Maximum Bond Upside

[Lang]

Swiss bond yields keep breaking new lows. At the moment:

- All Swiss government bonds up to 20 years have a negative yield.
- 30 year bonds now have a yield of 0.19%. Maximum upside left in that bond (before yield reaches zero) is about 4%.
- 50 year bonds now have a yield of 0.28%. Maximum upside left in that bond is about 10%.

How has a negative interest rate affected the bond price?

The 50 year bond was issued two years ago with a coupon rate of 2% and maturity in 2064. As I wrote, it now trades at a yield of 0.28%. The bond's price since its issuance has risen by 78%.

[buddtholomew]

Swiss bond yields keep breaking new lows. At the moment:

- All Swiss government bonds up to 20 years have a negative yield.
- 30 year bonds now have a yield of 0.19%. Maximum upside left in that bond (before yield reaches zero) is about 4%.
- 50 year bonds now have a yield of 0.28%. Maximum upside left in that bond is about 10%.

The 50 year bond was issued two years ago with a coupon rate of 2% and maturity in 2064. As I wrote, it now trades at a yield of 0.28%. The bond's price since its issuance has risen by 78%.

Thanks Lang. What about shorter maturities with negative yields. How have they faired?
How has a negative interest rate affected the bond price?

[Lang]

Over the same period, the 30Y was up by approximately 33% and the 10Y was up by approximately 13%.

Anyway, I just wanted to point out how crazy things are in Switzerland, and how, potentially, they could be in other countries as well.

[ochotona]

The stampede for the exit someday will be horrifying. When, we have no idea. Probably when people now age 17 earn their MBAs and start running things. They will have no context.

To them Nirp Zirp will be normal.

[barrett]

The stampede for the exit someday will be horrifying. When, we have no idea.

I would think for there to be a "stampede", there would have to be other safe havens for cash that are immediately obvious to a lot of people. The Swiss yields are just incredibly low, but why can't they stay that way for a long time? And the exit could be a slow climb back up to more normal historic rates.

Thanks for posting these numbers, Lang. Really gives us US investors something to think about.

On a related note, I was trying to explain this low/negative yield bond thing to a visiting Brazilian friend the other day. He buys government bonds that pay 7% above the rate of inflation (officially now 12%, I believe).

[buddtholomew]

The stampede for the exit someday will be horrifying. When, we have no idea.

I would think for there to be a "stampede", there would have to be other safe havens for cash that are immediately obvious to a lot of people. The Swiss yields are just incredibly low, but why can't they stay that way for a long time? And the exit could be a slow climb back up to more normal historic rates.

Thanks for posting these numbers, Lang. Really gives us US investors something to think about.

On a related note, I was trying to explain this low/negative yield bond thing to a visiting Brazilian friend the other day. He buys government bonds that pay 7% above the rate of inflation (officially now 12%, I believe).

Brazil - risk/reward..
As a US PP investor, should I be concerned with negative interest rates on long-term treasuries?
The price will increase but I will pay interest for holding the investment. Is that accurate?
If that's the case, is the interest I pay deductible in California? Half joking, 95% serious 

[ochotona]

The stampede for the exit someday will be horrifying. When, we have no idea.

I would think for there to be a "stampede", there would have to be other safe havens for cash that are immediately obvious to a lot of people. The Swiss yields are just incredibly low, but why can't they stay that way for a long time? And the exit could be a slow climb back up to more normal historic rates.

If a bunch of people freak out one day because the interest changes from -0.20% to -0.10%, and start to sell, in these bond markets with low liquidity, and you can't match up a buyer with a seller, then the price will crash!

[Lang]

There was already a "stampede" on that 50 year bond last year. The yield went up from 0.33% to 1.03% in a few months, and the bond price fell 21%.

[barrett]

There was already a "stampede" on that 50 year bond last year. The yield went up from 0.33% to 1.03% in a few months, and the bond price fell 21%.

I believe that more or less coincided with the move here in the US on the long bond from 2.25% to 3.25%. Yeah, it didn't feel great but it wasn't a disaster either. My position is still that with rates this low, one can lower the percentage of long bonds in a PP-style portfolio because they become so sensitive to rate changes in that environment. We don't need as many of them if they move up in price because of convexity. And we don't want as many for the same reason.

[Lang]

Swiss bonds just aren't stopping. The 30 year yield fell today to 0.16% and the 50 year yield fell to 0.26%. Anyone wanna buy?

European bond yields (Germany, France, etc.) fell sharply as well.

[Lang]

The 50 year Swiss yield is down today yet again, from 0.26% to 0.22%. At this pace it will get to zero next week...

[dualstow]

The 50 year Swiss yield is down today yet again, from 0.26% to 0.22%. At this pace it will get to zero next week...

.2% is pretty much zero. :-)

[Reub]

Any thoughts? Only that I'm in no position to criticize. Many's the time I considered the same, like every time TLT breaches 130. (I'm holding bonds directly, but TLT is a convenient and simple gauge). After Craig said he'd sell at 1%, I really got the bug.

FWIW. The reason I don't comment much on what I do is because I don't want people to blindly copy it.

Mostly though with unprecedented things going on with bonds, I just wanted to say that at some point you just have to take your chips and go home. Bonds are perhaps the only asset in the portfolio that the value risk vs. reward is pretty stark. Yields are what yields are and it's known what happens up or down as interest rates move. Gold doesn't have this indicator. Stocks don't either. Cash is cash and relatively stable and short interest rates moves can be waited out.

But again, with long bonds at 1% or less, the risk of holding them for me, is just not worth it. I bring up the issue now because I feel being quiet about it isn't doing any favors. You'll notice that I rarely ever comment on portfolio assets otherwise because mostly it's just noise. But long bonds below 1% is juggling nitroglycerin kind of risk in my mind and a horrible buy.

Again as others (and I) have pointed out. It's one thing to get out, but another to know when to get back in. I think it is safe to say though that bonds that are under 1% are probably not a hot buying opportunity and I'd avoid them regardless of portfolio theory. As when to get back in? I don't know. Again I haven't had to face this question yet. But I'll point out that people have been saying since 2008 that long bonds are a horrible idea and they've been wrong, wrong, wrong. So I could be joining that crowd if I sell out at 1%, but I'll just have to deal with that.

Hopefully Harry Browne will forgive me, but I think he'd be understanding when long bonds are paying 0.50% for 50 years that they aren't worth the risk.

These are interesting times, guys. We could be witnessing the endgame for Keynesianism. The ultimate race to the bottom where mere mortals are all losers.

I've lightened up on my long bonds too. They are looking very bearish to me these days. I know that it's counter to the PP philosophy but what the heck.

[Fred]

Any thoughts? Only that I'm in no position to criticize. Many's the time I considered the same, like every time TLT breaches 130. (I'm holding bonds directly, but TLT is a convenient and simple gauge). After Craig said he'd sell at 1%, I really got the bug.

FWIW. The reason I don't comment much on what I do is because I don't want people to blindly copy it.

Mostly though with unprecedented things going on with bonds, I just wanted to say that at some point you just have to take your chips and go home. Bonds are perhaps the only asset in the portfolio that the value risk vs. reward is pretty stark. Yields are what yields are and it's known what happens up or down as interest rates move. Gold doesn't have this indicator. Stocks don't either. Cash is cash and relatively stable and short interest rates moves can be waited out.

But again, with long bonds at 1% or less, the risk of holding them for me, is just not worth it. I bring up the issue now because I feel being quiet about it isn't doing any favors. You'll notice that I rarely ever comment on portfolio assets otherwise because mostly it's just noise. But long bonds below 1% is juggling nitroglycerin kind of risk in my mind and a horrible buy.

Again as others (and I) have pointed out. It's one thing to get out, but another to know when to get back in. I think it is safe to say though that bonds that are under 1% are probably not a hot buying opportunity and I'd avoid them regardless of portfolio theory. As when to get back in? I don't know. Again I haven't had to face this question yet. But I'll point out that people have been saying since 2008 that long bonds are a horrible idea and they've been wrong, wrong, wrong. So I could be joining that crowd if I sell out at 1%, but I'll just have to deal with that.

Hopefully Harry Browne will forgive me, but I think he'd be understanding when long bonds are paying 0.50% for 50 years that they aren't worth the risk.

These are interesting times, guys. We could be witnessing the endgame for Keynesianism. The ultimate race to the bottom where mere mortals are all losers.

I've lightened up on my long bonds too. They are looking very bearish to me these days. I know that it's counter to the PP philosophy but what the heck.

I bought individual LT's when I first started the PP a few years ago. One batch is @ 3.75% and the other at 3.25%. Every time I check them on Fidelity they are well in the green.

Not sure what Craig and you are thinking here. Are you saying you just wouldn't buy more at these low rates (tend to agree) or dump what you have?

[rickb]

I bought individual LT's when I first started the PP a few years ago. One batch is @ 3.75% and the other at 3.25%. Every time I check them on Fidelity they are well in the green.

Not sure what Craig and you are thinking here. Are you saying you just wouldn't buy more at these low rates (tend to agree) or dump what you have?

Craig, Reub - correct me if I'm wrong.

Craig is saying he'd sell if long term rates dropped below 1% (30 year bonds are at 2.7% as of today) - but didn't offer up a rate at which he'd buy back in (and does acknowledge that this is a problem).

Reub is saying he's sold some already.

If rates dropped to 1%, the bonds you bought at 3.75% and 3.25% would be a whole lot more green than they are now.  Then, from there, they'd drop if rates rose back to 2.5% (or 3.0%).  If you sell (at 1%) you lock in the gain from rates dropping that low - but you have to decide when you'd get back in.

[Reub]

I made a decision on Feb. 10th that the stock market was ready for a huge rise and so I sold about a third of my TLT as I went heavily into stocks. I don't anticipate a recession any time soon and think that rates may soon start to rise or remain flat. With equities and gold rocketing recently while bonds have been mostly unchanged I think that we're all laughing our way to the bank right now.

[buddtholomew]

I made a decision on Feb. 10th that the stock market was ready for a huge rise and so I sold about a third of my TLT as I went heavily into stocks. I don't anticipate a recession any time soon and think that rates may soon start to rise or remain flat. With equities and gold rocketing recently while bonds have been mostly unchanged I think that we're all laughing our way to the bank right now.

For now, yes...
Let's see what tomorrow brings.
I'm sticking with LTT's for what it's worth.

[buddtholomew]

Wrong so far.
LTT's continue to slide, but as long as it's not gold I'm OK.
Hopefully continue to get downside equity protection and have already reduced FI duration (LTT's + Cash to 5.6 years.
Stocks are about 11% off the lows. Some are buying while others are selling to harvest those gains.

[dualstow]

LTT's continue to slide,

Still not bad, though.
( yahoo finance link )

[Lang]

New lows in Swiss government bond yields:

20Y: -0.012%
30Y: 0.114%
50Y: 0.208%

Brave new world we're living in.

EDIT: They 50 year yield is now at 0.18%.

[Austen Heller]

New lows in Swiss government bond yields:

20Y: -0.012%
30Y: 0.114%
50Y: 0.208%

Brave new world we're living in.

Give the Swiss gov't your money for 20 years and pay them for the privilege, where do I sign up?

This actually reminds me of the Good Ol' Days, and by that I mean the mid-1800's in the US, where a secure bank was literally a place to keep your physical money, so it would not be stolen from you. Of course it makes sense to pay someone to guard your money in this case, but nowadays we are all so used to getting interest.

[Lang]

New lows in Swiss government bond yields:

20Y: -0.012%
30Y: 0.114%
50Y: 0.208%

Brave new world we're living in.

And now even lower:

20Y: -0.07%
30Y: 0.1%
50Y: 0.15%

Imagine the 30 year US Treasury yield at 0.1%...

[MachineGhost]

And now even lower:

20Y: -0.07%
30Y: 0.1%
50Y: 0.15%

Imagine the 30 year US Treasury yield at 0.1%...

Where does demand for 50-year bonds @ .15% come from? I mean, how the hell can anyone be so depressed that they see no real economic growth over the next 50 years? That's just batshit insane. What is the current rate of inflation?

[Lang]

-0.4%. Inflation has been mostly negative since 2009.

The only way it makes sense is if you expect the negative interest rate (currently at -0.75%) to persist for most of the next 50 years. 0.15% is a poor yield relative to 0% on cash, but if cash is yielding -0.75% (and you can't stuff it under your mattress), then 0.15% is not so bad...

As for the specific buyers, I'm guessing it's mostly pension funds. They are the only ones interested in bonds with such long maturity.

[Lang]

Swiss bond yields update:

10Y: -0.47%
20Y: -0.09%
30Y: 0.06%
50Y: 0.13%