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30-year U.S. bond yields less than S&P dividend rate

104 points by potiuper 7y ago

mkagenius 7y ago
Idk if this belongs at HN but if it does, then isn't this the greatest opportunity post 2008 crash to invest in to the markets?
- cocoa19 7y ago
  Meh, the price now is what it was in October of last year. Not really the greatest. I did rebalance my portfolio a bit, but I'm sitting tight waiting for better opportunities.
- techdevangelist 7y ago
  Assuming we’re at the bottom, with the virus concerns, plus the much earlier bond yield inversions we could be always from bottom.
- leptoniscool 7y ago
  The recent drop is not very significant (a little over 10%). The Great Financial Crisis caused a 60% drop around 2008/2009. https://www.nytimes.com/2020/02/27/business/what-is-a-stock-market-correction.html https://www.nytimes.com/2020/02/27/business/what-is-a-stock-...
  - mkagenius 7y ago
    I see, there was a similar drop in 2018. So not really that great of a fall.
    - serpix 7y ago
      yet. Nobody knows where the bottom is. The virus is only at the beginning of its conquest of the Western world.
  - mabbo 7y ago
    The question is whether we're at the bottom or just at the beginning of the roller coaster. Bonds are indicators of expectations and risks in the near-to-long future. When their rates get strange, people worry.
  - exogan 7y ago
    The recent drop happened in only one week, it was really abrupt and breaking records. GFC didn't happen over 1 week, the bear market from GFC was from October 9/10, 2007 to March 9, 2009.
    - thinkloop 7y ago
      I don't think it broke any real records, the only one is the absolute point drop in the indexes, but that's a meaningless stat that will constantly be broken in the future as the economy grows - proportion is what's interesting.
      - exogan 7y ago
        My bad, it did not break records outside the 1987, dot-com and GCF crises, made a mistake there. However, I don't agree with the theory of infinite economy growth (as you said "constantly be broken in the future").
        whatshisface 7y ago
        Future economy growth =/= infinite economy growth.
  - nostromo 7y ago
    Financial crises tend to be much worse for securities than a regular recession.
- tinza123 7y ago
  That's assuming you know when the drop will stop, otherwise it is the worst opportunity.
- JMTQp8lwXL 7y ago
  Yields have been declining since the 80s [0]. It could be the greatest opportunity, but a trade like that might take a lifetime to pan out. [0]: https://fred.stlouisfed.org/series/IRLTLT01USM156N https://fred.stlouisfed.org/series/IRLTLT01USM156N
  - tryptophan 7y ago
    Try 700 years. https://www.visualcapitalist.com/700-year-decline-of-interest-rates/ https://www.visualcapitalist.com/700-year-decline-of-interes... Betting against rate decreases in the long term is likely a terrible financial decision.
    - toomuchtodo 7y ago
      I love this comment and link! All asset class yields will eventually arrive at zero, it's just when.
- kypro 7y ago
  The 2008 GFC was a good opportunity invest in hindsight because for a period of time stock prices were low and the economy recovered within a few years. However today stock prices only 12%~ off all time highs and some are predicting prolonged stagflation.
  - selectodude 7y ago
    Lowering interest rates during a supply shock is shockingly irresponsible.
- exogan 7y ago
  It's hard to objectively calculate how large the impact from corona virus will be and how it has affected the supply chain. Additionally, this could be a black swan event that could become a catalyst, this is not an isolated event and it will send a shockwave across the markets. The losses in earnings as well as the reduction of consumption are hard to estimate, they need to be priced in into the stock's price which might be currently undervalued or overvalued. The idea is that no one knows exactly what the prices should look like. You might go for the S&P yield and end up losing 20% in the short term because of the price tanking. The point is that investors like certainty, that's why some are holding cash or even a mix of bonds, cash and gold. They might prefer lower yields than S&P and more certainty.
- mabbo 7y ago
  I'm in an interesting position related to this. In Canada, most people lock into their mortgage rate for 3-5 years. After that, you've got to renegotiate a rate but you're also free to switch banks. It's like starting over again at whatever you currently owe. I locked into mine 4 and a half years ago, so renewal is coming up this summer. Meanwhile, my home's value has skyrocketed (thanks to an insane Toronto housing market). What this all means is that in a few months, at my renewal date, the mortgage interests rates may be incredibly low (they're already at 2.7% today), my home's value is much higher than what I owe, and the stock market looks like it's going to be hitting the bottom around that time too. So the question is... do I gamble on this? I could easily access hundreds of thousands of dollars in a low interest mortgage and drop it all on index funds. If it worked, 10 years later I could retire early. If it doesn't, I'm another god-knows-how-many years away from paying off the mortgage. Mind you, my (sane, rational, smart-than-me) wife would never agree to any of this so it's only nice to think about.
  - Proziam 7y ago
    I know someone who did this. It didn't work out and it's their single biggest financial regret in life.
    - glouwbug 7y ago
      I've seen 6 people in the last 2 weeks on wallstreetbets gamble away their student loans. The sad part is one guy will post their success of doubling their student loan, and it will just cause a bunch of younger inexperienced 19 year olds to lose tens of thousands to their own gambles. It's really sad. It's an addiction
      - Proziam 7y ago
        For some, it is addiction. For others, they simply cannot fathom the risk they expose themselves to. They have no concept of the time, effort, and stress they will cost themselves over the course of their lives as a result of their error. Try explaining to a teenager that the 50k bet that costs them their chance at an education is actually them putting 1m+ at risk if you compound the effect over the course of their life.
- robjan 7y ago
  It's best to avoid timing the market. It could do up x% on Monday or down y%. The people driving the real volume know way more than you or I.
  - vikramkr 7y ago
    The performance of actively managed hedge funds would disagree with that. Doesn't seem like anyone can manage it consistently https://www.cnbc.com/2019/03/15/active-fund-managers-trail-the-sp-500-for-the-ninth-year-in-a-row-in-triumph-for-indexing.html https://www.cnbc.com/2019/03/15/active-fund-managers-trail-t...
    - AznHisoka 7y ago
      Yep people like to distinguish between “dumb money” and “smart money” but the truth is there is no such thing as smart money.
      - deleted 7y ago
        [deleted]
      - vikramkr 7y ago
        I agree theres nonsuch thing as smart money, but there probably is a distinction between dumb and not dumb money - like someone putting a part of their savings in an index fund versus someone putting their entire net worth on far out of the money AMD calls
- vikramkr 7y ago
  That's a question of market timing, and of you try and time the market, you'll either be broke or lucky. Maybe stocks are insanely undervalued and we're on the cusp of a bull run. Or, maybe the markets are going to crash and the dividend rate isn't going to hold as we move into future as companies go bankrupt and stop paying dividends. Unlike treasury bonds, dividends aren't certain, so this one data point alone isn't enough to really conclude either way
- lordnacho 7y ago
  As an ex fund manager, albeit with little macro experience, here's some thoughts. The time since the GFC is a sort of strange era. Again and again, we're told that central banks (and governments) are going to do whatever the heck keeps the market up. Buying the dip has more or less worked the whole time. A lot of asset classes look expensive if you take a longer-back view of things, but then again that longer view tended to not include "we'll do anything". This virus thing could be quite a different thing to what traders and fund managers are used to. The kinds of things I used to look at were things like what do the brokers say about rates, or what do economists think about oil. Or more specifially for me what does the market think about the supply and demand of volatility risk. Even the GFC itself was something that many people in my circles had thought about. It was definitely in the financial arena; either you thought subprime was gonna be a mess, or you thought it would stay localized and not burst its banks. Also keep in mind traders tend to be young, and there has been a trend towards juniorization particularly in the investment banks. I'm in the UK at the moment, and the number of cases doubled in the last couple of days. It did the same a couple of days earlier. So then the question is whether this is an exponential process. And if it is, what's going to stop it being exponential? Public awareness isn't going to be it, because everyone in the whole world already knows they're supposed to wash their hands and stay away from old people. Certainly we can't just pretend the virus is not here. An expert on the radio last night mentioned that if Twickenham was full for the match today, and the 80k people there all had flu, 8 of them would be expected to die. According to him with Coronavirus at 2-3% it would be in the ballpark of 2000. Chances are people who would be ill but recover would also be a fair chunk. So something has to be done, governments aren't going to get away with just playing it down as the numbers double every other day. And this is where fragility comes into play. We're used to the economy being coated in a thick layer of cheap money. Business models that were previously tenuous now seem solid, because there's always someone who will finance it. I'm sure you've heard of a few such businesses in the recent news. What this translates into is that you can motivate people to work in a certain way because you can borrow (and this is in the larger sense, not just loans) the firepower to pay them. But what if a bunch of people suddenly cannot work? If you're properly ill, there's no amount of money that will make you able to work. And you will have to live with not earning money, and your boss will have to live with work not getting done. It doesn't seem like something that handing more money out for will help. At most you can help to make sure that peripheral issues are solved, like cash crises in people's private finances don't cause them to have to sell their house or business. But people not being able to work on a large scale will cause some kind of collapse somewhere in the system, and supply and demand isn't going to generate more supply, it will just raise the price of work. This is kinda like how historians write that peasants had a great time after the plague killed a third of Europe. And of course companies are negotiating with labor over the spoils of production, so profits would seem to go down. But this is all pretty sensitive to the size of the actual outbreak. If the top is today the death toll is similar to 9/11, and the economy will be fine. If it grows to shut down schools and workplaces all over the world, it's gonna be really interesting.
- skybrian 7y ago
  One way to look at is, when did we last see prices like this? If this is a good opportunity then it's only slightly better than October of last year when the prices were about the same. (Slightly better because in theory, you could have done something else with the money in the meantime.) It's not better than any time before that, when prices were lower. Stocks are on sale, but it's hard to beat time in the market, which is still better for most timespans.
- rb808 7y ago
  No, this isn't a crash, the main US indices are just back to where they were 6 months ago. That isn't a great buying opportunity, they weren't cheap 6 months ago either.
- imtringued 7y ago
  The problem with this type of thinking is that it could always go even lower and by selling now you end up missing a lot of potential profit. The window of the global optimum is often only a few days wide.
mrep 7y ago
Hm, I'm seeing the title "Bond Markets Shred History Books During Furious Fear Trade". Also, kinda silly to focus on just dividends considering buybacks are now greater than dividends [0]. [0] (pdf): https://www.yardeni.com/pub/buybackdiv.pdf https://www.yardeni.com/pub/buybackdiv.pdf
- mraudiobook_com 7y ago
  They focus on that because it is the most insane thing ever. Title should have been, The markets are fucked, we are all fucked.
tryptophan 7y ago
The dividend yield doesn't matter (alone). The more common way to return cash to shareholder's is via buybacks. The actual 'yield' of the market should thus be calculated as div yield + buyback yield, giving the investor yield, which is what intellectually honest people should compare to treasury yields.
- SilasX 7y ago
  Right, but that just means dividend yield understates the misalignment, and we passed the weirdness point (for lack of a better term) a long time ago.
- MuffinFlavored 7y ago
  > The more common way to return cash to shareholder's is via buybacks. Is this more common throughout history or only common in today's modern market of cheap interest rates?
- bulletsvshumans 7y ago
  Buybacks directly cause dividend yields to go up because they reduce the number of outstanding shares, causing the remaining shareholders to receive a greater stake when future profits are distributed amongst fewer parties.
- im3w1l 7y ago
  Also got to take into account all the newly emitted stock, e.g. employee rsu (my understanding is that most companies net dilute over time).
Danieru 7y ago
Bonds are a commited fixed return, which means the value of bond goes up if the going rate for new bonds goes down. Thus bonds can be much more profitable than stocks when the marketing is going down. The central bank will drop rates, and thus any holder of existing bonds gets to sell their old bonds for more, maybe much more. Of course this is not the big driver for bond demand. Rather bonds are demanded by money managers who are not allowed to take any risk. Think banks, and especially central banks. Said money managers want to never-ever lose so much as a dollar of principle. They are not paid to maximize total return, but rather to manage this pile of money in such a way to never let it shrink. You'll see this set of incentives all over the world if you know where to look: money which is not expected to be invested. Think of mega-corp's payroll. Every month they need to pay X large number of dollars by the end of the month. Missing payroll by 1% would be such an incredible disaster it would lead to lawsuits. So big-corp does the sensible thing, and keeps the money in a money-market fund. Said money-market fund in-turn holds various short-term bonds (1 year or less). Who borrows money for only 1 year or less? People who have a little bit of their own money with which to take risk and want to turn around and borrow longer term. Bit by bit money which needs to be 100% safe, gets lent its way up the value chain until you reach end users. My favorite example of this is how the large Japanese REITs finance themselves. These REITs will have a relationship with a single major bank. One might expect that since they have a special relationship said bank will provide all financing: but they do not. Instead the REIT borrows floating-rate loans from 10+ banks, including their special bank. Then the REIT turns around and offers these loans to the special relationship bank. Said special bank takes the 10+ float rate loans and provides the REIT a single (let same size) 30year fixed rate loan. In this way everyone gets what they want. The REIT gets to tell investors their loans are not due for refinance until 2050. All the banks get to lend out money at 0.5% interest, and the special bank gets to take the other bank's money and earn an extra 0.5% interest on top of it all in exchange for taking the interest rate risk. So if you are wondering why bonds are weird: it is because you are not the customer.
- jariel 7y ago
  Until they pay a negative (edit) coupon.
- ikeboy 7y ago
brenden2 7y ago
It's worth noting that most people nowadays don't buy bonds directly, you would normally hold them through an ETF/index fund like BND or TLT. Yields typically drop when there's a flight to quality (i.e., people selling stocks to buy bonds). The upward pressure on bond prices drives yields down because people are willing to pay more for lower yields. Bonds are almost like a future of expected return on capital. If bond prices are high and yields are low, it suggests the market thinks equities will have a lower return. Bonds and stocks have been fairly non-correlated over recent years, but this hasn't always been so. It's great for modern portfolio theory (i.e., holding a portion of stocks and bonds and rebalancing periodically). There's no guarantee that it will stay this way. Anyway, I'm not giving investment advice, but I think the current market panic is short term and non-systemic, so it's not a terrible idea to consider rebalancing from bonds into stocks while the prices are good. If you think the market might keep dropping, then perhaps wait a little longer. The truth is that trying to time the market is like throwing a dart at a board blindfolded, so you might as well take advantage of the current state instead of speculating about the future.
- justinzollars 7y ago
  > Bonds and stocks have been fairly non-correlated over recent years, but this hasn't always been so. It's great for modern portfolio theory (i.e., holding a portion of stocks and bonds and rebalancing periodically). There's no guarantee that it will stay this way. This is true. This correlation has held for 30 years so we are conditioned into believing this is a sure trade - but it is not.
  - ethbro 7y ago
    Ultimately, correlation in free markets is just frequency of similar participant behavior, no? So if everyone is using robo advisor allocation, and the allocation algorithms all feature a similar bond shift, then that becomes the correlation?
- bluetwo 7y ago
  But if you did want to buy bonds, any citizen can setup an account at: https://treasurydirect.gov https://treasurydirect.gov Also you can buy iBonds and TIPS, which are protected against inflation.
clubdorothe 7y ago
I'm about to start investing with lump sum next week since stocks looks cheaper. I was thinking to go with 80% SWDA (global stocks [1]) and 20% AGGU (global bonds[2]). I'm a non US resident. - Should I consider to take less bonds? - Is lump sum a good idea, or should I DCA? [1] https://www.ishares.com/uk/individual/en/products/251882/ishares-msci-world-ucits-etf-acc-fund https://www.ishares.com/uk/individual/en/products/251882/ish... [2] https://www.ishares.com/uk/individual/en/products/291772/ishares-core-global-aggregate-bond-ucits-etf-fund https://www.ishares.com/uk/individual/en/products/291772/ish...
- brenden2 7y ago
  For questions like this, check out the Bogleheads wiki: https://www.bogleheads.org/wiki/Main_Page https://www.bogleheads.org/wiki/Main_Page There's a lot of research on lump sum vs. DCA, which is summarized here: https://www.bogleheads.org/wiki/Dollar_cost_averaging https://www.bogleheads.org/wiki/Dollar_cost_averaging
- smabie 7y ago
  I would consider dropping the bonds unless you are going with junk bonds. The yield on high-grade bonds is trash and not worth it. In fact, the only reason anyone buys that shit is: a) they are legally required to b) they don’t care about making money, just not losing it. Instead, I would consider adding metals (or just gold) as your 20% uncorrelated asset. The way my portfolio currently looks as of today (it changes a lot) is 50% gold and 50% 3x levered S&P 500 etf. This effectively gives me 1.5x market exposure plus an uncorrelated asset that both boosts my returns and cuts my volatility. When I feel like this whole coronavirus thing is over I’ll probably increase the 3x market exposure.
- hamstercat 7y ago
  I would not recommend taking investment advice from HackerNews. /r/PersonalFinance is a better place, or you can start reading forums like Boggleheads and blogs. If you’re canadian I can recommend a couple of blogs I follow, otherwise I’m sure there are others from your country with specific advice. If all else fails, paying a for-fee advisor that doesn’t sell funds can help you setup a plan for yourself.
Zelphyr 7y ago
Is there a ELI5 about this somewhere?
- smabie 7y ago
  Sure, what’s the question?
thebrain 7y ago
I recently cashed out a Canada Savings Bond I had from when I was a kid and I after taking into account inflation I made about $8 while the government had my money for 20+ years.
- mapleoin 7y ago
  How much did the bond cost?
  - thebrain 7y ago
    I was really young so it was just $500.
- unlinked_dll 7y ago
  Bond rates are supposed to track the inflation rate so it's nice to see it functioning as intended
  - cheez 7y ago
    Depends which "inflation" measure is being used.
    - 3fe9a03ccd14ca5 7y ago
      Depends on which asset classes are used.
- acpacp 7y ago
  Well, at least you beat inflation
  - typpo 7y ago
    $500 CAD in 2000 would have to be ~$705 now in order to beat inflation, according to Statistics Canada - so his $8 return was not great. https://www.in2013dollars.com/canada/inflation/2000?amount=500 https://www.in2013dollars.com/canada/inflation/2000?amount=5...
exogan 7y ago
I'd rather have bonds with a small yield than the S&P (which fluctuated 3% almost every day this week) with a higher yield.
- dcftoapv 7y ago
  You've just discovered the Sharpe ratio. The part you're missing is that bond prices are just as volatile as equity prices in risk-on environments.
- pasttense01 7y ago
  Another alternative is to go all cash.
papito 7y ago
I backed the truck up in 2018 for Fidelity Treasury Bond Index Fund. Most of of my 401K is in it. It's up 31% in the last year. With almost no management fee. That's all.
- dcftoapv 7y ago
  Congrats, but you should sell out of that before prices come crashing back down to earth, which they inevitably will after the covid-19 scare passes. It might be a couple of months, but history says that you're going to lose all of that money again over the next two years.
  - papito 7y ago
    I am well aware of the risk of rising interest rates, but those will be in the toilet due to the lasting effect on the disrupted supply chain.
    - dcftoapv 7y ago
      You're betting against all of documented history. Also, your concern shouldn't be interest rate risk. Your concern should be a reversal in perceived credit risk. You benefited from a flight to quality. While these can persist much longer than one would expect (see LTCM), you will eventually lose.
outside1234 7y ago
I'm not sure why this headline is news. Bond yields should be less than S&P dividend rates because with a bond, there is a much higher likelihood of getting your principal back (debt is senior to capital) that isn't there with underlying stocks of the S&P. Also, the underlying stocks of the S&P can cut their dividends to 0 tomorrow without warning, so you need to price this risk in.
- hylaride 7y ago
  > Bond yields should be less than S&P dividend rates No. Stocks don’t necessarily pay out any dividends at all, like google or amazon. Stocks can also give substantial capital gains. Bonds have historically had higher yields than the dividend yield of the S&P to entice people to purchase them to compete with this fact. While they have a higher chance of getting your principal back they also have to compete with other assets for the money. This is why bond yields typically go up during “good” times as people feel the stock market is a better place, but the yields then go down (for “safer” bonds at least, like the federal government or high rated corporations) as people flock to safety and the demand means they can pay out less. This is news because it’s another indication that people are flocking to “safety” causing both the bond yields to go down due to demand, and the stock yields to go up as their prices fall.
  - perl4ever 7y ago
    "Stocks can also give substantial capital gains" They did, but if dividends are higher than bond yields, that could be nature's way of telling you that future capital gains will be roughly zero or less. If you look back like 40 years, the long term bonds ended up returning about the same as the stock market. So maybe the current long term yields are telling you what stocks will return over the same period of time.
- deleted 7y ago
  [deleted]
deleted 7y ago
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dcftoapv 7y ago
This is a fun and directionally interesting comparison, but it's ultimately meaningless. Cash flows with different durations can't be used in carry trades so this cannot be exploited even if you have a hypothesis about the relative risk of each asset. Convexity increases the price of high duration cash flows which drives down yields of instruments such as the 30 year treasury.
Proven 7y ago
Seems appropriate at time like this. The US government will outlive most S&P companies. Additionally, the US government can't run out of paper money.

104 points by potiuper 7y ago

Idk if this belongs at HN but if it does, then isn't this the greatest opportunity post 2008 crash to invest in to the markets?

cocoa19 7y ago
Meh, the price now is what it was in October of last year. Not really the greatest. I did rebalance my portfolio a bit, but I'm sitting tight waiting for better opportunities.
techdevangelist 7y ago
Assuming we’re at the bottom, with the virus concerns, plus the much earlier bond yield inversions we could be always from bottom.
leptoniscool 7y ago
The recent drop is not very significant (a little over 10%). The Great Financial Crisis caused a 60% drop around 2008/2009. https://www.nytimes.com/2020/02/27/business/what-is-a-stock-market-correction.html https://www.nytimes.com/2020/02/27/business/what-is-a-stock-...
- mkagenius 7y ago
  I see, there was a similar drop in 2018. So not really that great of a fall.
  - serpix 7y ago
    yet. Nobody knows where the bottom is. The virus is only at the beginning of its conquest of the Western world.
- mabbo 7y ago
  The question is whether we're at the bottom or just at the beginning of the roller coaster. Bonds are indicators of expectations and risks in the near-to-long future. When their rates get strange, people worry.
- exogan 7y ago
  The recent drop happened in only one week, it was really abrupt and breaking records. GFC didn't happen over 1 week, the bear market from GFC was from October 9/10, 2007 to March 9, 2009.
  - thinkloop 7y ago
    I don't think it broke any real records, the only one is the absolute point drop in the indexes, but that's a meaningless stat that will constantly be broken in the future as the economy grows - proportion is what's interesting.
    - exogan 7y ago
      My bad, it did not break records outside the 1987, dot-com and GCF crises, made a mistake there. However, I don't agree with the theory of infinite economy growth (as you said "constantly be broken in the future").
      - whatshisface 7y ago
        Future economy growth =/= infinite economy growth.
- nostromo 7y ago
  Financial crises tend to be much worse for securities than a regular recession.
tinza123 7y ago
That's assuming you know when the drop will stop, otherwise it is the worst opportunity.
JMTQp8lwXL 7y ago
Yields have been declining since the 80s [0]. It could be the greatest opportunity, but a trade like that might take a lifetime to pan out. [0]: https://fred.stlouisfed.org/series/IRLTLT01USM156N https://fred.stlouisfed.org/series/IRLTLT01USM156N
- tryptophan 7y ago
  Try 700 years. https://www.visualcapitalist.com/700-year-decline-of-interest-rates/ https://www.visualcapitalist.com/700-year-decline-of-interes... Betting against rate decreases in the long term is likely a terrible financial decision.
  - toomuchtodo 7y ago
    I love this comment and link! All asset class yields will eventually arrive at zero, it's just when.
kypro 7y ago
The 2008 GFC was a good opportunity invest in hindsight because for a period of time stock prices were low and the economy recovered within a few years. However today stock prices only 12%~ off all time highs and some are predicting prolonged stagflation.
- selectodude 7y ago
  Lowering interest rates during a supply shock is shockingly irresponsible.
exogan 7y ago
It's hard to objectively calculate how large the impact from corona virus will be and how it has affected the supply chain. Additionally, this could be a black swan event that could become a catalyst, this is not an isolated event and it will send a shockwave across the markets. The losses in earnings as well as the reduction of consumption are hard to estimate, they need to be priced in into the stock's price which might be currently undervalued or overvalued. The idea is that no one knows exactly what the prices should look like. You might go for the S&P yield and end up losing 20% in the short term because of the price tanking. The point is that investors like certainty, that's why some are holding cash or even a mix of bonds, cash and gold. They might prefer lower yields than S&P and more certainty.
mabbo 7y ago
I'm in an interesting position related to this. In Canada, most people lock into their mortgage rate for 3-5 years. After that, you've got to renegotiate a rate but you're also free to switch banks. It's like starting over again at whatever you currently owe. I locked into mine 4 and a half years ago, so renewal is coming up this summer. Meanwhile, my home's value has skyrocketed (thanks to an insane Toronto housing market). What this all means is that in a few months, at my renewal date, the mortgage interests rates may be incredibly low (they're already at 2.7% today), my home's value is much higher than what I owe, and the stock market looks like it's going to be hitting the bottom around that time too. So the question is... do I gamble on this? I could easily access hundreds of thousands of dollars in a low interest mortgage and drop it all on index funds. If it worked, 10 years later I could retire early. If it doesn't, I'm another god-knows-how-many years away from paying off the mortgage. Mind you, my (sane, rational, smart-than-me) wife would never agree to any of this so it's only nice to think about.
- Proziam 7y ago
  I know someone who did this. It didn't work out and it's their single biggest financial regret in life.
  - glouwbug 7y ago
    I've seen 6 people in the last 2 weeks on wallstreetbets gamble away their student loans. The sad part is one guy will post their success of doubling their student loan, and it will just cause a bunch of younger inexperienced 19 year olds to lose tens of thousands to their own gambles. It's really sad. It's an addiction
    - Proziam 7y ago
      For some, it is addiction. For others, they simply cannot fathom the risk they expose themselves to. They have no concept of the time, effort, and stress they will cost themselves over the course of their lives as a result of their error. Try explaining to a teenager that the 50k bet that costs them their chance at an education is actually them putting 1m+ at risk if you compound the effect over the course of their life.
robjan 7y ago
It's best to avoid timing the market. It could do up x% on Monday or down y%. The people driving the real volume know way more than you or I.
- vikramkr 7y ago
  The performance of actively managed hedge funds would disagree with that. Doesn't seem like anyone can manage it consistently https://www.cnbc.com/2019/03/15/active-fund-managers-trail-the-sp-500-for-the-ninth-year-in-a-row-in-triumph-for-indexing.html https://www.cnbc.com/2019/03/15/active-fund-managers-trail-t...
  - AznHisoka 7y ago
    Yep people like to distinguish between “dumb money” and “smart money” but the truth is there is no such thing as smart money.
    - deleted 7y ago
      [deleted]
    - vikramkr 7y ago
      I agree theres nonsuch thing as smart money, but there probably is a distinction between dumb and not dumb money - like someone putting a part of their savings in an index fund versus someone putting their entire net worth on far out of the money AMD calls
vikramkr 7y ago
That's a question of market timing, and of you try and time the market, you'll either be broke or lucky. Maybe stocks are insanely undervalued and we're on the cusp of a bull run. Or, maybe the markets are going to crash and the dividend rate isn't going to hold as we move into future as companies go bankrupt and stop paying dividends. Unlike treasury bonds, dividends aren't certain, so this one data point alone isn't enough to really conclude either way
lordnacho 7y ago
As an ex fund manager, albeit with little macro experience, here's some thoughts. The time since the GFC is a sort of strange era. Again and again, we're told that central banks (and governments) are going to do whatever the heck keeps the market up. Buying the dip has more or less worked the whole time. A lot of asset classes look expensive if you take a longer-back view of things, but then again that longer view tended to not include "we'll do anything". This virus thing could be quite a different thing to what traders and fund managers are used to. The kinds of things I used to look at were things like what do the brokers say about rates, or what do economists think about oil. Or more specifially for me what does the market think about the supply and demand of volatility risk. Even the GFC itself was something that many people in my circles had thought about. It was definitely in the financial arena; either you thought subprime was gonna be a mess, or you thought it would stay localized and not burst its banks. Also keep in mind traders tend to be young, and there has been a trend towards juniorization particularly in the investment banks. I'm in the UK at the moment, and the number of cases doubled in the last couple of days. It did the same a couple of days earlier. So then the question is whether this is an exponential process. And if it is, what's going to stop it being exponential? Public awareness isn't going to be it, because everyone in the whole world already knows they're supposed to wash their hands and stay away from old people. Certainly we can't just pretend the virus is not here. An expert on the radio last night mentioned that if Twickenham was full for the match today, and the 80k people there all had flu, 8 of them would be expected to die. According to him with Coronavirus at 2-3% it would be in the ballpark of 2000. Chances are people who would be ill but recover would also be a fair chunk. So something has to be done, governments aren't going to get away with just playing it down as the numbers double every other day. And this is where fragility comes into play. We're used to the economy being coated in a thick layer of cheap money. Business models that were previously tenuous now seem solid, because there's always someone who will finance it. I'm sure you've heard of a few such businesses in the recent news. What this translates into is that you can motivate people to work in a certain way because you can borrow (and this is in the larger sense, not just loans) the firepower to pay them. But what if a bunch of people suddenly cannot work? If you're properly ill, there's no amount of money that will make you able to work. And you will have to live with not earning money, and your boss will have to live with work not getting done. It doesn't seem like something that handing more money out for will help. At most you can help to make sure that peripheral issues are solved, like cash crises in people's private finances don't cause them to have to sell their house or business. But people not being able to work on a large scale will cause some kind of collapse somewhere in the system, and supply and demand isn't going to generate more supply, it will just raise the price of work. This is kinda like how historians write that peasants had a great time after the plague killed a third of Europe. And of course companies are negotiating with labor over the spoils of production, so profits would seem to go down. But this is all pretty sensitive to the size of the actual outbreak. If the top is today the death toll is similar to 9/11, and the economy will be fine. If it grows to shut down schools and workplaces all over the world, it's gonna be really interesting.
skybrian 7y ago
One way to look at is, when did we last see prices like this? If this is a good opportunity then it's only slightly better than October of last year when the prices were about the same. (Slightly better because in theory, you could have done something else with the money in the meantime.) It's not better than any time before that, when prices were lower. Stocks are on sale, but it's hard to beat time in the market, which is still better for most timespans.
rb808 7y ago
No, this isn't a crash, the main US indices are just back to where they were 6 months ago. That isn't a great buying opportunity, they weren't cheap 6 months ago either.
imtringued 7y ago
The problem with this type of thinking is that it could always go even lower and by selling now you end up missing a lot of potential profit. The window of the global optimum is often only a few days wide.

mrep 7y ago

Hm, I'm seeing the title "Bond Markets Shred History Books During Furious Fear Trade". Also, kinda silly to focus on just dividends considering buybacks are now greater than dividends [0]. [0] (pdf): https://www.yardeni.com/pub/buybackdiv.pdf https://www.yardeni.com/pub/buybackdiv.pdf

mraudiobook_com 7y ago
They focus on that because it is the most insane thing ever. Title should have been, The markets are fucked, we are all fucked.

tryptophan 7y ago

The dividend yield doesn't matter (alone). The more common way to return cash to shareholder's is via buybacks. The actual 'yield' of the market should thus be calculated as div yield + buyback yield, giving the investor yield, which is what intellectually honest people should compare to treasury yields.

SilasX 7y ago
Right, but that just means dividend yield understates the misalignment, and we passed the weirdness point (for lack of a better term) a long time ago.
MuffinFlavored 7y ago
> The more common way to return cash to shareholder's is via buybacks. Is this more common throughout history or only common in today's modern market of cheap interest rates?
bulletsvshumans 7y ago
Buybacks directly cause dividend yields to go up because they reduce the number of outstanding shares, causing the remaining shareholders to receive a greater stake when future profits are distributed amongst fewer parties.
im3w1l 7y ago
Also got to take into account all the newly emitted stock, e.g. employee rsu (my understanding is that most companies net dilute over time).

Danieru 7y ago

Bonds are a commited fixed return, which means the value of bond goes up if the going rate for new bonds goes down. Thus bonds can be much more profitable than stocks when the marketing is going down. The central bank will drop rates, and thus any holder of existing bonds gets to sell their old bonds for more, maybe much more. Of course this is not the big driver for bond demand. Rather bonds are demanded by money managers who are not allowed to take any risk. Think banks, and especially central banks. Said money managers want to never-ever lose so much as a dollar of principle. They are not paid to maximize total return, but rather to manage this pile of money in such a way to never let it shrink. You'll see this set of incentives all over the world if you know where to look: money which is not expected to be invested. Think of mega-corp's payroll. Every month they need to pay X large number of dollars by the end of the month. Missing payroll by 1% would be such an incredible disaster it would lead to lawsuits. So big-corp does the sensible thing, and keeps the money in a money-market fund. Said money-market fund in-turn holds various short-term bonds (1 year or less). Who borrows money for only 1 year or less? People who have a little bit of their own money with which to take risk and want to turn around and borrow longer term. Bit by bit money which needs to be 100% safe, gets lent its way up the value chain until you reach end users. My favorite example of this is how the large Japanese REITs finance themselves. These REITs will have a relationship with a single major bank. One might expect that since they have a special relationship said bank will provide all financing: but they do not. Instead the REIT borrows floating-rate loans from 10+ banks, including their special bank. Then the REIT turns around and offers these loans to the special relationship bank. Said special bank takes the 10+ float rate loans and provides the REIT a single (let same size) 30year fixed rate loan. In this way everyone gets what they want. The REIT gets to tell investors their loans are not due for refinance until 2050. All the banks get to lend out money at 0.5% interest, and the special bank gets to take the other bank's money and earn an extra 0.5% interest on top of it all in exchange for taking the interest rate risk. So if you are wondering why bonds are weird: it is because you are not the customer.

jariel 7y ago
Until they pay a negative (edit) coupon.
ikeboy 7y ago

brenden2 7y ago

It's worth noting that most people nowadays don't buy bonds directly, you would normally hold them through an ETF/index fund like BND or TLT. Yields typically drop when there's a flight to quality (i.e., people selling stocks to buy bonds). The upward pressure on bond prices drives yields down because people are willing to pay more for lower yields. Bonds are almost like a future of expected return on capital. If bond prices are high and yields are low, it suggests the market thinks equities will have a lower return. Bonds and stocks have been fairly non-correlated over recent years, but this hasn't always been so. It's great for modern portfolio theory (i.e., holding a portion of stocks and bonds and rebalancing periodically). There's no guarantee that it will stay this way. Anyway, I'm not giving investment advice, but I think the current market panic is short term and non-systemic, so it's not a terrible idea to consider rebalancing from bonds into stocks while the prices are good. If you think the market might keep dropping, then perhaps wait a little longer. The truth is that trying to time the market is like throwing a dart at a board blindfolded, so you might as well take advantage of the current state instead of speculating about the future.

justinzollars 7y ago
> Bonds and stocks have been fairly non-correlated over recent years, but this hasn't always been so. It's great for modern portfolio theory (i.e., holding a portion of stocks and bonds and rebalancing periodically). There's no guarantee that it will stay this way. This is true. This correlation has held for 30 years so we are conditioned into believing this is a sure trade - but it is not.
- ethbro 7y ago
  Ultimately, correlation in free markets is just frequency of similar participant behavior, no? So if everyone is using robo advisor allocation, and the allocation algorithms all feature a similar bond shift, then that becomes the correlation?
bluetwo 7y ago
But if you did want to buy bonds, any citizen can setup an account at: https://treasurydirect.gov https://treasurydirect.gov Also you can buy iBonds and TIPS, which are protected against inflation.

clubdorothe 7y ago

I'm about to start investing with lump sum next week since stocks looks cheaper. I was thinking to go with 80% SWDA (global stocks [1]) and 20% AGGU (global bonds[2]). I'm a non US resident. - Should I consider to take less bonds? - Is lump sum a good idea, or should I DCA? [1] https://www.ishares.com/uk/individual/en/products/251882/ishares-msci-world-ucits-etf-acc-fund https://www.ishares.com/uk/individual/en/products/251882/ish... [2] https://www.ishares.com/uk/individual/en/products/291772/ishares-core-global-aggregate-bond-ucits-etf-fund https://www.ishares.com/uk/individual/en/products/291772/ish...

brenden2 7y ago
For questions like this, check out the Bogleheads wiki: https://www.bogleheads.org/wiki/Main_Page https://www.bogleheads.org/wiki/Main_Page There's a lot of research on lump sum vs. DCA, which is summarized here: https://www.bogleheads.org/wiki/Dollar_cost_averaging https://www.bogleheads.org/wiki/Dollar_cost_averaging
smabie 7y ago
I would consider dropping the bonds unless you are going with junk bonds. The yield on high-grade bonds is trash and not worth it. In fact, the only reason anyone buys that shit is: a) they are legally required to b) they don’t care about making money, just not losing it. Instead, I would consider adding metals (or just gold) as your 20% uncorrelated asset. The way my portfolio currently looks as of today (it changes a lot) is 50% gold and 50% 3x levered S&P 500 etf. This effectively gives me 1.5x market exposure plus an uncorrelated asset that both boosts my returns and cuts my volatility. When I feel like this whole coronavirus thing is over I’ll probably increase the 3x market exposure.
hamstercat 7y ago
I would not recommend taking investment advice from HackerNews. /r/PersonalFinance is a better place, or you can start reading forums like Boggleheads and blogs. If you’re canadian I can recommend a couple of blogs I follow, otherwise I’m sure there are others from your country with specific advice. If all else fails, paying a for-fee advisor that doesn’t sell funds can help you setup a plan for yourself.

Zelphyr 7y ago

Is there a ELI5 about this somewhere?

smabie 7y ago
Sure, what’s the question?

thebrain 7y ago

I recently cashed out a Canada Savings Bond I had from when I was a kid and I after taking into account inflation I made about $8 while the government had my money for 20+ years.

mapleoin 7y ago
How much did the bond cost?
- thebrain 7y ago
  I was really young so it was just $500.
unlinked_dll 7y ago
Bond rates are supposed to track the inflation rate so it's nice to see it functioning as intended
- cheez 7y ago
  Depends which "inflation" measure is being used.
  - 3fe9a03ccd14ca5 7y ago
    Depends on which asset classes are used.
acpacp 7y ago
Well, at least you beat inflation
- typpo 7y ago
  $500 CAD in 2000 would have to be ~$705 now in order to beat inflation, according to Statistics Canada - so his $8 return was not great. https://www.in2013dollars.com/canada/inflation/2000?amount=500 https://www.in2013dollars.com/canada/inflation/2000?amount=5...

exogan 7y ago

I'd rather have bonds with a small yield than the S&P (which fluctuated 3% almost every day this week) with a higher yield.

dcftoapv 7y ago
You've just discovered the Sharpe ratio. The part you're missing is that bond prices are just as volatile as equity prices in risk-on environments.
pasttense01 7y ago
Another alternative is to go all cash.

papito 7y ago

I backed the truck up in 2018 for Fidelity Treasury Bond Index Fund. Most of of my 401K is in it. It's up 31% in the last year. With almost no management fee. That's all.

dcftoapv 7y ago
Congrats, but you should sell out of that before prices come crashing back down to earth, which they inevitably will after the covid-19 scare passes. It might be a couple of months, but history says that you're going to lose all of that money again over the next two years.
- papito 7y ago
  I am well aware of the risk of rising interest rates, but those will be in the toilet due to the lasting effect on the disrupted supply chain.
  - dcftoapv 7y ago
    You're betting against all of documented history. Also, your concern shouldn't be interest rate risk. Your concern should be a reversal in perceived credit risk. You benefited from a flight to quality. While these can persist much longer than one would expect (see LTCM), you will eventually lose.

outside1234 7y ago

I'm not sure why this headline is news. Bond yields should be less than S&P dividend rates because with a bond, there is a much higher likelihood of getting your principal back (debt is senior to capital) that isn't there with underlying stocks of the S&P. Also, the underlying stocks of the S&P can cut their dividends to 0 tomorrow without warning, so you need to price this risk in.

hylaride 7y ago
> Bond yields should be less than S&P dividend rates No. Stocks don’t necessarily pay out any dividends at all, like google or amazon. Stocks can also give substantial capital gains. Bonds have historically had higher yields than the dividend yield of the S&P to entice people to purchase them to compete with this fact. While they have a higher chance of getting your principal back they also have to compete with other assets for the money. This is why bond yields typically go up during “good” times as people feel the stock market is a better place, but the yields then go down (for “safer” bonds at least, like the federal government or high rated corporations) as people flock to safety and the demand means they can pay out less. This is news because it’s another indication that people are flocking to “safety” causing both the bond yields to go down due to demand, and the stock yields to go up as their prices fall.
- perl4ever 7y ago
  "Stocks can also give substantial capital gains" They did, but if dividends are higher than bond yields, that could be nature's way of telling you that future capital gains will be roughly zero or less. If you look back like 40 years, the long term bonds ended up returning about the same as the stock market. So maybe the current long term yields are telling you what stocks will return over the same period of time.
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dcftoapv 7y ago

This is a fun and directionally interesting comparison, but it's ultimately meaningless. Cash flows with different durations can't be used in carry trades so this cannot be exploited even if you have a hypothesis about the relative risk of each asset. Convexity increases the price of high duration cash flows which drives down yields of instruments such as the 30 year treasury.

Proven 7y ago

Seems appropriate at time like this. The US government will outlive most S&P companies. Additionally, the US government can't run out of paper money.