You can argue the same principles for any of the four assets, it all depends on the current economic climate. There will always be one asset that is out of favor for some reason or the other.ochotona wrote:The issue is the risk of changes in the market price of the bond due to interest rate changes.economicsjunkie wrote: I've seen this suggestions here a couple of times now. If low/negative interest rates are of concern here, then why in the world would a switch to a shorter duration be sensible, where interest rates would be even lower/more negative?!
{picks up HP-12C Financial Calculator}
Let's say you buy a new 30 year Treasury for $10,000, and the coupon rate is 0.5%. The Present Value (PV) of that bond, if the market interest rate is 0.5% is just $10,000. You pay $10,000, you get your 0.5% interest for 30 years, and in 30 years you get your $10,000 back.
If the market interest rate increases to 1.0%, your PV of the bond just fell to $7548.26. You just had a -24.5% change because of a 0.5% change in the interest rate. Your bond has to sell at a discount in order for it to be attractively priced for someone to buy who might just as well buy a new 30 year bond paying 1%, not the old 0.5%.
That's what long bond investors are so freeking scared of.
With deflation looming on the horizon as the QE and debt bubble is about to pop, I actually look very favorably upon bonds, even with these low interest rates. Because a 0,5% yield will be a heck of a lot better than gold who will depreciate in value thanks to cash becoming more and more scarce and valuable. As well as stocks which may never recover for the next few decades alike Japan because the companies will have a hard time making the bottom line as they need to pay off their debt financed assets that bought at the top of the bubble and not generate any growth.