Bond rates

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.
Click to expand...

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?
 
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?
Click to expand...

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.
 
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.
Click to expand...


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
 
cremeegg said:
Interesting article here https://www.economist.com/buttonwoods-notebook/2014/11/06/bubble-history
Click to expand...
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.
 
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
 
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
 
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
Click to expand...
Eh, bond yields edged lower - not higher - on foot of this news.:rolleyes:
 
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.
 
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?
 
Last edited:
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.
 
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 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 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 voxeu.org
 
Last edited:
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.
 
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.
 
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?
 
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
 
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
Click to expand...
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?
 
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.
 
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.
 
You must log in or register to reply here.
Back
Top