WELL.......
Negative rates are supposed to stimulate the economy, incentivising investment by making it less attractive to hold cash and spurring demand by making credit cheaper. But evidence of the theory working in practice is far from conclusive. Certainly Europe’s bankers are squealing, as they feel margins squeezed by low rates on lending and a reluctance to pass on negative rates to depositors.
Why did Europe promote negative interest rates? Our Federal Reserve system and Treasury may operate within boundaries that are not available to the ECB (European Central Bank) functions, as the euro area's fiscal and financial rules are not similar. I will not expand this difference here. One may readily discover facts of their choice.
Suffice to note that the U.S. moved to Quantitative Easing, while the Euro Zone remained with a policy of austerity after the market melt in 2008. Many here will recall the rough times in Europe for several years following the melt.
As to investment grade bonds today. IMHO, one can not (yet) invest in bond funds that will allow for the steady eddy yield and pricing from the days of yesteryear; to take one's investment into the future without a care and the feeling of protection against the nasty's. Keeping in mind, that as long as there are buyers, don't be concerned with the yield; as your pricing/capital appreciation will out perform the yield expected.
My own question(s) to these type of bonds, is how long will purchases remain in place; IF the yields continue to trend to the negative zone??? Purchasers being the big investment houses, hedge funds, pension funds, insurance companies, sovereign wealth funds and individuals, etc.
With some of this in mind, this house has not been inclined to purchase investment grade bond fund(s) for any sake of yield; as this is third place in thought. First and second place belong to a cushion against the current political strains globally and what this may also bring for global equity(s). Yes, a protective place generating some yield and more so; since the mini melt in December of 2018, decent price appreciation. Early 2018 found a U.S. equity blip in February and a few rough patches until the mini melt in December. Early equity market tremors? I won't begin to suggest this knowledge; but money continues to run to IG bonds.
IF U.S. yields continue downward for whatever reason(s), what are the impacts?
--- CD's.....the folks who do not and/or will not invest in the markets, and maintain monies in CD's
--- financial institutions.....will they be able to maintain a proper spread (deposits/loans) to obtain a profit?
--- consumer loans.....mortgage, auto, etc.; would consumers take on too much cheap debt?
--- corporate bond issuance..... more or too much debt, and for what purpose?
--- private pension funding
--- insurance company(s) products, including annuities
and more.
I remain with the thought, as from 2009; This Time Is Different, at least for my investing period.
Your thoughts please.
Thank you for allowing my self therapy.
Catch
Comments
@johnN You noted: "Equities maybe still too high imho"
From a technical view, and only one view type; as technical folks have their own favorite views of the numbers and what they mean, I offer two charts. These charts are set for 5 years of pricing data. One theory is that Relative Strength below 30 is oversold (buy, buy, buy) and over 70 is overbought (handle with caution). This RSI is shown near the top of the chart, and should appear as TEAL in color when over 70. BAGIX (a plain intermediate bond fund), in theory; should be sold, and at the least, not purchased at this point. BUT, what the heck do I/we know. The RSI is merely a gauge of buys and sells to obtain a price point over time. Obviously, the bond types in this fund have had folks buying for awhile, yes?
As to ITOT (U.S. market etf), which is a twin of Vanguard's VTI for returns; one does not find at this time a RSI that suggests this market area is overbought (not too hot too handle at this time).
I need to leave this as is for now..... other time commitments; but wanted to offer a view regarding your above statement.
BAGIX , 5 year chart
ITOT , 5 year chart
Ah, yes. I'm familiar with this AD. We've been there and done that, eh?
Apparently there’s quite a few investors asking the same sorts of questions you are. But I guess the old adage to “buy good funds and hang on for the long run” is still true. Otherwise one’s likely to end up on some high-priced shrink’s couch.
Regards
I don’t know if anyone saw or read it, but several days ago I posted a thread on the question of how nations and individuals might react in a world where virtually all rates were negative.
In a nutshell (not to be confused with fruitcake), some are beginning to suggest that nations will do away with paper currencies completely, thus requiring all money to be invested or on deposit somewhere. This would prevent individuals from stockpiling loads of paper currency in order to preserve its face value.
Interesting to think about.
You asked: "If you buy bonds what would you buy??"
First note: We're full up here with our current allotment of investment grade bonds. With this in mind; and IF the equity markets begin a serious down trend, we would monitor the affect on U.S. government issues. Enough risk off money could still further buy these type of issues and provide decent capital appreciation via price performance.
Second note: Our path with bonds and any other holdings will not match anyone else's investment path. Too many variables; as with your and your Mom's accounts. Without full knowledge of monetary positions and taxable statuses, tis impossible, even for an adviser, to imply suggestions. Our investment path is not fixed in stone and remains flexible. At some point in the near future, we will give up the "thinking" about what our composition should be for the portfolio. The composition, although still a conscious choice; may be as simple as FBALX.
POTUS tweet early this morning.
Well, folks; this should boost your bond returns for a tiny bit, once it happens.
Quite aside from his demand that the Fed adopt emergency stimulus measures when the unemployment rate is 3.7%, Trump's tirade included the idea that the US should "refinance our debt." Why is that a stupid, ignorant remark? 1/
The answer is that federal debt isn't like a mortgage you can prepay; it's bonds that promise a fixed yield until maturity. The government could issue new bonds and buy the old bonds back, but this wouldn't reduce interest payments at all ... 2/
.. because while there are outstanding bonds yielding more than current rates — say, 10-year bonds yielding 3 percent — those bonds sell at a premium. So buying back, say, $1 trillion in debt wld cost more than $1 trillion — enough more that the interest wld be the same 3/
If only the US could issue $1 trillion in bonds paying negative 3 percent, then we'd have $2 trillion in debt, but the net cost to service would be 3% x $1T - 3% x $1T = 0. Voila, problem solved. He just didn't demand a low enough interest rate to make it work.
Yes, part of the reason for the post. Aside from profits from IG bonds, where do all of these other areas of interest rate sensitive land ???
msf's post about callable bonds is also very valid. I checked before I posted, but could not find any data for the percentage of bonds in issuance that are callable?
With this, I'll reduce the amount held in my CD Ladder (cash area) and increase the amount held in my bonds funds (income area). This could take place, for me, as early as December when I have a CD maturing within my CD Ladder and continue until I have reached the desired target asset allocation for my portfolio. Currently, my CD Ladder accounts for about 10% of my overall portfolio's value, savings at about 5% with the residual being in demand cash.
The below link is for multiple stories, if you choose to view/read to help sort out this complex policy; which is a combo rate cut for some areas and QE into broad areas, including private sector corporate bond purchases (this is not new, but extended).
Catalog this continuing story of central banks and their actions under: Fun times in Bondland.
ECB rate decision
Note: POTUS had commented about the ECB policy. His tweet link is found a few comment boxes back in this thread.
Smile on.
Catch
https://www.nytimes.com/2019/09/12/opinion/trump-economy.html
plus comedy!
Trump thinks that federal debt is like a business loan, which you can pay down early to take advantage of lower interest rates. He’s clearly unaware that federal debt actually consists of bonds, which can’t be prepaid (which is one reason interest rates on federal debt are always lower than, say, rates on home mortgages). That is, he imagines that the government’s finances can be managed as if the U.S. were a casino or a golf course, and it never occurred to him to ask anyone at Treasury whether that’s how it works.
(Of course someone is going to point out that fed can repurchase some bonds.)