Crazy European Bond Market

[BeachOrCity]

From the article:

If you are a conservative investor you'd want to take your profits on your long term bonds, buy high quality short term bonds and let this settle out for a few years to see what to invest in..............

^^^^^ This +1

 

[Running_Man]

Absolutely unimaginable 10 years ago...........................

 

[Marc]

Absolutely unimaginable 10 years ago...........................

The German economy is a wreck with so many restrictions on a free market economy yet people loan them money for free; yet US is paying over 1.7% for the same term; this doesn't make sense. If the US didn't have to pay interest on debt we could someday balance the budget.

Marc

 

[Running_Man]

So in the past few days the Austrian 100 year bond has finally had a reversal after first testing the old high, often these parabolic moves up are met with a parabolic move down and could be the harbinger of other issues, as such it could be the canary in the investing coal mine, watching this closely to see if fall continues or if reversal to new high occurs. Certainly is interesting when supposedly one of the safest investments in the world drops 10 percent in four days.............

 

[samclem]

Nobody should be surprised that the value of a 100 year bond is very volatile.

 

[Theo]

The German economy is a wreck with so many restrictions on a free market economy yet people loan them money for free; yet US is paying over 1.7% for the same term; this doesn't make sense. If the US didn't have to pay interest on debt we could someday balance the budget.

Marc

Fed could just issue only 3 month treasuries and set the interest rate however low they want if interest on debt was an issue. It isn't really, it provides income to the economy. Hell, with a small change in the law, they wouldn't need to issue debt at all. Dollars would be essentially zero % interest perpetual debt securities in that case.

 

[NW-Bound]

There is now pressure on the Federal Reserve to lower the interest rate to negative, in order to match the European rates.

However, a Bloomberg article said that the worldwide debt at negative yields has dropped to $14.3 trillion, down from $17 trillion in August.

 

[Markola]

What do you think that behavior is about? Are negative yields proving to be an incentive to pay off debt and put money to work rather than pay a bank to hold one’s cash?

 

[nancyfrank232]

What do you think that behavior is about? Are negative yields proving to be an incentive to pay off debt and put money to work rather than pay a bank to hold one’s cash?

Negative yields are an incentive to borrow more, buy assets and avoid cash

 

[Running_Man]

Denmark banks are announcing that deposit rates may soon be -1 percent annually for short term deposits, they expect this situation to last at least eight more years. Denmark is also one of the leading countries for the elimination of cash, which would force short term funds to be adjusted by the deposit rate. Basically a $10 annual bank fee for every $1000 one would hold.
https://www.businesstimes.com.sg/banking-finance/world-record-in-negative-rates-has-bankers-testing-no-mans-land

 

[NW-Bound]

^^^ Thanks for sharing. I almost miss your post.

Yes, in a cashless society you do not have the option of drawing your deposit and keeping cash in real paper bills and stuffing your box in the bank vault to avoid losing a bit each month. This is really unprecedented.

Denmark still has inflation, although at a very low level of 0.5%. This inflation combined with the negative interest rate ensures that people's money will lose 1.5% of its value each year.

I feel blessed that my money market fund just paid me the rate of 1.7% for the month of October, deposited today as I just checked. At least it cancels out the inflation rate.

 

[NW-Bound]

Low interest rates are wreaking havoc on the Dutch pension federation, considered the world's best pension system.

An extended period of negative or record low interest rates has put huge pressure on pension funds in the Netherlands, forcing them to alert retirees that their incomes could be cut...

These developments have roots not in The Hague, the Netherlands' seat of government, but in the cities that host the world's most powerful central banks: Washington, Frankfurt and Tokyo...

Marc Heemskerk, a Mercer pension expert based in Amsterdam, said that the tension extends beyond the Netherlands, pointing to Denmark as another country that could be exposed. In a perverse way, the stricter, more reliable pension systems could be the ones to face complications. "The more guarantees you have on your pensions, the [worse] the problem is," Heemskerk said.

See: The world's best pension system is being pushed to the brink

The photo below shows pensioners demonstrating against possible benefit cuts.

Besides cuts in benefits, another remedy is to raise contributions from current workers.

Shaktie Rambaran Mishre, chair of the Dutch pension federation, which represents 197 pension funds and their members, said that contributions might have to rise by up to 30 per cent over the next few years. “As things stand, around 2m people are facing cuts from next year,” she added...

See: https://www.ft.com/content/b42f5424-07c4-11ea-9afa-d9e2401fa7ca

 

[Markola]

Signs of a reckoning for years of stimulus?

 

[NW-Bound]

It's time for retirees to realize that their fortune is linked to that of the young workers. If the world slips into economic hard times, one cannot say that he is owed what is due, no matter what happens to the rest of the population.

Even for people of independent means like most posters here, the value of our investments will rise and fall with the economy. We are never insulated from the world that we live in.

 

[Running_Man]

https://twitter.com/x/status/1204908939143450626

Interesting comments on who and why the buying goes on the negative yield bonds

 

[NW-Bound]

https://twitter.com/x/status/1204908939143450626

Interesting comments on who and why the buying goes on the negative yield bonds

Yes, very interesting!

"... who are the largest holders of negative yielding German bonds? US retirees through their Vanguard 401k."

 

[pb4uski]

^^^ Where did you see that? I clicked on the link and did a search for Vanguard and 401k and never saw what you quoted above. Doesn't make much sense.

 

[NW-Bound]

^^^ Where did you see that? I clicked on the link and did a search for Vanguard and 401k and never saw what you quoted above. Doesn't make much sense.

The link shows an short 2-minute video segment of an interview. The statement I quoted was spoken by Mike Green.

I looked up the Web to learn that he is the Portfolio Manager of Thiel Macro LLC, an investment firm that manages personal capital of Peter Thiel.

 

[pb4uski]

At first I was skeptical, but it seems to be true. Link to semi-annual report for VTABX - Vanguard Total International Bond Fund... then do a search (Ctrl-F) for "0.000%" and a slew of 0% coupon bonds. Most trade at premiums (negative yield to maturity) and some trade at a discount (positive yield to maturity).

https://personal.vanguard.com/funds/reports/q12312.pdf?2210154480

At first I was thinking why in the world would a bond fund buy a zero coupon bond, especially at a premium? But the more that I thought about it perhaps they feel that they have no choice since it is an index fund rather than a managed fund and they need to buy these zero coupon bonds to replicate the index.

I dunno, but I was transitioning out of VTABX and this has just solidified my resolve. The distribution yield is 1%, SEC yield is 0.51%... but OTOH, the YTD, 1-year, 3-year and 5-year total returns are 8.20%, 9.58%, 4.68% and 4.02%, respectively.... so those are pretty good but the ride if interest rates increase in the future might be bad with a duration of 8.3 years.

 

[samclem]

If a market isn't effectively open to free trading, if prices are significantly affected by factors other than buyers and sellers trading for their own economic self interests, then it is not a market where index investing is appropriate.

IMO, many foreign government bonds and some equity markets (e.g China) fall into this category. I was disappointed that Vanguard has chosen to incorporate these markets in their index funds, it is not in the interests of their customers/owners.

 

[NW-Bound]

... At first I was thinking why in the world would a bond fund buy a zero coupon bond, especially at a premium? But the more that I thought about it perhaps they feel that they have no choice since it is an index fund rather than a managed fund and they need to buy these zero coupon bonds to replicate the index...

I don't follow in an absolute sense any religious or political dogma. So, there's no way I would do that in my investment endeavor.

Some people like to believe in something that they take as immutable truth, because it keeps things simple and puts their mind at ease. They make up their mind once, and never have to examine any new evidence, or wonder if something has changed.

 

[audreyh1]

I generally avoid foreign bonds. So I would not buy an international bond index fund.

 

[pb4uski]

I don't follow in an absolute sense any religious or political dogma. So, there's no way I would do that in my investment endeavor.

Some people like to believe in something that they take as immutable truth, because it keeps things simple and puts their mind at ease. They make up their mind once, and never have to examine any new evidence, or wonder if something has changed.

I think we agree. As more of a buy and hold investor, while I think it is foolish to buy a zero at a premium to par if they failed to do so and rates dropped as they did the last year and they missed out on the market appreciation that that subset of the index provided in 2019 then they might had some unhappy investors so that may be why they do it.

I just hope that they don't do it in their managed funds.

 

[Running_Man]

The total video requires a subscription to watch, but the interesting part as rates go negative the price of the bonds becomes like a hockey stick and since index funds, are market capped as the long maturity zero coupon bond increases in price they become a larger percentage of the index, leading to more buying as incremental funds are added. Now of course this also leads to large future potential volatility, a tendency to outperform managed funds as they do not buy these assets because of their negative expected return, but the built in negative expected return is a certainty over time, which is why passive index funds are about the only buyers, because passive investors do not by design calculate values based on expected returns. But in the short term more and more turn to passive funds as they are over performing a valuation method.

 

[Sunset]

I generally avoid foreign bonds. So I would not buy an international bond index fund.

Whewwww..... I don't either (had to check).