The bond Market clearly isn't something the amature investor should be playing.
I find it amazing that the so called professionals, such as pension funds have been pilling into government bonds these past few years.
Pilling in right at the end of a 30 year bull market in bond values is a disaster just waiting to happen.
Inflows intop bonds in now reminiscent of the inflows into equities in 2000. We all know what happened next...
I don't understand your point.
The bond Market can't disappear overnight all the debt in the world has to be held by someone. Or are you suggesting that we all just walk away from our obligations?
Professional money managers calculate the expected return on a debt obligation by assessing the net present value of the future stream of income payments in the context of the credit worthiness of the issuer and term of the bond.
They have a positive expected return otherwise why would they buy?
Are you suggesting an alternative universe where basic mathematics no longer functions just because bonds have delivered positive returns for the last three decades?
As Marc said it is not for the amateur!
You need to understand that very often pension funds are required to hold a certain percentage of their holdings in different asset classes, including bonds and furthermore the fund managers will have a different perspective on how they assess the worth of a particular bond as opposed to your "trading view" of things. First of all they have a much longer time frame in mind than most investors - think anything from 20 to 40 years and second of all they will be buying the bonds with the intention of holding them to maturity. These two factors make all the difference - if they can find a deeply discounted bond with a good coupon, they can do very well out of it in the long term, even allowing for the default rate.
Jim.
<H2>Pension funds are ruined by bonds’ seduction
</H2>Whether or not the Greek tragedy ends with that country defaulting on its debts, the mere fact that the possibility exists ought to send a shiver down the spine of pension trustees everywhere.
This is because for the past 10 years they have been by turns advised, cajoled and bullied into moving their funds out of equities and into government and corporate bonds. They were told to do this to reduce risk.
Over any 12-month period equities are likely to prove less volatile than bonds and, in the world of investment consultants, volatility is equated with risk.
So it came to pass that debt securities were deemed less risky than equities. It was also argued that pension funds should take note of their liabilities and buy assets to match them so if a fund saw that it would need cash in 20 years it would buy a bond which matured in 20 years and then, in theory, forget about or ignore everything that happens in between.
The result has been a massive shift in pension funds from equities into bonds.
Unfortunately the popularity of any investment strategy seems to be directly linked to the absence of people who remember why it did not work last time, and so it is with bonds.
Anyone who had lived through the debt bubble and deleverage of the Seventies in this country would know that the last place you want to be in a credit crunch either as a government or a corporate is up to your neck in debt.
The malaise of Greece is a timely reminder why. In hard times countries and companies cannot pay their bills so they default on their debts. And when that happens bonds turn out to be every bit as volatile, or risky, as equities.
In fact bonds are bad news even when there is no outright default. Tim Bond, head of asset allocation at Barclays Capital and a man who, as author of that firm's annual Equity and Gilts Study probably knows more about long-term trends in bond markets than any one individual in London, said last week that for the next 10 years returns on government bonds would be “ disastrous”.
His reasons go deeper than the credit crunch and focus on demographics. His thesis is that the buoyancy of equity markets for the past 20 years was a result of the cheap capital which was caused by the excess savings of the post-war baby boomer generation.
But they are now fast approaching retirement, and drawing down savings rather than accumulating them. This, he says, will tilt the world from capital surplus to capital shortage.
In the coming decade it will cost much more to borrow and as interest rates rise the capital value of bonds will fall. It is, he says, “a no brainer to have no bonds in your portfolio, certainly no government bonds”.
For pension funds to continue their shift from equities to bonds would, he adds, “be a disastrous investment policy for the next decade”
But one suspects that no one out there is listening, preferring to wait until bond markets crash and then demanding why no one warned them.
On the first point this is actually an equilibrium constaint I was referring to.
Bonds are in positive net supply. You might want to short the bond Market but for you to go short someone else has to be long.
The net positions of everyone adds up to the total bond market.
Let me spell it out really clearly - there are bonds out there and someone has to own them.
As Jim pointed out some investors (insurance companies for example) aren't worried about certain definitions of risk such as standard deviation.
They are seeking to match assets and liabilities over long periods such as decades.
The bond Market allows them to do this. They are not worried about some random blog post on seeking alpha or zero hedge.
They actually run real businesses looking after other peoples money in a prudent and fiduciary capacity. What matters is the net present value of a reliable stream of future income payments.
They are much less concerned with the risk of short term losses so do not need to worry so much about short term interest rates.
The things you worry and speculate about are largely irrelevant to professional investors as they should be for most retail investors.
The current yield curve is fairly steep suggesting higher interest rates in the future again this is not news to anyone.
It therefore follows that anyone buying a bond today is already compensated for the interest rate risk.
But the market can't resolve what is unknown so inflation may turn out to be higher than expected but we don't know that for sure now. People confuse risk and uncertainty here.
On the first point this is actually an equilibrium constaint I was referring to.
Bonds are in positive net supply. You might want to short the bond Market but for you to go short someone else has to be long.
The net positions of everyone adds up to the total bond market.
Let me spell it out really clearly - there are bonds out there and someone has to own them.
As Jim pointed out some investors (insurance companies for example) aren't worried about certain definitions of risk such as standard deviation.
They are seeking to match assets and liabilities over long periods such as decades.
The bond Market allows them to do this. They are not worried about some random blog post on seeking alpha or zero hedge, you really believe all their aim is 'prudence and fidicial
They actually run real businesses looking after other peoples money in a prudent and fiduciary capacity. What matters is the net present value of a reliable stream of future income payments.
They are much less concerned with the risk of short term losses so do not need to worry so much about short term interest rates.
The things you worry and speculate about are largely irrelevant to professional investors as they should be for most retail investors.