) with no private sector bids or pull back and do something similar like the fed with about 10% government debt. Thankfully the Germans are against this. My own opinion is political integration through monetary policy (eurobond), I wonder what language we will use (bonjour)


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## joe sod

BilliamD75 said:


> The ecb is half pregnant with almost 40% government debt. The tipping point is Lagarde, does she go like boj and buy all the bonds (euro bond) with no private sector bids or pull back and do something similar like the fed with about 10% government debt.



why does the fed only have 10% government debt compared to the ECB of 40%, the US were doing quantitive easing long before the ECB?, Is it because the FED were buying more corporate debt than government debt compared to the ECB, and did the ECB buy only government debt, did they buy any corporate bonds?
Why is it an issue anyway for the ECB to have so much government debt, afterall they print euros out of nothing. I know Venezuala and Zimbabwe did not get away with it and their currencies collapsed, but they were one trick pony economies. In the case of Japan even with buying so much japanese debt they had deflation not inflation, the japanese yen increased its buying power over those decades. I am posing these questions because I dont understand either. 
Is it because Japan is a highly productive technological economy so still produces alot of stuff the rest of the world needs to buy. the US with it technology dominance is also in that bracket. However is Europe now? , Germany the only real technology powerhouse is faltering, the car industry is going backwards .


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## BilliamD75

That's a lot of questions that cannot be answered on a single thread. Entities buy government debt just to get yield and their money back when due. 
I will stick to the bonds (public) in the central banks. Most of the US government debt(21 trillion) is held outside of the US, the fed hold about 10%(,thats why the dollar is the world's reserve currency as its global) . The boj hold almost 95% government debt and continually repurchase the debt as there is no bids internationally as its a rigged system its just to fund the government , thats why there is no investment from the public side causing deflation. (yes they can print there own currency however from an international perspective would you lend money into that economy). The ecb is half way there (2.6 trillion) , if it buys all the bonds(euro bond) then it's just to finance government with no investment internationally on the public side, (yes it can print euros however we will need loads of wheelbarrows to carry the cash around) from an Irish perspective and being part of the global food chain it would be a disaster.I hope this helps.


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## Protocol

joe sod said:


> thats whats mind blowing why are they still rushing to buy these bonds when interest rates are almost nothing ??, it doesn't make sense. The money invested in bonds is increasing while interest rates are falling , this should not be happening !!. At the same time little new money is flowing into european stock markets they have been range bound since 2015.
> Normal financial theory says that when interest rates are falling money flows from bonds to stocks, in europe its almost the reverse now.




There are lots of buyers of Govt bonds, even at low yields.

Take Irish CU for example, with surplus deposit liabilities, they buy Govt debt.

Pensions funds, etc., lots of buyers, even of 10yr bonds yielding 0%.

Note that as yields have fallen, bond prices rise, so these buyers have done well.


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## joe sod

BilliamD75 said:


> (yes it can print euros however we will need loads of wheelbarrows to carry the cash around) from an Irish perspective and being part of the global food chain it would be a disaster.I hope this helps.



but it has been printing lots of euros to buy the government bonds, like japan has and like the US has. But the currencies have not collapsed , inflation is non existent, the oil and commodities are not going up in price like you would expect with devaluing currencies. If the biggest buyers of sovereign bonds are the central banks themselves and not the private sector, if the european and global stock markets (ex US) are barely moving , the ftse 100 and european stock markets are still more or less at levels they were at in year 2000 (ftse 100 at 7200 in year 2000, now at 7500 in 2019) . So the quantitive easing euros are not going into the stock markets.

I think I am now realising whats happening all these new euros are not being spent in the private sector by and large as little inflation, but by governments and the public sectors , the quantitive easing has really just allowed overly indebted governments like ours to keep spending. Its socialism financed by the bond markets, but how long can it last? so far so good


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## Protocol

Note that ECB purchases of Govt debt has stopped, since Dec 2018.









						Asset purchase programmes
					

outright monetary transactions




					www.ecb.europa.eu


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## Protocol

Joe sod,

be careful, the ECB buys the Govt bonds, and pays the previous owners, who are typically banks/pension funds, etc.

Govts do not directly receive revenue in these transactions.

Yes, Govts do benefit indirectly, as their borrowing costs fall.


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## Protocol

Yes, although QE has not led to consumer price inflation, there has been asset price inflation, e.g. US stocks and property prices round the world.


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## BilliamD75

Protocol said:


> There are lots of buyers of Govt bonds, even at low yields.
> 
> Take Irish CU for example, with surplus deposit liabilities, they buy Govt debt.
> 
> Pensions funds, etc., lots of buyers, even of 10yr bonds yielding 0%.
> 
> Note that as yields have fallen, bond prices rise, so these buyers have done well.


Are you saying that credit unions with excess liquidity are buying 10y Irish government bonds at 0%interest with inflation at 1.5% average across the eurozone losing 15% minimum nominal value plus costs with no access which will be purchased by the ecb through secondary market participation ending up with toxic Italian government debt. With this kind of thinking I am going to the credit union and taking my money out as it is not safe.


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## Protocol

Each CU is different.

I read the annual accounts of two / three CU.

They place their customer deposits on deposit with the main banks.

They also buy Govt bonds.

They can't buy equities or properties, so deposits and safe bonds are really the only places to hold surplus savings.

Of course, it would be preferable if their lending increased to be closer to the deposits.


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## joe sod

Protocol said:


> be careful, the ECB buys the Govt bonds, and pays the previous owners, who are typically banks/pension funds, etc.
> 
> Govts do not directly receive revenue in these transactions.



is that not just sleight of hand, they say they do not buy bonds directly when they are issued but they buy them in the market creating an artificial demand and lowering the interest rates to nothing, where would interest rates be if the central banks were not buying,?also where would the italian, irish and greek governments be, they would be bankrupt , thats where they were heading in 2011 before draghi stepped in.



Protocol said:


> They can't buy equities or properties, so deposits and safe bonds are really the only places to hold surplus savings.



the bond markets are really rigged, you have the central banks creating this huge artificial demand and then you have the banks ,pension funds etc forced to buy them and getting nothing. Imagine where the stock markets would be if they had these huge forcerd buyers?


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## joe sod

Protocol said:


> Pensions funds, etc., lots of buyers, even of 10yr bonds yielding 0%.
> 
> Note that as yields have fallen, bond prices rise, so these buyers have done well.



So as interest rates have fallen, paradoxically the demand for bonds is going up in expectation that interest rates will keep falling, thereby increasing the value of the  bonds already bought !!!!         IS THIS NOT VERY DANGEROUS.

Is this the madness that happens in any bubble, Is the bond market really a bubble about to burst, what about all those pensioners about to draw down those pensions stuffed with way overpriced bonds.


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## Sarenco

It's important to bear in mind that there is an inverse relationship between bond prices and bond yields.  So, if bond coupons rise that axiomatically means that bond prices have fallen.  But the yield (income) has increased!  So, provided you hold to maturity, it's pretty much a wash.

I would query whether it's even theoretically possible for bonds to be in a bubble.


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## joe sod

Sarenco said:


> So, if bond coupons rise that axiomatically means that bond prices have fallen. But the yield (income) has increased! So, provided you hold to maturity, it's pretty much a wash.


 Yes I get that, but whats been happening for so long is the reverse so that the coupon has now fallen to zero but the bond price has still risen so a german 100 euro bond with 0% coupon is selling for +100euros in the bond market now . Therefore if as you say you wait the 10 years to maturity you still only get 100 euros back even though you paid +100 euros , 10 years ago.


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## Sarenco

joe sod said:


> Therefore if as you say you wait the 10 years to maturity you still only get 100 euros back even though you paid +100 euros , 10 years ago.


Yup. 

But that doesn't necceasarily mean that bonds are in a bubble.  What if inflation is negative over that 10-year period?  Think of Japan.


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## Protocol

Be careful with language.

In terms of bonds, coupon, running yield, and yield to maturity are three different terms.

Coupon rates are usually fixed, e.g. bond issued with 2% fixed coupon, but now has YTM of 0.5%.


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## joe sod

Sarenco said:


> Yup.
> 
> But that doesn't necceasarily mean that bonds are in a bubble.  What if inflation is negative over that 10-year period?  Think of Japan.



@Sarenco I'm not claiming to be an expert on this stuff by the way, however the reason that you expect higher interest rates on 10 year bonds (usually at least 3 percent), is that you need to be compensated for the risk that you don't know where inflation will be in that time. It seems that the bond markets have a one way bet which has worked since 1982 that there will be low inflation, however now they have taken that to the extreme by actually predicting deflation, why else would you buy a bond effectively with negative yield.

This is now what pension funds are doing with your money, they are predicting that this trend continues, but what if they are wrong, what if inflation comes roaring back like in the 70s. Look what's happening in the middle east with Iran detaining oil tankers, this can really escalate.


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## PMU

joe sod said:


> This is now what pension funds are doing with your money, they are predicting that this trend continues, but what if they are wrong, what if inflation comes roaring back like in the 70s.


The ECB will increase interest rates by 'whatever it takes' to stamp out inflation. The ECB's main task is to maintain an annual inflation rate of below 2% in the medium term.


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## galway_blow_in

I opened a thread nearly four years ago asking " why are American treasuries so cheap" 

Got told I was talking rubbish, now it's crystal clear they were a terrific buy and extremely undervalued


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## WolfeTone

PMU said:


> The ECB will increase interest rates by 'whatever it takes' to stamp out inflation. The ECB's main task is to maintain an annual inflation rate of below 2% in the medium term.



But there is no inflation. With the exception of asset prices, which is counted (conveniently) for asset holders. 
There is capital inflation, but not labour inflation.
Holders of capital benefit from increasing values without increasing interest rates. 

The ECB has been trying to stoke inflation for how many years now? 
All the QE has gone into assets, increasing stocks, property, bonds. But such increases are, inexplicably not included in calculating inflation.


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## joe sod

PMU said:


> The ECB will increase interest rates by 'whatever it takes' to stamp out inflation. The ECB's main task is to maintain an annual inflation rate of below 2% in the medium term.



thats what they say, but they cant because of the gargantuan size of the bond market now, they will crush the wealth effect on all those pensioners with so much overpriced bonds in their portfolios, thats why we have negative yielding bonds now because the ECB has been buying all these bonds . 
If inflation comes back they will pretend its not happening, they will probably then try and exclude oil prices from the cpi index using green washing and greenhouse gases as the reason. In other words they will pretend that reality is not happening until it is realised that the emperor has no cloths


----------



## galway_blow_in

joe sod said:


> thats what they say, but they cant because of the gargantuan size of the bond market now, they will crush the wealth effect on all those pensioners with so much overpriced bonds in their portfolios, thats why we have negative yielding bonds now because the ECB has been buying all these bonds .
> If inflation comes back they will pretend its not happening, they will probably then try and exclude oil prices from the cpi index using green washing and greenhouse gases as the reason. In other words they will pretend that reality is not happening until it is realised that the emperor has no cloths



Sun zero yields on EU debt will drive more money to American treasuries. Heard one commentator say the other day 

"The U. S is the last shoe to drop"


----------



## joe sod

Michael Hasenstab, the guy that made a fortune buying irish bonds during the financial crisis now thinks the long bull market in bonds and rising bond prices is coming to an end








						‘Contrarian’ who won big on Irish bonds thinks markets are wrong again
					

The flip-side of falling interest rates and bond yields has been a rally in the bond markets.




					www.independent.ie
				





"The flip-side of falling interest rates and bond yields has been a rally in the bond markets.
As yields drop, bond prices rise, and in recent months, owning US government debt – known as treasuries – has been an easy way to make money.
So it has been a tough time to hold the view that the long era of low rates – which began with the financial crisis more than a decade ago – is about to reverse.
Few prominent investors have been punished harder for this contrarian stance than Franklin Templeton’s Michael Hasenstab, who manages funds with total assets of about $115bn (€104bn), including the Templeton Global Bond Fund.
He is not only less bullish than most bond managers; he is actively shorting treasuries, making bets that interest rates will rise and bond prices will fall."


----------



## BilliamD75

It's the biggest single danger to the Irish economy (BONDS) and nobody is talking about it, all you here is brexit this brexit that (Britain's economy will take off like a rocket if it leaves the EU due to their weaking currency but that's for another day) and speculation what will happen. I did not read the article however hasenstab and his ilk (loan sharks) are half right that rates will rise. We are in this country are at a tipping point and what ever way we fall it's not going to be easy, it's very high interest rates on one side or total loss of sovereignty with eurobonds given Brussels (politician's) complete control over monetary policy(. If Irish politicians had complete control of monetary policy every public servant would be a millionaire and the union boys are girls would be multimillionaires). Hasenstab is betting that the free market will always win and it will however long it takes, thats just my opponion.


----------



## joe sod

WolfeTone said:


> The ECB has been trying to stoke inflation for how many years now?
> All the QE has gone into assets, increasing stocks, property, bonds. But such increases are, inexplicably not included in calculating inflation.



Thats the thing they have stoked inflation but they conveniently exclude those things from the cpi. If they admitted those assets to the cpi then the game would be up and they would have to raise interest rates thereby bursting the bond bubble, the biggest bubble in history. it dwarfs global stock markets and has quadrupled since the early 2000s.
Because bonds are regarded as the safe investment and because they benefited from the 2001 stock market crash and the 2008 real estate and banking collapse and because this bubble has been inflating since 1982, very few people see it as a bubble, nobody in the markets now really knows what happens to bonds when inflation takes off. 
But something is changing as investors finally baulked at taking up the new issue german bonds at negative interest rates, they failed to get them all away. Therefore next time they will have go less negative or back to zero. If that happens then the price of the already issued negative interest bonds will fall in price. That is how bubbles get pricked because then investors will look for higher interest rates from riskier ones like irish and italian bonds.


----------



## BilliamD75

Yes the German bond issue of 2 billion of 30 year bonds at negative yield was a disaster for German bonds, 40 % was taken up by the private sector with the remainder going to the German central Bank, the idea that private capital is rushing into bonds does not hold water even safe haven German bonds, if it were it would be oversubscribed. 
It looks like the ecb will take rates deeper into negative territory with more QE next month, in economic terms you cannot stoke inflation with monetary deflation, all the QE went into government bonds and nothing to do with the economy at large. We are heading into a economic storm and the ecb is at the wheel. If I was legarde I would raise rates to 2% minimum base rate to start with and stop funding government indirectly. Those that save and pensioners should not have to pay for this policy. That's my opinion.


----------



## joe sod

BilliamD75 said:


> n economic terms you cannot stoke inflation with monetary deflation, all the QE went into government bonds and nothing to do with the economy at large.


but thats the strange thing. they have printed lots of euros out of thin air, its just that it all went back into bonds which is effectively government spending. Are we looking at a slow burn zimbabwe or venezuala afterall they did the same thing printed their currency which bankrolled their governments for a few years but then almost immediately hyperinflation. I think bonds are the key because they are allowing european governments to keep spending even though they are over indebted, strangely however these very bonds are seen as a "safe haven" and investors (of course forced buyers, pensions ,banks and insurance companies) are voraciously buying them even at negative interest rates. But this game will end and lagarde is not an economist or a financial expert, (remember john hurley head of the irish central bank during financial crash, got there not because of phds in economics but because of seniority in the civil service).


----------



## cremeegg

Interesting article here https://www.economist.com/buttonwoods-notebook/2014/11/06/bubble-history

on the bond bubble. Its from almost 5 years ago, but really we have just advanced further down the road that the article references.

Unlike other bubbles this bond bubble does not promise spectacular returns, indeed negative returns are offered. While stocks and property may be overvalued, they are not in the same zone as bonds.

Just as a matter of interest (pun) if rates rose to say 4% next month what would that do to the price of a 10 year bond currently yielding say 1%.


----------



## BilliamD75

Cremeegg you hold to maturity at a loss or you take the haircut and sell at a loss, there is no sugar coating it.


----------



## Protocol

cremeegg said:


> Interesting article here https://www.economist.com/buttonwoods-notebook/2014/11/06/bubble-history
> 
> on the bond bubble. Its from almost 5 years ago, but really we have just advanced further down the road that the article references.
> 
> Unlike other bubbles this bond bubble does not promise spectacular returns, indeed negative returns are offered. While stocks and property may be overvalued, they are not in the same zone as bonds.




Be careful here, bond returns have been strong this year, not negative.

Bond prices have risen.

My father's bond fund is doing very well.

But yes, I fear it's a bubble.


----------



## cremeegg

Protocol said:


> Be careful here, bond returns have been strong this year, not negative.
> 
> Bond prices have risen.
> 
> My father's bond fund is doing very well.
> 
> But yes, I fear it's a bubble.



Bond returns are not the same thing as Bond yields.

Your fathers bond fund is doing well because bond prices have risen, the yield moves inversely with the price.

If a bond paying €2 interest per annum was bought for €90 that is a yield of 2.2%

If your father owned that bond and the price increased to €95, then your father has done well, he has made a 5.55% return (approx it is a bit more complicated that that, the bonds maturity has shortened).

However the yield has fallen to 2.1%

In any normal world a bond with a negative yield would not exist, yet at present some bonds do in fact have negative yields.

The room for bond prices generally to rise further without moving into negative yield territory is small.


----------



## galway_blow_in

cremeegg said:


> Bond returns are not the same thing as Bond yields.
> 
> Your fathers bond fund is doing well because bond prices have risen, the yield moves inversely with the price.
> 
> If a bond paying €2 interest per annum was bought for €90 that is a yield of 2.2%
> 
> If your father owned that bond and the price increased to €95, then your father has done well, he has made a 5.55% return (approx it is a bit more complicated that that, the bonds maturity has shortened).
> 
> However the yield has fallen to 2.1%
> 
> In any normal world a bond with a negative yield would not exist, yet at present some bonds do in fact have negative yields.
> 
> The room for bond prices generally to rise further without moving into negative yield territory is small.



Is that not like saying if I bought a property for 100 k with a rent of 10k per annum, the yield is 10%, yet in time if the value of the property increases in value to 150k, I'm only yielding sub 7%

The income is still the same regardless, the yield to the original purchase price is what matters from an investment POV, is it not?


----------



## cremeegg

galway_blow_in said:


> Is that not like saying if I bought a property for 100 k with a rent of 10k per annum, the yield is 10%, yet in time if the value of the property increases in value to 150k, I'm only yielding sub 7%
> 
> The income is still the same regardless, the yield to the original purchase price is what matters from an investment POV, is it not?



It is exactly like that.

You have a property with a value of €150k and an income of €10k, thats a yield of 6.67% on your asset.

While there are major transaction costs associated with property, bonds are bought and sold at the press of a button.


----------



## galway_blow_in

cremeegg said:


> It is exactly like that.
> 
> You have a property with a value of €150k and an income of €10k, thats a yield of 6.67% on your asset.
> 
> While there are major transaction costs associated with property, bonds are bought and sold at the press of a button.




If i purchased a house for 100k and its delivering 10k per annum NET, provided the rent remains at 10k, I consider I'm getting a 10% yield no matter what price the house is worth in a few years 

Obviously bonds are a different asset in many ways but focusing on yield specifically, that's my reasoning


----------



## joe sod

cremeegg said:


> Interesting article here https://www.economist.com/buttonwoods-notebook/2014/11/06/bubble-history


 very interesting and explanatory artice.  I like this paragraph

"It was true that, in the main, developed countries found that they could run deficits without being punished by the markets. Indeed, eventually, they found that they could depreciate their exchange rates without being penalised by their creditors in the form of higher yields. This was an easy option in the short-term. But it was a bit like the 25-year old who boasts that smoking, drinking and overeating hasn't harmed him; the bad habits will catch up with him eventually. "
and
"Bubbles are very hard intellectually to deal with. Those who ride the bubble look smart; those who try to buck it, like the late Tony Dye, get fired.  "

Im thinking of the banks here surely there must be dissenting voices within the financial sector about the wisdom of loading up on so much government debt especially at negative interest rates. I suppose they feel they cant speak up after being bailed out by the likes of the irish government, but the bonds issued  by the irish government to bail out the banks is owned buy those very same banks. You couldn't make it up.


----------



## Protocol

I don't think commercial banks are big buyers of Govt debt? Are they?


----------



## joe sod

The madness accelerates, the Irish government latest bond release dipped negative , its one thing to pay the German government to loan your money too but the Irish government !!!
Remember this is the same government that could not get the markets to lend them money a decade ago even at high interest rates relatively.
It appears that the bond markets no longer care about risk because everyone gets the money at zero interest rates no matter what their track record. Remember bond holders are now "bailed in" when the next crisis hits


----------



## joe sod

With the huge rise in oil prices the biggest since 1990 and the invasion of Kuwait, will this burst the bond bubble. It certainly puts a dent in the theory that deflation will continue. What will it do to the value of all those negative interest rate bonds. The funds will now have to rush to buy gold and commodities to protect the falling value of these bonds. It looks like the financial markets could have been seriously caught out


----------



## Sarenco

joe sod said:


> The funds will now have to rush to buy gold and commodities to protect the falling value of these bonds. It looks like the financial markets could have been seriously caught out


Eh, bond yields edged lower - not higher - on foot of this news.


----------



## BilliamD75

Maybe, the ecb have created the biggest bubble in history (public), Draghi said he will do whatever it takes to save the euro, what he really meant was do whatever it takes to save the European Union through monetary policy and by doing so he has created its demise. His latest comments that government's should use fiscal policy to create inflation as the ecb are out of bullets is a good one considering the ecb are creating deflation by lowering interest rates to negative and buying government bonds through QE, it hasn't worked in ten years but keep going.


----------



## joe sod

Ray dalio had an interesting interview with regard to bonds and negative interest rates. He said we have never had a period like this before but of any period it bears most resemblance to the 1930s. He is worried about the end game to all this, so far it has been easy for governments to keep running large deficits and then monetizing the debt as bonds, they have suffered no penalty for doing this as investors have been willing to buy this debt even at negative interest rates. But he raised an interesting question, what if investors lose interest in buying bonds , what will they buy instead, when there is a movement of money out of bonds where will that money go?


----------



## WolfeTone

We have gone from QE over a number of years, to QT which lasted less than a year, back to QE again. 

https://www.bloomberg.com/news/arti...onger-term-repo-ops-for-funding-past-year-end 

The whole monetary financial system is broken. It is corrupted to the core, beyond repair. The US is engaged in money printing exercises beyond anything ever seen before.


----------



## joe sod

Philip lane the former governor of the central bank and now ecb governor gave an almost laughable reason for the historically low and negative interest rates we have now. He said it was because of the increased number of pensioners and their longer life spans, that they have increased the demand for "low risk" assets like bonds. However if that was the case then why was there a need for quantitative easing and the central banks stepping in to massively buy those very bonds, surely those pensioners should have been creating this demand themselves if that was true. It also omits the fact that many pensioners do not have their own pension funds and depend on the state (ala Ireland) for their pensions , and those governments need to issue bonds in order to fund those pensioners.
Methinks Philip lane has been sent out to bat for the ecb and try to justify their continued policy of buying bonds in the market.


----------



## Protocol

Demography has often been suggested as a reason for the fall in real interest rates.






						Demographics and technology explain secular stagnation and more
					

Advanced economies will face large demographic and radical technological change in the next decades. This column shows how demographics and endogenous technological changes, which encompass both innovation and automation, can interact to limit the future prospects for growth and alter the factor...




					voxeu.org
				









						Can demography explain secular stagnation?
					

The secular stagnation hypothesis has gained traction in the aftermath of the Global Crisis. This column argues that demography has played an important role in reducing the interest rates. The increase in life expectancy, which has not been offset by an increase in the retirement age, has led to...




					voxeu.org
				









						Demographics and long-run growth
					

Demographic change represents an important contributing factor to the slowdown of long-run growth. This column explores some of the channels through which this occurs and how the effects of demographic change can be mitigated. Policies that target consumption-saving choices, labour-leisure...




					voxeu.org


----------



## joe sod

If demographics and technology alone were responsible for falling interest rates, then why the need for quantitative easing and the ecb going into those bond markets to  buy those very bonds, they were the only buyer of Irish bonds not so long ago?, they bought more than anybody. Surely they should be selling their bonds back into the bond markets now if they really believed that was the case. I'd love to see the effect of that on Irish and Italian bonds.


----------



## Purple

The economic activity generated by low interest rates has traditionally been the driver for wage inflation. Wage inflation due to labour shortages is the driver for inflation. Over the last 20-30 years 2 billion people in Asia and other developing countries have entered the global labour market. While their wages have increased ours in the developed world have not. That has allowed a period of sustained historically low inflation and zero or negative interest rates have done nothing to stimulate that wage inflation because there is no labour shortages as the products we consume are not made here. 
IIt has nothing to do with evil banks or bankers or anything like that and on a global level it has lifted billions out of poverty but in real terms working people in the developed world feel poorer because they are poorer.


----------



## joe sod

looks like the bond markets are finally balking at buying ever more government bonds at zero and negative interest rates. US treasuries regarded as the safest bond out there had to raise interest rates slightly to get the latest issue sold. What does that mean for massive government stimulus worldwide to support lockdowns? Will the irish government now have to raise interest rates to get their next bond issue sold and will that really decide the ending of lockdowns?


----------



## Fire away

I have moved my pension to a rated bonds. Would I be better off to go back into equities. Dont retire for another 25 years


----------



## Sarenco

Fire away said:


> I have moved my pension to a rated bonds. Would I be better off to go back into equities. Dont retire for another 25 years


IMO it’s perfectly reasonable to have your pension 100% invested in a global equity fund if you’re 25 years from retirement.

Why did you switch to a bond fund?


----------



## NoRegretsCoyote

I just don't see the upside with bonds. Yields have fallen (meaning prices have risen) for 40 years and there is a point where yields can't fall lower because people have only so much tolerance for negative interest rates. Maybe we're not there yet, but we can't be far

After a ten-year bull run of course there is downside with equities but theoretically unlimited upside.


----------



## joe sod

There was a great article I read last week on how low and negative interest rates are behind most of what is happening now including the tech bull market. Negative interest rates distort the normal valuation of money, where future money is normally worth less than today's money, that's why you need an interest rate in order to compensate investors for the normal fall in money value. But with negative interest rates investors get back less money than they invested, so logically they value tomorrow's money more than today's. Therefore they are willing to invest this money in negative yielding bonds and also tech growth stocks like Tesla and others.
 For example if a stock like tesla which makes little money today but in theory may make a lot of money in the future then investors are prepared to buy that potential future money because they value it more. The corollary of that is that they have been shunning value stocks in boring old companies that make plenty of money today because they don't value today's money as much as tomorrow's money. That is all because of negative interest rates.


----------



## WolfeTone

@joe sod that is a bit of a mind-bender but if understand correctly the critical factor here is time? 



joe sod said:


> That is all because of negative interest rates.




Bear with me a little see if I can figure this out. 

Ordinarily my €100 will have less purchasing power in 5yrs time than it does today. To protect against that I need a positive interest rate to maintain its purchasing power, say 3%, or €103 in 5yrs time. 
But if I'm being offered a negative interest rate, say - 0.10% it means my €100 will have purchasing power of €99.90c in 5yrs time. 
And investors think this is value? Meaning they think there is a real risk €100 will actually be worth less than €99.90 so that is why they are buying bonds with negative yields? 
Is this not a deflationary trap?


----------



## WolfeTone

Danes get 20yr 0% fixed mortgage 

"_Denmark has a so-called pass-through system in which mortgages are directly tied to the covered bonds used to fund the loans. Lenders act as brokers between borrowers and investors, generating income from fees, not interest rates. Borrowers get the coupon rate, though the effective cost is generally a bit higher because bonds rarely sell at par."_

Two things, another illustration of the demise of retail banking? 

More importantly, what does 0% fixed over 20yrs signify about the value of money?


----------



## NoRegretsCoyote

WolfeTone said:


> [And investors think this is value? *Meaning they think there is a real risk €100 will actually be worth less than €99.90 so that is why they are buying bonds with negative yields?*



Not necessarily. It's just that the demand for safe assets exceeds supply. 

You can adjust bonds for inflation. These bonds adjusted for inflation have been negative the last year or so in the US. (Longer in Europe).

This pretty much means that you are giving the US government $100 dollars today and in 2031 they will give you back whatever $90 would have bought in 2021.


----------



## WolfeTone

NoRegretsCoyote said:


> in 2031 they will give you back whatever $90 would have bought in 2021



Would you mind elaborating on this please? 
This sounds like they will give you $90 in 2031? Or am I misreading?


----------



## RedOnion

WolfeTone said:


> Would you mind elaborating on this please?
> This sounds like they will give you $90 in 2031? Or am I misreading?


$90 adjusted for inflation.


----------



## WolfeTone

RedOnion said:


> $90 adjusted for inflation.



So in 2031, for my $100 today, I will get $90 in return adjusted for inflation? But because we don't know what the inflation rate will be, it could mean a return of $90, $95, $100, $110 etc... depending on the inflation rate over the period 2021 to 2031? 

But in essence, I am selling my $100 today in 2021 for guaranteed purchasing power of $90 (adjusted for inflation) in 2031?


----------



## RedOnion

WolfeTone said:


> But in essence, I am selling my $100 today in 2021 for guaranteed purchasing power of $90 (adjusted for inflation) in 2031?


Pretty much.

So if you imagine people investing in long term bonds for their pension, etc, they're putting in 100 quid to get back 90 in 'todays money' in 10 years times.


----------



## WolfeTone

RedOnion said:


> they're putting in 100 quid to get back 90 in 'todays money' in 10 years times.



Yes, which on the face of it looks like a bad deal, _unless _you are anticipating with a some deal of reasoning that your $100 today could actually have less purchasing power than $90 in 2031, if say you left it on a deposit savings account?


----------



## NoRegretsCoyote

WolfeTone said:


> Yes, which on the face of it looks like a bad deal, _unless _you are anticipating with a some deal of reasoning that your $100 today could actually have less purchasing power than $90 in 2031, if say you left it on a deposit savings account?



Perhaps.

An inflation-protected bond is like insurance. No matter what happens to inflation your purchasing power at the end is guaranteed.


----------



## joe sod

WolfeTone said:


> Yes, which on the face of it looks like a bad deal, _unless _you are anticipating with a some deal of reasoning that your $100 today could actually have less purchasing power than $90 in 2031, if say you left it on a deposit savings account?


but because most the "demand" for these bonds is created by the central banks "buying" them with newly created money and now making the interest rate go more and more negative the bonds issued two years and 5 years ago are worth more because they actually have a positive interest rate or even just a less negative interest rate. Therefore the value of bond funds generally rises because they have these older bonds. If anything happens though that makes interest rates go back up again even a little bit then the great game is up. Then the older bonds are negative but the newly issued ones have a higher interest rate, then the rush to get out of these bond funds that have all these negatively yielding bonds with severe consequences for pension funds etc. Of course the markets are betting that the central banks can't allow this to happen and this has basically been a one way bet since the 1980s . Central banks are the ones that caused negative interest rates because they couldn't allow interest rates to stop at 0 because to maintain the demand for today's bonds that yield 0 must only be because tomorrow's will be negative


----------



## NoRegretsCoyote

joe sod said:


> Central banks are the ones that caused negative interest rates




Interest rates are ultimately determined by the supply and demand for loanable funds.

Central banks do a lot in the short run but they can't alter structural factors like an ageing population, productivity growth,etc.


----------



## RedOnion

WolfeTone said:


> Yes, which on the face of it looks like a bad deal, _unless _you are anticipating with a some deal of reasoning that your $100 today could actually have less purchasing power than $90 in 2031, if say you left it on a deposit savings account?


Yes, kind of. If you look at the difference in the yield between these inflation linked bonds, and normal treasury bonds, it'll give an indication of where the market expectation of inflation is for the next 10 years.


----------



## joe sod

Looks like the markets are getting ready for inflation, bond yields rising again because of inflation expectations. Even Germany had to offer a small positive yield again to sell 30 year government bonds. Maybe the era of unlimited borrowing by governments at negative interest rates is coming to an end. Also will not be good for the tech sector where valuations are based on future earnings and growth,  companies that generate money today rather than tomorrow become more valuable.
       Oil is going the opposite way up in price and is making a mockery of last year's wild predictions that we are moving away from oil, it is still a crucial commodity and still dictates financial markets although less so now than before.


----------



## joe sod

Ntma had another bond auction yesterday but now at higher interest rates of 0.35%, the trend is now up for interest rates. There was a frenzy of European governments bond auctions in the last week especially from Spain and Italy. They are obviously trying to raise as much money as possible now before interest rates rise more.
With rampant inflation , the highest us figure of 7% since 1982. The 40 year trend of ever lower and negative interest rates had finally ended


----------



## joe sod

I see the interest  rate on the recent  ntma bond auction  has now doubled from 0.38% to 0.7%. In other  words the value  of these bonds on the market  has already  fallen to produce this higher interest rate. The Irish government will have to raise interest rates alot the next time in order to sell them. Investors will need a premium now to insure them against rising interest rates. The era of cheap money is well and truly over


----------



## ClubMan

Mortgage rates are at rock bottom – so expect your costs to rise, homeowners warned
					

Mortgage holders have been warned that rates have hit rock bottom and the next moves will be increases.




					www.independent.ie


----------



## Itchy

ClubMan said:


> Mortgage rates are at rock bottom – so expect your costs to rise, homeowners warned
> 
> 
> Mortgage holders have been warned that rates have hit rock bottom and the next moves will be increases.
> 
> 
> 
> 
> www.independent.ie



The guy who is recommending people lock in long term rates, also financially benefits from people locking in long term rates, despite his business facing _increasing _competition in the market.


----------



## ClubMan

Itchy said:


> Man who recommends people lock in long term rates also benefits from people locking in long term rates in the face of _increasing _.


Huh? And the link doesn't work.


----------



## Itchy

ClubMan said:


> Huh? And the link doesn't work.


Edited. Just a comment on Charlie's source for macro economic analysis.


----------



## joe sod

Carnage in the bond markets is only accelerating now that inflation is really taking hold. Bond yields are surging and the price of bonds are falling especially those long dated very low interest rate ones. The overall global bond index is down 12% so far this year. That crazy 100 year austrian 1% yield bond has now halved in value.

Bond investors long used to the low inflation environment since the 1980s are only now getting a real taste of the effects of high inflation on bond prices


----------



## jpd

Unfortunately, the laws of arithmetic are still the same as in the 80s


----------



## joe sod

Just heard on newstalk this morning that bond investors have had their worst performance since 1990. Investors are taking money out of bonds to put into equities now due to the effect of high inflation on bond prices


----------



## Sarenco

Global equities have drawn down a lot further than Eurozone Government Bonds, year to date.

Inflation equally reduces the real return on all assets.


----------



## joe sod

But global equities should be compared to global bonds not euro zone bonds. Euro zone equities have had an incredible run recently because investors are now looking for value stocks not bonds or growth stocks.
The global equities index has a very high component of us tech stocks which like bonds are not performing in this high inflation environment.
As regards eurozone bonds they probably have not sold off to the same extent as global bonds due to the ecb
 (really Christine Lagarde actually as there are now bundesbank dissenters on the ecb board)
Insistence that eurozone interest rates will not rise this year, instead they are allowing the euro to fall in value which will only exasperate inflation in the future


----------



## Sarenco

joe sod said:


> Euro zone equities have had an incredible run recently because investors are now looking for value stocks not bonds or growth stocks.


The total return on the FTSE Developed Eurozone Index (EUR) in the first quarter of this year was -8.9%.

The total return on the FTSE Developed (Ex-Eurozone) Index (EUR) was -2.4% over the same period.


----------



## joe sod

I just had a look at that ftse developed euro index, yes it has fallen as you say in 2022 but has doubled in value since May 2020. I think the short term movements in eurozone equities versus eurozone bonds is ukraine war related in that short term the market thinks that the ecb will delay raising interest rates because of the ukraine war.

However bonds have had an incredible run over the last 40 years and especially over the last decade with negative interest rates, eurozone equities have done very badly compared to their historical relationship with bonds and the risk you take with equities.  
It seems that finally inflation is back and that an awful lot of money invested in the bond markets will need to find a new home over the next decade. If funds simply reduce the component of their portfolio invested in bonds due to the eroding effect of inflation that will have a dramatic effect.


----------



## Sarenco

joe sod said:


> ftse developed euro index …. has doubled in value since May 2020


Eh, no it hasn't.


----------



## jpd

There are so many different indices around, often with similar names, it would help to give the exact code of the index you are referring to and who publishes it


----------



## Sarenco

jpd said:


> There are so many different indices around, often with similar names, it would help to give the exact code of the index you are referring to and who publishes it


I was referring to the FTSE Developed Eurozone Index, which is published by FTSE Russell.  Indices don't have codes.


----------



## joe sod

Sarenco said:


> Eh, no it hasn't.


Yes you are correct, I had a quick look at that index chart on my phone and the years compressed together  , it's still had a great performance since the pandemic albeit not as good as us growth or tech stocks. 

The point is the sectors that have done so well since the financial crash like bonds and tech are not going to do well now in the high inflation era we are now in.
People are worried about a possible collapse in the stock markets but what they really need to be concerned with is the collapsing value of money which is ongoing but has now accelerated with high inflation rates.
Locking money into low or negative yielding bonds while successful for a long time is not going to work now


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## Purple

joe sod said:


> The point is the sectors that have done so well since the financial crash like bonds and tech are not going to do well now in the high inflation era we are now in.
> People are worried about a possible collapse in the stock markets but what they really need to be concerned with is the collapsing value of money which is ongoing but has now accelerated with high inflation rates.
> Locking money into low or negative yielding bonds while successful for a long time is not going to work now


Bonds and Equities have done well due to QE; there's been a massive global increase in money supply since the 2008 crash. Now that QE is stopping things will change. Better minds than mine can predict what that change will look like.


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## joe sod

Purple said:


> Bonds and Equities have done well due to QE; there's been a massive global increase in money supply since the 2008 crash. Now that QE is stopping things will change. Better minds than mine can predict what that change will look like.


That's true,  there is an ecb meeting on Thursday  ,will be interesting to see what Christine Lagarde says this time regarding inflation and interest rates. The market does not believe what the ecb is saying about not raising interest rates this year as yield on bonds are rising as their values fall anticipating interest rate rises. 
The main thing is to be invested in stocks that make prenty of money today not tomorrow.


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## joe sod

The bond market is not a proper indicator anymore of whether a recession is coming mainly because it is no longer a proper functioning market. The biggest participants are now the central banks and governments so it is effectively controlled by government who need it in order to source vast amounts of funding. You just have to look at the difference between actual interest rates on government bonds and the inflation rate. If the market was functioning normally interest rates on European government bonds should be much higher in order to compensate investors for the much higher inflation rate but the interest rates are being held down.

Another factor is that since the financial crash banks and financial institutions are mandated to invest a large proportion of their capital in "safe assets" in other words government bonds, that is why you are getting zero interest on your deposit accounts even though inflation is running north of 5 %, by leaving money for long periods in deposit accounts you are effectively giving your money to the government

If inflation continues to run hot and the central banks do not let interest rates rise the suspicion is that price controls will be introduced in order to dampen inflation, we are firmly in the era of "big government".


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## joe sod

Rory Gillen had an interesting blog today about the coming interest rate rises, inflation and the performance of the Bloomberg eurozone government bond index since December 2021. Apparently it's down 12% so far this year as bond prices fall with rising interest rates. Of course stocks especially US growth stocks are down a lot more. However his point was that balanced portfolios of bonds and stocks are no longer working after this prolonged spell of ultra low interest rates. You just have to look at the 1970s bond markets to see what can happen to fixed income securities in an era of ultra high inflation driven by high energy prices and international instability caused by the Ukraine war.
Of course the warnings have been there for a good few years that interest rates were bound to rise but because it took so long for it to happen many investors ignored those warnings and people were talking about a new era of cheap money for ever more. The pandemic seemed to confirm this when bonds had there last big blow out after the 40 bond year bull market.


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