4 ms·

Why does low or negative yield bonds mean that you are going to be ok with govt bonds? This is exactly the problem, where bonds are no longer providing interest

Why does low or negative yield bonds mean that you are going to be ok with govt bonds? This is exactly the problem, where bonds are no longer providing interest payments. I agree that being more conservative is probably necessary, however I think other than specific investments and... burying your cash might be the "conservative" options. Bonds were those, and no longer are now.

rolltiide 7y ago
The bond interest payments are separate from the value of the bond. Which you can sell back at a greater premium and faster than even worrying about maturity. This is the greatest bull market in bonds of all time and they are starting to behave like cheap deep in-the-money options contracts, which decline slightly in value over time due to theta (time value). Options are fun.
- pmart123 7y ago
  I’m not sure how I get your logic? I do think the US bond yields have a large discrepancy versus other developed market yields, but convexity greater increases as yields fall towards zero. So how is that behavior similar to a deep ITM option?
  - rolltiide 7y ago
    the only similarity is that a deep ITM option is an asset that decreases in value in one way while gaining in value in another way, due to the same forces. a negative yielding bond - or a bond going towards negative yield - decreases in value one way while gaining in a value another way, the more it gains in value the deeper the negative yield goes.
dragontamer 7y ago
> This is exactly the problem, where bonds are no longer providing interest payments. If interest rates drop even more, the value of bonds go up. Right now, a 1.68% 10-year bond looks like it sucks. But next year, a 1.68% 9-year bond will beat the pants off of a 1.3% 10-year. You can sell a 1.68% 9-year bond for a lot more money when everyone else only has 1.3% 10-year bonds. If the 10-year drops to 1%, you'll make even more money. A falling interest rate market benefits those who buy bonds, especially if no one knows where the bottom is.
- chrstphrhrt 7y ago
  I know nothing of finance, but I have a normal liquid savings account that's paying 2.25%, apparently "permanently". Why would anyone buy a less-flexible product that pays less?
  - kileywm 7y ago
    That high yield savings account is (likely) unavailable to their tax-advantaged account(s) such as 401k. In that case, their choices may be limited to stocks or bonds.
    - astura 7y ago
      You can hold CDs in an IRA; currently Navy Federal is offering a 5-Year CD at 3.50% APY available for IRAs with no maximum purchase amount. [1] Earlier this year I opened up an IRA with them and I put $100 in a 3.680% APY 40 months CD. I did this because they were matching the first $100 on new IRAs, so I deposited $100 and they deposited $100. [1] https://www.navyfederal.org/products-services/checking-savings/certificates.php https://www.navyfederal.org/products-services/checking-savin...
  - dragontamer 7y ago
    > normal liquid savings account that's paying 2.25% Yes. That's what an inverted yield curve means. Liquid funds are "more expensive" than long-term funds. That's why things are inverted right now. The long-term expectation (over the course of the next 10 years) is that savings accounts will drop. That's why people are willing to "only" be paid 1.6% for a 10-year, because its better to be paid 1.6% for 10 years... rather than 2.25% for this year (and then only 0.5% for the next 9 years). In essence: the bankers are taking the opposite bet you're making. When the bankers are making a move, you probably should think about the future of money... bankers probably know more than you and I do. EDIT: > Why would anyone buy a less-flexible product that pays less? Because they have a pessimistic view of the next 5 to 10 years. When big-money starts to make these pessimistic bets, its a recession indicator.
  - scott00 7y ago
roenxi 7y ago
Not knowing exactly how much you want explained; but... The yield curve is inverting because buyers with serious money are buying medium-term cash instruments in defiance of naive valuation logic that the short-term cash instruments are more competitively priced. This suggests that they see something in the near future, big enough that they are throwing the easily calculated "Net Present Value with usual assumptions" out the window when they make their purchasing decisions. Since bond buying and selling is usually done on a pure NPV basis this is a big deal and a good signal that it is time to avoid anything that might be risky until we find out what the big thing is. Hence, buy government bonds as the single most conservative option. NPV might be partially irrelevant.

rolltiide 7y ago

The bond interest payments are separate from the value of the bond. Which you can sell back at a greater premium and faster than even worrying about maturity. This is the greatest bull market in bonds of all time and they are starting to behave like cheap deep in-the-money options contracts, which decline slightly in value over time due to theta (time value). Options are fun.

pmart123 7y ago
I’m not sure how I get your logic? I do think the US bond yields have a large discrepancy versus other developed market yields, but convexity greater increases as yields fall towards zero. So how is that behavior similar to a deep ITM option?
- rolltiide 7y ago
  the only similarity is that a deep ITM option is an asset that decreases in value in one way while gaining in value in another way, due to the same forces. a negative yielding bond - or a bond going towards negative yield - decreases in value one way while gaining in a value another way, the more it gains in value the deeper the negative yield goes.

dragontamer 7y ago

> This is exactly the problem, where bonds are no longer providing interest payments. If interest rates drop even more, the value of bonds go up. Right now, a 1.68% 10-year bond looks like it sucks. But next year, a 1.68% 9-year bond will beat the pants off of a 1.3% 10-year. You can sell a 1.68% 9-year bond for a lot more money when everyone else only has 1.3% 10-year bonds. If the 10-year drops to 1%, you'll make even more money. A falling interest rate market benefits those who buy bonds, especially if no one knows where the bottom is.

chrstphrhrt 7y ago
I know nothing of finance, but I have a normal liquid savings account that's paying 2.25%, apparently "permanently". Why would anyone buy a less-flexible product that pays less?
- kileywm 7y ago
  That high yield savings account is (likely) unavailable to their tax-advantaged account(s) such as 401k. In that case, their choices may be limited to stocks or bonds.
  - astura 7y ago
    You can hold CDs in an IRA; currently Navy Federal is offering a 5-Year CD at 3.50% APY available for IRAs with no maximum purchase amount. [1] Earlier this year I opened up an IRA with them and I put $100 in a 3.680% APY 40 months CD. I did this because they were matching the first $100 on new IRAs, so I deposited $100 and they deposited $100. [1] https://www.navyfederal.org/products-services/checking-savings/certificates.php https://www.navyfederal.org/products-services/checking-savin...
- dragontamer 7y ago
  > normal liquid savings account that's paying 2.25% Yes. That's what an inverted yield curve means. Liquid funds are "more expensive" than long-term funds. That's why things are inverted right now. The long-term expectation (over the course of the next 10 years) is that savings accounts will drop. That's why people are willing to "only" be paid 1.6% for a 10-year, because its better to be paid 1.6% for 10 years... rather than 2.25% for this year (and then only 0.5% for the next 9 years). In essence: the bankers are taking the opposite bet you're making. When the bankers are making a move, you probably should think about the future of money... bankers probably know more than you and I do. EDIT: > Why would anyone buy a less-flexible product that pays less? Because they have a pessimistic view of the next 5 to 10 years. When big-money starts to make these pessimistic bets, its a recession indicator.
- scott00 7y ago

roenxi 7y ago

Not knowing exactly how much you want explained; but... The yield curve is inverting because buyers with serious money are buying medium-term cash instruments in defiance of naive valuation logic that the short-term cash instruments are more competitively priced. This suggests that they see something in the near future, big enough that they are throwing the easily calculated "Net Present Value with usual assumptions" out the window when they make their purchasing decisions. Since bond buying and selling is usually done on a pure NPV basis this is a big deal and a good signal that it is time to avoid anything that might be risky until we find out what the big thing is. Hence, buy government bonds as the single most conservative option. NPV might be partially irrelevant.