When does AA = Greater Fool Theory?

[COcheesehead]

A month ago I thought my bond buying days were over for awhile, but things change.
There were some compelling opportunities in muni’s last week. I bought some in the 2-6 year range right around a 3% yield. They went fast, but with the market doing a dance right now, those may pop up again.
I stay clear of bond funds. I buy individual bonds and hold to maturity. No NAV erosion then.
I also broaden my view of bonds and look at fixed income as a whole. There are more opportunities than just “bonds”.

 

[Closet_Gamer]

No. I don't use words like "always" or "never" in an investing context. In fact, with apologies to the Efficient Frontier devotees and to those who love to play with the plethora of retirement calculators, I think that production of a two-digit probability number is prima facie evidence of a garbage-in, gospel-out device. The only sure thing about those two-digit numbers is that they are wrong, but no such device AFIK ever provides error bounds. Probably because they have no idea what they are.

OK, that said, if I had to decide today I think that TIPS would probably be the best bet.

First, the whole point of negative interest rates is to stimulate inflation. So the objective of the exercise is implicitly to increase the nominal value of TIPS. Granted, an increase in real value would be preferable but a nominal increase is better than no increase at all.

Second the standard YTM calculations, when applied to TIPS, do not produce a YTM at all. They produce a lower bound on YTM. To the extent that there is any inflation, the YTM rises. I have never seen a YTM number for a TIPS that specifies an inflation rate assumption, but that is what you need in order to predict YTM. Implicitly, then, the YTM numbers you get are assuming zero inflation.

Third, the biggest part of looking at long bonds is inflation expectations. With TIPS this is unnecessary and it pretty much eliminates crystal-balling the yield curve. Less guesswork = increased certainty of results.

So, I'll stick with "probably" and "probably not" to predict the future. And even that is probably due to overconfidence. As various famous people are claimed to have said: "It is difficult to make predictions, especially about the future."

Very interesting. Thanks!