The End of the Yield Famine is Far Away - Dr Lacy Hunt

[dtbach]

Don't beat yourself up. The CPI in 1980 was 13.51%, so even at these bond rates the government bonds were net losers. And if we think back to the mood of the country at the time, things looked pretty gloomy.

Sounds like now, eh? Who knew at the time that the next 20 years would be great for both stock AND bond owners?? I think the worst is past us (2000-2009), with cheap energy and new technology advances the future is starting to look better.

 

[FIREd]

For the record - most of my bond funds are intermediate duration.

IMO, the warnings of near term rises in interest rates have been greatly exaggerated, and I think deflation is at least an equal risk.

I figure we're in for a long bottoming process.

That's what I think too. Rising interest rates would kill the "recovery". With the trillions of dollars we are spending to prop up the system, we are barely achieving positive economic growth. I think that deflation is a real risk whether brought on by austerity measures, bond vigilantes, or another economic downturn.

 

[MichaelB]

IMO, the warnings of near term rises in interest rates have been greatly exaggerated, and I think deflation is at least an equal risk.

I figure we're in for a long bottoming process.

IMHO deflation continues to be the greater risk.

 

[bjorn2bwild]

Dr hunt makes a very convincing argument for the slow growth "ice age" future.
With all the central bank money creation, the significance of the Taibbi article (to me), is that there will not be a reliable market signal when/if inflation returns.
I have been buying both EE and I bonds with new money. I still have a ? about what to do after that.

 

[ejman]

I think the Japan scenario looms large. Dr. Bernake studied both the Great Depression and the Japan scenario extensively and had many constructive ideas which he implemented as best he could. I think that the end result (so far) of the experiment after several years is that economic theory knows how to deal with inflation reasonably well. Deflation and how to deal with it apparently still baffles the brightest economic minds.

 

[clifp]

Interesting, but I don't follow how a bond holder would have lost 80%. If they owned individual bonds they would have been repaid their principal at maturity. If they owned bond funds, then a fund with a 5 year duration would be replacing about 20% of its holdings each year, and with rates rising so fast, the replacement bonds would have a higher yield, offsetting the reduction in NAV. After five years, all of the lower rate bonds would have been flushed out.

In addition, we have to pay attention to the rise in rates as a percentage of the current rates. When rates shot up 7% in two years, the current rates were much higher than the almost zero rates we see now. In proportion, it was not as significant as if the current rates went from near zero to 7%, which I still say is highly unlikely.

First of all I did say after tax real returns, not nominal, because after tax real returns are really the only ones that matter. A 1971 dollar was only worth $.44 ten years latter. Second there were very high tax rates for interest in the 70s 44% (for incomes above $32,000) all the way up to 70%. So counting state income tax I was assuming that > 1/2 of all interest payments were lost to taxes. Finally, my assumptions was a bond fund with a duration of 10 years not 5, which would have suffered roughly a 60% drop in value when in interest rates went from 5 to 15.5%. Although I guess it would be more accurate to characterize that as long bond fund.

 

[kmt1972]

Speaking of after tax returns, I did some research on this as well. I started from the point of view that since everyone has a different marginal tax rate the best way to look at it is to look at real after inflation muni returns. Doing research on my Bloomberg terminal I was able to get the Bloomberg 10 year Muni yield index and then substract CPI from yet and get the average over each year. Of course the duration of 10 year is longer then what most of us would invest in so this number would inflate the returns in Munis relative to how we might invest, but it is a good indicator. I only could get data after 2000. Doing so I got

2001 1.3%
2002 2.5%
2003 1.4%
2004 1.1%
2005 0.3%
2006 0.6%
2007 1.1%
2008 -0.3%
2009 3.8%
2010 1.2%
2011 -0.4%
2012 -0.4%
2013 0.1% YTD

2008 had high inflation so that expains the negative return. 2009 negative CPI did distort things a bit upward but I did remember 2009 as a very good years in NY Munis. I bought a lot of Munis in 2009 as a hedge for NY state raising taxes so I remember. My logic was if NY state would raise taxes it meant I lose some $$$ but I can make it back by investing in NY Munis which would most likely rise if NY state raised taxes.

Anyhow, 2011 and onward even real Muni yields are negative or near zero.

 

[Fermion]

IMHO deflation continues to be the greater risk.

Which makes EE bonds somewhat of a no-brainer steal right now.

A couple can buy $20K per year of EE bonds, locking in a return of 3.57% if held 20 years, which *should* beat inflation by 1% over the next 20 years if some of the conclusions in this thread pan out. The ability to turn in the bond without losing prinicpal makes it that much better until about year 12, when you start thinking about losing the doubling feature.

I have seriously considered only buying 20K of Ibonds and 20K of EE bonds each year with the rest of our money in the stock market.

 

[haha]

Which makes EE bonds somewhat of a no-brainer steal right now.

A couple can buy $20K per year of EE bonds, locking in a return of 3.57% if held 20 years, which *should* beat inflation by 1% over the next 20 years if some of the conclusions in this thread pan out. The ability to turn in the bond without losing prinicpal makes it that much better until about year 12, when you start thinking about losing the doubling feature.

I have seriously considered only buying 20K of Ibonds and 20K of EE bonds each year with the rest of our money in the stock market.

It would take you so long to do this, that by the time you are into your process the reality on the ground likely will have changed enough to make the transition meaningless or negative. Unless Ben can actually freeze events for as long as he wants, which I think is forever, as nothing much seems to be changing in a way that would indicate to someone with his beliefs a more market oriented stance.

Ha

 

[Fermion]

It would take you so long to do this, that by the time you are into your process the reality on the ground likely will have changed enough to make the transition meaningless or negative. Unless Ben can actually freeze events for as long as he wants, which I think is forever, as nothing much seems to be changing in a way that would indicate to someone with his beliefs a more market oriented stance.

Ha

Maybe. The real thing I don't like about EE-bonds is the fact that all of your taxes are deferred until year 20 (or I guess you can wait at near no yield a few more years) then you get the doubling and a big 1099 interest gain. It is nice that it is exempt from state and local taxes though.

It is totally fruitless to predict Obamacare out 20 years, but for some people, having 20K in interest gains roll in to them in one year might put them above certain subsidy levels.

You can pay the tax on the EE bond each year, but only on the normal rate, which is 0.2%. Kind of pointless.

 

[Khufu]

IMHO deflation continues to be the greater risk.

It does begin to look that way:

 

[rjohnla]

IR will continue to go down, rem. Japan = 20+ years (it's deflation). But the purchasing power of the USD (contrary to thinking) will go up. Just invert Dow or S&P and you can see what the USD is / will be doing.