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We are seeing the same thing with TIPS funds. iShares Barclays TIPS is at a negative 1.46 yield. PIMCO Real Return is a negative 1.18%. For 2012, there has been almost no dividend income. With negative yields, this means prices for the bonds are at significant premiums. Assuming inflation does go up in future years, this would push prices up higher, which will depress yields even more. Yet investors continue to buy more of these overpriced bonds.
No grocery store could survive trying to find buyers for canned tuna if it were priced the same way. But somehow the federal government can find plenty of suckers who believe inflation will be high enough to move these bond prices even higher than they already are. Anything is possible, I suppose. But what if that does not happen, or what if it takes a long time to occur, or what if these bond holders need to sell? The really surprising thing to me is that I see more than a few "investors" who live off their interest and dividends buying TIPS bonds at inflated prices and negative yields.
Hi Bob- I'm not sure about buying any new bonds now, but our holdings in American Century's Inflation Adjusted Bond Fund ACITX have a 4.8% increase so far this year, and that's nothing to complain about.
Say what you want about Bill Gross ("He never means what he says!"), but:
CNBC: Gross - "If Fed does QE3, you want to buy what the Fed is buying - TIPS and Mortgages." Gross - "QE3 almost a done deal." Gross - "Need to see several months of 3% or more GDP growth before Fed backs off."
Not unlike an equity, one has to determine at any given point; what they may consider overbought/priced too high. Had Apple Computer been paying a 5% dividend at the beginning of the year, one now finds the reported yield at about .4%; and could go negative with higher stock pricing, I don't think the holder of this stock would really give a rip; as they would be happy with the +64% capital appreciation, YTD. This applies to bonds, too; eh? Is the 10 year note or TIPS or whatever issue one chooses to review, overpriced at this time? I don't know and I am sure Mr. Bernanke does know, either. Yes, some bonds are expensive today; as well as the possibility that some equites are overpriced, too; depending on one's viewpoint of the global circumstances.
Our house will take our capital appreciation from whatever sector; high yield, low yield and negative yield. We're not in "it" for the yields.
When it is time to run, it doesn't matter whether it is equities or bonds; good dividend paying companies or bonds of any flavor.
Reply to @catch22: To a significant degre, an issue with valuation (whether bonds or the S & P or whatever) is that you have interventions and rumors of interventions to the point where fundamentals matter less than whether or not there will be more easing. Front-running the Fed and front-running other attempted actions remains a primary focus.
There's other issues with that, as well - push rumors of easing and all manner of other things that turn out to be completely untrue a day or a week later - push the shorts out, run the market up, drop the market. Continual gaming by large institutions who wonder why the retail investor continues to exit. Generations who are retiring are going to sit in fixed income and maybe some Procter and Gamble-type stocks and they are not going to take the same risks again.
As for retail, I know this is going to come as a surprise to many, but people actually put more in bond funds and took more money out of stock funds yet again. I know, I know, unexpected.
I agree................monetary perversion rules the day. I can't imagine that most folks, including the PhD's are really sure what the true worth may be of lots of things, including investment sectors. Heck, one doesn't have to even drive to the casino............we can all play from home on our pc's.
Reply to @catch22: The attempt (with ZIRP, etc) was to push people into risk, and I think it's really quite fascinating to see that much of the population has not responded in the desired fashion, instead selling stocks and moving into fixed income (and I have to imagine that much of that move into fixed income is into fairly vanilla fixed income.) Older generations are not wanting to take risks again, new investors/younger generations are not coming in in the same volume.
I suppose my concern becomes what if the attempt to get people into risk becomes more aggressive (negative interest rates - NIRP, etc.) People have to have some inflation protection, even if it's a moderate amount. People like John Hussman can discuss all manner of statistics in an attempt to show how fundamentals are worse than the market indicates, but you have a government that seems incredibly aggressive in its attempts to paper over any problems whatsoever with easy monetary policy as far as the eye can see, rather than actually trying to let any part of the system actually flush out problems on its own.
And, sure enough, market ramps on leaked Bernanke letter talking about scope for more QE
Reply to @BobC: We hold very small position in TIPs in our portfolio (IRA). We are 76+78 only income from RMD and SS. We hold various fixed income funds but considering adding to TIPs. As you say, with a negative yield and overpriced, just avoid therm now. Do you have a preferred substitute Bob? We have both trad IRA and roth.
Comments
No grocery store could survive trying to find buyers for canned tuna if it were priced the same way. But somehow the federal government can find plenty of suckers who believe inflation will be high enough to move these bond prices even higher than they already are. Anything is possible, I suppose. But what if that does not happen, or what if it takes a long time to occur, or what if these bond holders need to sell? The really surprising thing to me is that I see more than a few "investors" who live off their interest and dividends buying TIPS bonds at inflated prices and negative yields.
Regards- OJ
CNBC:
Gross - "If Fed does QE3, you want to buy what the Fed is buying - TIPS and Mortgages."
Gross - "QE3 almost a done deal."
Gross - "Need to see several months of 3% or more GDP growth before Fed backs off."
Had Apple Computer been paying a 5% dividend at the beginning of the year, one now finds the reported yield at about .4%; and could go negative with higher stock pricing, I don't think the holder of this stock would really give a rip; as they would be happy with the +64% capital appreciation, YTD.
This applies to bonds, too; eh?
Is the 10 year note or TIPS or whatever issue one chooses to review, overpriced at this time? I don't know and I am sure Mr. Bernanke does know, either. Yes, some bonds are expensive today; as well as the possibility that some equites are overpriced, too; depending on one's viewpoint of the global circumstances.
Our house will take our capital appreciation from whatever sector; high yield, low yield and negative yield. We're not in "it" for the yields.
When it is time to run, it doesn't matter whether it is equities or bonds; good dividend paying companies or bonds of any flavor.
Take care,
Catch
There's other issues with that, as well - push rumors of easing and all manner of other things that turn out to be completely untrue a day or a week later - push the shorts out, run the market up, drop the market. Continual gaming by large institutions who wonder why the retail investor continues to exit. Generations who are retiring are going to sit in fixed income and maybe some Procter and Gamble-type stocks and they are not going to take the same risks again.
As for retail, I know this is going to come as a surprise to many, but people actually put more in bond funds and took more money out of stock funds yet again. I know, I know, unexpected.
http://www.ici.org/research/stats/flows/flows_08_22_12
I agree................monetary perversion rules the day. I can't imagine that most folks, including the PhD's are really sure what the true worth may be of lots of things, including investment sectors.
Heck, one doesn't have to even drive to the casino............we can all play from home on our pc's.
Take care,
Catch
I suppose my concern becomes what if the attempt to get people into risk becomes more aggressive (negative interest rates - NIRP, etc.) People have to have some inflation protection, even if it's a moderate amount. People like John Hussman can discuss all manner of statistics in an attempt to show how fundamentals are worse than the market indicates, but you have a government that seems incredibly aggressive in its attempts to paper over any problems whatsoever with easy monetary policy as far as the eye can see, rather than actually trying to let any part of the system actually flush out problems on its own.
And, sure enough, market ramps on leaked Bernanke letter talking about scope for more QE
http://www.zerohedge.com/news/bernanke-rescue-there-scope-further-action-federal-reserve
We hold very small position in TIPs in our portfolio (IRA). We are 76+78 only income from RMD and SS. We hold various fixed income funds but considering adding to TIPs. As you say, with a negative yield and overpriced, just avoid therm now. Do you have a preferred substitute Bob? We have both trad IRA and roth.