3 ms·

What you’re talking about is the coupon, not the yield. Say you have Bunde that was sold at 100 EUR. The coupon is 4 EUR. So the coupon is 4%. The yield however

by mruts 8y ago

What you’re talking about is the coupon, not the yield. Say you have Bunde that was sold at 100 EUR. The coupon is 4 EUR. So the coupon is 4%. The yield however depends on the current market price. To calculate the yield you take the coupon and divide it by the current market price. Because bonds mature into each other, that is a 5-year issued 4 years ago should be the same as a 1-year issued today, both bonds will have the exact same yield. So effectively all the old bonds turn into new bonds, all linked to the same yield. This is why yields can be negative, it’s not like a negative yield bonds means you are paying someone. It just means that the price is so high the effective return is negative (remember that you get the face value of bond back after it matures) One exception to this rule is newly issued bonds. Because of regulations and rules, some institutional investors must buy bonds direct from the treasury. This means that they often trade a premium (they have a lower yield) compared to old bonds. Bonds can be a little counterintuitive because when bond prices go up, yields go down. So negative yields actually mean that market is very bullish. You might then ask, why would anyone purchase a negative yield bond? Well, there are a couple different reasons: a) they have to, due regulations or internal rules. b) they are speculating on interest rates or currency. Or c) they are speculating on the bond market (related to b). Bonds can be complicated because they have exposure to a lot of factors: rates, inflation, equities, debt, etc. But they are useful instruments because they have intrinsic value: they simply pay a fixed coupon and then the principal after N-years.

baybal2 8y ago
> You might then ask, why would anyone purchase a negative yield bond? Well, there are a couple different reasons: a) they have to, due regulations or internal rules. b) they are speculating on interest rates or currency. Or c) they are speculating on the bond market (related to b). d) they expect them to go down even further
- gdieowkbdnd 8y ago
  That’s what “speculating on the bond market” means.
jorblumesea 8y ago
Just to add on this... for most investors, they provide some backbone and counterweight to market cycles. In terms of safety, they are a safer investment choice because they represent debt, not equity. This is a good example, graphed: https://www.google.com/search?tbm=fin&q=MUTF:+VBMFX&stick=H4sIAAAAAAAAAONgecRozi3w8sc9YSm9SWtOXmPU4OIKzsgvd80rySypFJLiYoOyBKT4uHj00_UNK8uTCsvzilN4FrFy-4aGuFkphDn5ukUAAJdCiW1KAAAA&biw=1440&bih=711#scso=_SBtfXJqwEOm0ggeplaqoCg2:0,_eBtfXJfiK-Gm_QbPo6HQBg2:0&smids=/g/1ywbr166m&wptab=COMPARE https://www.google.com/search?tbm=fin&q=MUTF:+VBMFX&stick=H4... Bonds Summarized: a) are less volatile compared to equities b) provide consistent and guaranteed returns, albeit at a lower rate compared to equities c) often work counter to market cycles: when interest rates rise, bonds fall in value, and when interest rates are cut, bonds rise. Depending on the depth of the fund, you may not see any changes at all. Generally speaking, stocks almost always perform significantly better than bonds over long periods. If you can handle the risk, in theory 100% stocks is a better investment. Bonds provide the "don't freak out and sell" part of your portfolio.
- mruts 8y ago
  A couple on interesting points: a) Bonds, as you said, were traditional seem as counter cyclical, when equities or rates went up, bonds went down, and vice-versa. Nowadays, it seems like this might not be true anymore. So much money is pouring into the US securities market that both often now move in tandem. In the past, in risk-off environments (when you want to lower your risk), investors would move out of equities and into bonds. But now, since so much money is foreign, you see outflows from both bonds and stocks is a risk-off environment. This makes bonds a worse hedge today against equities than in the past. b) It's true that 100% stocks almost always outperforms 100% bonds. But things get really interesting when you consider a mix of equities and bonds. Take an 100% equities portfolio of say 10 stocks: do a simulation in which you vary the weights of each position (the percentage of each stock that makes up your portfolio). Now graph the historical returns on Y axis and the historical volatility of all these simulated portfolios. What you'll see is called the "Markowitz Bullet"[1] The efficient frontier (EF), is all the portfolios that have the best risk adjusted returns (also known as the Sharpe ratio). Basically what that means is that those portfolios on the EF (the top "edge" of the bullet) have better risk/reward characteristics than any of the portfolios below them. so with a 100% equities portfolio, the best you can do to maximize your Sharpe ratio will be on the top edge of the curve. Now consider mixing in some bonds which are at the risk-free rate. 3 month US T-notes are traditionally considered to be the risk-free rate. That is, they have no volatility and a fixed return (say 2%). By adjusting your allocation of risk-free bonds and equities you can achieve a better Sharpe ratio than anything you could do with just equities alone. So now, with adding bonds, you can now beat the EF. The EF is now the line drawn between the risk-free point (0 variance, 2% returns) and tangent portfolio (the highest point on the curve). Check out the picture below for an illustration. But it gets even better! If you can borrow at the risk free rate, you can now your leverage returns (but also volatility) into outer space! Modern portfolio theory is based on this concept that adding the risk-free rate to your portfolio can actually make you achieve better risk-adjusted returns than you otherwise could with just equities alone. Seems pretty magical when you think about it (though it's predicated on the original sin of finance: that the risk-free rate actually exists) https://en.wikipedia.org/wiki/Modern_portfolio_theory#/media/File:Markowitz_frontier.jpg https://en.wikipedia.org/wiki/Modern_portfolio_theory#/media...
hakfoo 8y ago
It's not about buying a return, it's about buying stability. If you've got a billion dollars/euros to manage, and assuming you can't just stuff notes in a mattress and hope silverfish don't eat them, you also can't just dump it in consumer-grade investments (typical bank insurance wouldn't cover most of it if the bank collapsed). Virtually any combination of stock/bond/tangible/land market investments, no matter how diverse, has non-trivial risk of significant loss over some time horizon. In contrast, the most premier government bonds (US, German, maybe Japanese and/or Canadian) have a huge "too big to fail" factor. If those suddenly lose 30% of their value, it probably means the world a a whole has far bigger problems than your investment portfolio. If your goal is asset preservation above all else, it's worth eating a known, predictable zero or negative rates of return on those bonds, as a safe harbor from the much bigger risks of the broader market.

by mruts 8y ago

baybal2 8y ago

> You might then ask, why would anyone purchase a negative yield bond? Well, there are a couple different reasons: a) they have to, due regulations or internal rules. b) they are speculating on interest rates or currency. Or c) they are speculating on the bond market (related to b). d) they expect them to go down even further

gdieowkbdnd 8y ago
That’s what “speculating on the bond market” means.

jorblumesea 8y ago

Just to add on this... for most investors, they provide some backbone and counterweight to market cycles. In terms of safety, they are a safer investment choice because they represent debt, not equity. This is a good example, graphed: https://www.google.com/search?tbm=fin&q=MUTF:+VBMFX&stick=H4sIAAAAAAAAAONgecRozi3w8sc9YSm9SWtOXmPU4OIKzsgvd80rySypFJLiYoOyBKT4uHj00_UNK8uTCsvzilN4FrFy-4aGuFkphDn5ukUAAJdCiW1KAAAA&biw=1440&bih=711#scso=_SBtfXJqwEOm0ggeplaqoCg2:0,_eBtfXJfiK-Gm_QbPo6HQBg2:0&smids=/g/1ywbr166m&wptab=COMPARE https://www.google.com/search?tbm=fin&q=MUTF:+VBMFX&stick=H4... Bonds Summarized: a) are less volatile compared to equities b) provide consistent and guaranteed returns, albeit at a lower rate compared to equities c) often work counter to market cycles: when interest rates rise, bonds fall in value, and when interest rates are cut, bonds rise. Depending on the depth of the fund, you may not see any changes at all. Generally speaking, stocks almost always perform significantly better than bonds over long periods. If you can handle the risk, in theory 100% stocks is a better investment. Bonds provide the "don't freak out and sell" part of your portfolio.

mruts 8y ago
A couple on interesting points: a) Bonds, as you said, were traditional seem as counter cyclical, when equities or rates went up, bonds went down, and vice-versa. Nowadays, it seems like this might not be true anymore. So much money is pouring into the US securities market that both often now move in tandem. In the past, in risk-off environments (when you want to lower your risk), investors would move out of equities and into bonds. But now, since so much money is foreign, you see outflows from both bonds and stocks is a risk-off environment. This makes bonds a worse hedge today against equities than in the past. b) It's true that 100% stocks almost always outperforms 100% bonds. But things get really interesting when you consider a mix of equities and bonds. Take an 100% equities portfolio of say 10 stocks: do a simulation in which you vary the weights of each position (the percentage of each stock that makes up your portfolio). Now graph the historical returns on Y axis and the historical volatility of all these simulated portfolios. What you'll see is called the "Markowitz Bullet"[1] The efficient frontier (EF), is all the portfolios that have the best risk adjusted returns (also known as the Sharpe ratio). Basically what that means is that those portfolios on the EF (the top "edge" of the bullet) have better risk/reward characteristics than any of the portfolios below them. so with a 100% equities portfolio, the best you can do to maximize your Sharpe ratio will be on the top edge of the curve. Now consider mixing in some bonds which are at the risk-free rate. 3 month US T-notes are traditionally considered to be the risk-free rate. That is, they have no volatility and a fixed return (say 2%). By adjusting your allocation of risk-free bonds and equities you can achieve a better Sharpe ratio than anything you could do with just equities alone. So now, with adding bonds, you can now beat the EF. The EF is now the line drawn between the risk-free point (0 variance, 2% returns) and tangent portfolio (the highest point on the curve). Check out the picture below for an illustration. But it gets even better! If you can borrow at the risk free rate, you can now your leverage returns (but also volatility) into outer space! Modern portfolio theory is based on this concept that adding the risk-free rate to your portfolio can actually make you achieve better risk-adjusted returns than you otherwise could with just equities alone. Seems pretty magical when you think about it (though it's predicated on the original sin of finance: that the risk-free rate actually exists) https://en.wikipedia.org/wiki/Modern_portfolio_theory#/media/File:Markowitz_frontier.jpg https://en.wikipedia.org/wiki/Modern_portfolio_theory#/media...

hakfoo 8y ago

It's not about buying a return, it's about buying stability. If you've got a billion dollars/euros to manage, and assuming you can't just stuff notes in a mattress and hope silverfish don't eat them, you also can't just dump it in consumer-grade investments (typical bank insurance wouldn't cover most of it if the bank collapsed). Virtually any combination of stock/bond/tangible/land market investments, no matter how diverse, has non-trivial risk of significant loss over some time horizon. In contrast, the most premier government bonds (US, German, maybe Japanese and/or Canadian) have a huge "too big to fail" factor. If those suddenly lose 30% of their value, it probably means the world a a whole has far bigger problems than your investment portfolio. If your goal is asset preservation above all else, it's worth eating a known, predictable zero or negative rates of return on those bonds, as a safe harbor from the much bigger risks of the broader market.