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I'm sure this is a hugely ignorant question, so I'm asking honestly... > Some funds track government bond indexes, meaning they must buy the bonds regardless o

I'm sure this is a hugely ignorant question, so I'm asking honestly... > Some funds track government bond indexes, meaning they must buy the bonds regardless of the yield. Well, that looks like the problem, to me. How about don't do that? Just choose to invest in literally anything else that doesn't have a known negative ROI.

parsimo2010 7y ago
No. The investment vehicle should (strive to) attain it's stated goal. If I invest in a fund that tracks bonds, then I expect it to track bonds. I didn't invest in a fund that said it would give me zero percent yield, I invested in a fund that said it would track bonds. If you want a fund that invests in literally anything that doesn't have a known negative ROI then you need a different fund. If funds try to do what they think investors want rather than what they said they'd do, then they can get in serious trouble.
SilasX 7y ago
1) The funds themselves are specifically designed for people who want their money in government bonds. If that doesn't make sense for you as an investor now, then yes, you should get out of the fund, but the fund is still chartered to cater to whichever (insane) people still wish to be in government bonds in a negative rate era. 2) It's not necessarily bad to have bought into the fund. To the extent that interest rates go down, that means the value of the bonds, and therefore of your shares in the fund, goes up. So you could at least pocket that (one-time) return and move your money into a 0-yielding savings account.
usefulcat 7y ago
Investors are free to not invest in such funds..
maxerickson 7y ago
If you agree to sell me a fish, I'm gonna be frustrated when you fulfill the order with a hotdog. The whole point of the funds is that they manage the buying and management of government bonds, that's the service they provide. You can buy bond funds that only partially invest in government bonds.
nknealk 7y ago
There are often regulations or other structures that govern what kind of assets a pension fund must buy. For example, California's pension fund has a 20 percent fixed income investment target (note CA pension is has somewhat more flexibility than others in what they can do) https://www.calpers.ca.gov/page/investments/asset-classes/trust-level-portfolio-management https://www.calpers.ca.gov/page/investments/asset-classes/tr... There's some moral hazard here. The same people who regulate the fund also have the benefit of borrowing money cheaply.
_croz 7y ago
People invest in bonds because they are safer than stocks. Government, municipal, and corporate bonds pay interest relative to interest rates set by the central bank and how risky they are perceived. Across the bond categories, there will always be funds (ETFs & Mutual funds) backed by these categories of bonds for investors to purchase and their value proposition is that they behave like the underlying asset. It's much more convenient for people to buy shares of a mutual fund or an ETF than to buy individual bonds at an auction, so it's an attractive product for them to offer and take a small management fee on top of. > Just choose to invest in literally anything else that doesn't have a known negative ROI. A fund manager who is responsible for creating a product that matches government bonds can't buy something else because it would no longer be what it is intended to be: a product which behaves according to how the underlying asset behaves. Investors however, will buy other (riskier) products because it doesn't make sense to buy something with zero or negative interest, which puts more money into less safe hands, hence the talk about bubbles. If the only thing that is offering any return is a ponzi scheme and everyone is invested in it because nothing else is offering return, then it's going to end badly for a lot of people.
BenoitEssiambre 7y ago
Because the private markets aren't offering many assets that compare well against these bonds if you take into account returns, risk and liquidity. BTW this is normal. Historically, negative real returns on stores of value were the norm. Before financial systems existed, almost all investments had negative returns if you didn’t put work and energy into them. To store value, you had to accumulate stuff, buildings or land. Most options either had high maintenance costs, were subject to risk of damage from natural causes and theft, were very volatile or required hard labor to get production out of. Even in societies with financial systems, getting low risk, hassle free, liquid, positive real returns has been difficult for most of history. This just reflects the natural laws of thermodynamics that tell us that everything tends to decay without a constant supply of work and energy. In general, most things require maintenance to keep their worth. The 20th century was probably the most notable exception. Because of unprecedented demographic and technological growth, positive risk free real returns were easy to find. The recency effect probably explains some of the confusion people have about this. It is possible that under favorable conditions, wealth can have positive returns and even compound into very good long run returns but it is not a guarantee and there is nothing natural about it. It may not continue forever, particularly amidst an aging and retiring population in a world no longer as rich in easy to exploit natural resources. While people are used to get negative returns on short term purchases, you buy fresh vegetables at the supermarket, even if they degrade over time, many can’t seem to accept the normalcy of negative returns on longer term assets. In nature, squirrels’ nut caches have a certain percentage of losses from theft and spoilage. Real returns tending towards the negative is natural even if they can seem unusual for humans just out of the 20th century. More here "The World Deserves a Pay Raise" (https://medium.com/@b.essiambre/the-world-deserves-a-pay-raise-302f25efd82a https://medium.com/@b.essiambre/the-world-deserves-a-pay-rai...)
- selestify 7y ago
  > This just reflects the natural laws of thermodynamics that tell us that everything tends to decay without a constant supply of work and energy. "Decay" is very subjective. The laws of thermodynamics only tell us that entropy (an objective quantity) must increase over time, but it does not tell us how it increases or whether this increase is desirable or not. Life itself exists only because the combination of life + the environment creates more entropy than just a lifeless environment. Yet few would describe life as a "decay" of physical elements into self-replicating structures. This is not to say that the phenomena you describe doesn't exist, it's just to say that the laws of physics at the scale of statistical mechanics are far removed from high-level processes at the scale of human society.

parsimo2010 7y ago

No. The investment vehicle should (strive to) attain it's stated goal. If I invest in a fund that tracks bonds, then I expect it to track bonds. I didn't invest in a fund that said it would give me zero percent yield, I invested in a fund that said it would track bonds. If you want a fund that invests in literally anything that doesn't have a known negative ROI then you need a different fund. If funds try to do what they think investors want rather than what they said they'd do, then they can get in serious trouble.

SilasX 7y ago

1) The funds themselves are specifically designed for people who want their money in government bonds. If that doesn't make sense for you as an investor now, then yes, you should get out of the fund, but the fund is still chartered to cater to whichever (insane) people still wish to be in government bonds in a negative rate era. 2) It's not necessarily bad to have bought into the fund. To the extent that interest rates go down, that means the value of the bonds, and therefore of your shares in the fund, goes up. So you could at least pocket that (one-time) return and move your money into a 0-yielding savings account.

usefulcat 7y ago

Investors are free to not invest in such funds..

maxerickson 7y ago

If you agree to sell me a fish, I'm gonna be frustrated when you fulfill the order with a hotdog. The whole point of the funds is that they manage the buying and management of government bonds, that's the service they provide. You can buy bond funds that only partially invest in government bonds.

nknealk 7y ago

There are often regulations or other structures that govern what kind of assets a pension fund must buy. For example, California's pension fund has a 20 percent fixed income investment target (note CA pension is has somewhat more flexibility than others in what they can do) https://www.calpers.ca.gov/page/investments/asset-classes/trust-level-portfolio-management https://www.calpers.ca.gov/page/investments/asset-classes/tr... There's some moral hazard here. The same people who regulate the fund also have the benefit of borrowing money cheaply.

_croz 7y ago

People invest in bonds because they are safer than stocks. Government, municipal, and corporate bonds pay interest relative to interest rates set by the central bank and how risky they are perceived. Across the bond categories, there will always be funds (ETFs & Mutual funds) backed by these categories of bonds for investors to purchase and their value proposition is that they behave like the underlying asset. It's much more convenient for people to buy shares of a mutual fund or an ETF than to buy individual bonds at an auction, so it's an attractive product for them to offer and take a small management fee on top of. > Just choose to invest in literally anything else that doesn't have a known negative ROI. A fund manager who is responsible for creating a product that matches government bonds can't buy something else because it would no longer be what it is intended to be: a product which behaves according to how the underlying asset behaves. Investors however, will buy other (riskier) products because it doesn't make sense to buy something with zero or negative interest, which puts more money into less safe hands, hence the talk about bubbles. If the only thing that is offering any return is a ponzi scheme and everyone is invested in it because nothing else is offering return, then it's going to end badly for a lot of people.

BenoitEssiambre 7y ago

Because the private markets aren't offering many assets that compare well against these bonds if you take into account returns, risk and liquidity. BTW this is normal. Historically, negative real returns on stores of value were the norm. Before financial systems existed, almost all investments had negative returns if you didn’t put work and energy into them. To store value, you had to accumulate stuff, buildings or land. Most options either had high maintenance costs, were subject to risk of damage from natural causes and theft, were very volatile or required hard labor to get production out of. Even in societies with financial systems, getting low risk, hassle free, liquid, positive real returns has been difficult for most of history. This just reflects the natural laws of thermodynamics that tell us that everything tends to decay without a constant supply of work and energy. In general, most things require maintenance to keep their worth. The 20th century was probably the most notable exception. Because of unprecedented demographic and technological growth, positive risk free real returns were easy to find. The recency effect probably explains some of the confusion people have about this. It is possible that under favorable conditions, wealth can have positive returns and even compound into very good long run returns but it is not a guarantee and there is nothing natural about it. It may not continue forever, particularly amidst an aging and retiring population in a world no longer as rich in easy to exploit natural resources. While people are used to get negative returns on short term purchases, you buy fresh vegetables at the supermarket, even if they degrade over time, many can’t seem to accept the normalcy of negative returns on longer term assets. In nature, squirrels’ nut caches have a certain percentage of losses from theft and spoilage. Real returns tending towards the negative is natural even if they can seem unusual for humans just out of the 20th century. More here "The World Deserves a Pay Raise" (https://medium.com/@b.essiambre/the-world-deserves-a-pay-raise-302f25efd82a https://medium.com/@b.essiambre/the-world-deserves-a-pay-rai...)

selestify 7y ago
> This just reflects the natural laws of thermodynamics that tell us that everything tends to decay without a constant supply of work and energy. "Decay" is very subjective. The laws of thermodynamics only tell us that entropy (an objective quantity) must increase over time, but it does not tell us how it increases or whether this increase is desirable or not. Life itself exists only because the combination of life + the environment creates more entropy than just a lifeless environment. Yet few would describe life as a "decay" of physical elements into self-replicating structures. This is not to say that the phenomena you describe doesn't exist, it's just to say that the laws of physics at the scale of statistical mechanics are far removed from high-level processes at the scale of human society.