Bond rates

[joe sod]

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.

 

[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.

 

[joe sod]

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.

 

[Sarenco]

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.

 

[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%.

 

[joe sod]

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.

 

[PMU]

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.

 

[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

 

[WolfeTone]

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.

 

[joe sod]

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]

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]

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]

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]

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]

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.