Something is very off in the bond market

[lordmetroid]

Who in their right mind would want to buy bonds that offer these meager dividends? Who can rightfully say "I want to borrow the government my money for thirty years and in return I get almost zero interest. What an awesome great deal!"

[ochotona]

Corporations, pension funds, insurance co's, mutual funds. Even if interest rates go negative, they can't keep billions in $100 bills.

[MachineGhost]

Who in their right mind would want to buy bonds that offer these meager dividends? Who can rightfully say "I want to borrow the government my money for thirty years and in return I get almost zero interest. What an awesome great deal!"

If you don't expect any economic growth for 30 years (i.e. Japan), then it makes perfect sense.  Yields are always relative to growth and inflation.

[Bean]

Corporations, pension funds, insurance co's, mutual funds. Even if interest rates go negative, they can't keep billions in $100 bills.

Big Corps are doing share buy-backs.  Heck a lot of them are taking out low interest Corp loans to buy back shares that pay a higher dividend.

[dualstow]

Who in their right mind would want to buy bonds that offer these meager dividends? Who can rightfully say "I want to borrow the government my money for thirty years and in return I get almost zero interest. What an awesome great deal!"

It may not be an "awesome great deal," but it has never been about the (interest) dividends, either.
A friend of mine asked me the exact same question when I was buying at 4 1/2% interest.

[Kbg]

There is a very interesting summary of an academic article on interest rates and demographics by Larry Swedroe on ETF.com. I've never read about this connection before and found it very interesting.

Summary
The demographic transition that all advanced economies are currently experiencing is a factor in helping to explain the prolonged decline of global real interest rates. The main channel through which changing demographics affect the real interest rate is the increase in life expectancy. This is because, at all stages of their life cycle, individuals save more to finance consumption over this longer time horizon.Quantitatively, the demographic transition can account for about one-third of the overall decline in the real interest rate since 1990.

These findings have important implications for investors planning for their retirement. First, we should not expect real rates to return to their long-term averages. Second, lower-than-historical real interest rates mean either that investors will have to accumulate a larger pool of assets to meet their financial goals or that they will have to accept more equity risk to make up for lower real returns on bonds. And third, people who already are in retirement—which is usually accompanied by a high bond allocation—should also account for now lower expected returns.

[barrett]

This is because, at all stages of their life cycle, individuals save more to finance consumption over this longer time horizon.

Meaning that saving money as opposed to buying stuff results in lower inflation and therefore lower bond yields, correct?

Just wanted to add that I think lordmetroid is looking at different numbers (European bonds yields if I'm not mistaken) than what we have here in The US. Here in the US, yields are just downright annoying. In Europe, yes I think they are insanely low.

[MachineGhost]

Summary
The demographic transition that all advanced economies are currently experiencing is a factor in helping to explain the prolonged decline of global real interest rates. The main channel through which changing demographics affect the real interest rate is the increase in life expectancy. This is because, at all stages of their life cycle, individuals save more to finance consumption over this longer time horizon.Quantitatively, the demographic transition can account for about one-third of the overall decline in the real interest rate since 1990.

These findings have important implications for investors planning for their retirement. First, we should not expect real rates to return to their long-term averages. Second, lower-than-historical real interest rates mean either that investors will have to accumulate a larger pool of assets to meet their financial goals or that they will have to accept more equity risk to make up for lower real returns on bonds. And third, people who already are in retirement—which is usually accompanied by a high bond allocation—should also account for now lower expected returns.

I think this may be some kind of conflation of Harry Dent, New Keynesianism and Bernanke's "savings glut" baloney.  Since its more or less mainstream economic thought, I would fully expect Swedroe to parrot it.  Nonetheless, if we don't adopt pro-growth policies in this country and soon (i.e. electing Trump), then his advice about Japanification is well heeded as there's simply not enough time left to regain any glory before China takes the "world financial center" crown.

[MachineGhost]

Meaning that saving money as opposed to buying stuff results in lower inflation and therefore lower bond yields, correct?

Just wanted to add that I think lordmetroid is looking at different numbers (European bonds yields if I'm not mistaken) than what we have here in The US. Here in the US, yields are just downright annoying. In Europe, yes I think they are insanely low.

Saving more is actually an effect of lower confidence due to non-pro growth policies (i.e. austerity).  Note that you don't really know how they define "savings" here as it is far from a universally agreed-upon term.  True savings implies primary capital investment into the real economy but there is also income "saved" into the secondary markets of the financial economy or parked into zero/low duration cash.  Its the latter that is considered a problem by mainstream dogma and needs top-down "inflation stimulus" as if savers were nothing more than guillible monkeys too stupid to know what is in their own best interests.  So along that vein in the EU, the ECB is directly asset swapping bank reserves for their equivalent of Treasuries, so they are driving yields down on Treasuries as well as charging member banks negative interest to hold their bank reserves (which gets passed onto the depositors).  Its futile and will end very badly.  Exactly how it will end I could not predict other than the disintegration of the EU.  The eurocrats could save themselves if they federalize like the USA.  I wouldn't put it past them to try.

[Kbg]

Not counting health care, I think an aging population consumes less as well. All the big purchases in life are generally in the rear view mirror by the time you are 50.

If you are a demographics follower/believer...then no need to get too freaked out about China. The one child policy that was in place started in 1980. Their population over 65 grows by about 2% points every 5 years from now until 2050 when it peaks and begins to level out at 26-27% of the population. Their age bucket graphs have a very large bulge in the late 30s - late 40s groups with a significant taper down into the younger age groups. We have a bulge and then the rest of it is like the two side walls of a house (i.e. balanced). We get up to about 21-22% of population over 65 by 2050.

I've never been a doom and gloomster as it is not in my nature. I think the actual reality is that the world is simply getting more in balance vice the US going down the proverbial tube. 1945 was a unique time in history caused by global war and we were a major beneficiary of the aftermath. It was good to be one of the winners, the major lender and probably most important not a battleground.

[MachineGhost]

I've never been a doom and gloomster as it is not in my nature. I think the actual reality is that the world is simply getting more in balance vice the US going down the proverbial tube. 1945 was a unique time in history caused by global war and we were a major beneficiary of the aftermath. It was good to be one of the winners, the major lender and probably most important not a battleground.

That's one way to look at it but hedonics assures that Americans will not put up with with their shrinking middle class lifestyle.  Wouldn't you rather have Trumpish pro-growth policies to light a fire under everyone's arse rather than a slow, meager death by deflationary austerity?  Do you think the Japanese are happy, contented and have lots of sex? 

[Fred]

That's one way to look at it but hedonics assures that Americans will not put up with with their shrinking middle class lifestyle.  Wouldn't you rather have Trumpish pro-growth policies to light a fire under everyone's arse rather than a slow, meager death by deflationary austerity?  Do you think the Japanese are happy, contented and have lots of sex? 

Hedonics?

MG, I'm still trying to figure out if your IQ and knowledge is so far beyond mine that I can't understand what your are saying and probably never will or whether you are just full of sh**.

[MachineGhost]

Hedonics?

MG, I'm still trying to figure out if your IQ and knowledge is so far beyond mine that I can't understand what your are saying and probably never will or whether you are just full of sh**.

That's a natural reaction!

This should help: https://www.youtube.com/watch?v=koo1QSeHXvw

And this: https://en.wikipedia.org/wiki/Hedonic_treadmill

[Greg]

That's one way to look at it but hedonics assures that Americans will not put up with with their shrinking middle class lifestyle.  Wouldn't you rather have Trumpish pro-growth policies to light a fire under everyone's arse rather than a slow, meager death by deflationary austerity?  Do you think the Japanese are happy, contented and have lots of sex? 

Hedonics?

MG, I'm still trying to figure out if your IQ and knowledge is so far beyond mine that I can't understand what your are saying and probably never will or whether you are just full of sh**.

It's 50/50.  MG has reached perfect parity between IQ and BS. 

Does he have to rebalance when one gets too high? (B.S. or IQ)

[gizmo_rat]

MG, I'm still trying to figure out if your IQ and knowledge is so far beyond mine that I can't understand what your are saying and probably never will or whether you are just full of sh**.

Impossible to call, I suspected the latter, but MG raised a few things years ago that directly impacted me in the fullness of time and I think are uncontentious now. (Wheat, Statins, UK Vit D depletion ) So I wouldn't rush into any judgement. 

[Greg]

MG, I'm still trying to figure out if your IQ and knowledge is so far beyond mine that I can't understand what your are saying and probably never will or whether you are just full of sh**.

Impossible to call, I suspected the latter, but MG raised a few things years ago that directly impacted me in the fullness of time and I think are uncontentious now. (Wheat, Statins, UK Vit D depletion ) So I wouldn't rush into any judgement.

I love rushing to judgment though. I'd like to see a MachineGhost vs PointedStick election for president. (also I realize in the dissident opinions thread on the PP, they speak about threads veering off the OP. I certainly don't help ).

[Kbg]

I've never been a doom and gloomster as it is not in my nature. I think the actual reality is that the world is simply getting more in balance vice the US going down the proverbial tube. 1945 was a unique time in history caused by global war and we were a major beneficiary of the aftermath. It was good to be one of the winners, the major lender and probably most important not a battleground.

That's one way to look at it but hedonics assures that Americans will not put up with with their shrinking middle class lifestyle.  Wouldn't you rather have Trumpish pro-growth policies to light a fire under everyone's arse rather than a slow, meager death by deflationary austerity?  Do you think the Japanese are happy, contented and have lots of sex? 

What are pro-growth policies that will directly flow into the pockets of middle Americans? The Pubs seem to be good at pro growth for rich guys and Dems are good at redirecting money to the lower strata but I'm not seeing much for the mid section from either party.

[MachineGhost]

I love rushing to judgment though. I'd like to see a MachineGhost vs PointedStick election for president. (also I realize in the dissident opinions thread on the PP, they speak about threads veering off the OP. I certainly don't help ).

I would much prefer to be PS's right hand man and he can be the puppet in the spotlight.  Besides, he has much better emotional control than when I'm feeling sadistic (which is often, although it's all for a good cause!).

[MachineGhost]

What are pro-growth policies that will directly flow into the pockets of middle Americans? The Pubs seem to be good at pro growth for rich guys and Dems are good at redirecting money to the lower strata but I'm not seeing much for the mid section from either party.

I think its a little more involved than just an ideological power shift in the Beltway because there needs to be a wholesale cleaning and restructuring of government and business at all levels, not campaign trail rhetoric just to get elected.  It's all a game and the game must come to an end.  Only we the people have the power and will to get that done bottoms up, because everone else will fight to tooth and nail to preserve their whale-corpse-sucking-make-work jobs.

The middle class actually does get more back in government subsidies then they pay out, otherwise they would be revolting too.  Imagine the uproar in ending the charity and mortgage deductions which aren't even a core fundamental issue with government.  It's window dressing.  "We are all Socialists now."

I just don't think people are ready yet, although there's lots of piehole flapping as usual.  Everyone is comfortable with the status quo, no matter how crony and corrupt it is and is becoming.  Isn't there a saying by someone that the familiar enemy is better than the unknown or something like that?

I suspect only WWIII or a a global synchronized recession will really motivate people to vote for permanent change to business as usual.  Right now its just vanguard "activist fringe elements" like me interested in practically reforming DC.  It certainly doesn't help having the RIFFF problem in the interim which is yet another sideshow for power consolidation and civil liberty diminishment.  We the people are either going to ultimately throw these fuckers all out of their Bullshit jobs or we're going to wind up in an Orwellian Dystopian State and so far the latter is winning each and every day.

As for pro-growth within the current status quo, Trump best illustrate's how it would be.  It's not Shock Therapy like in Poland, just gradualism.  But far more aggressive than "Reform Republicanism" as embodied by Bush and Rubio.  Politicians don't like to do anything too "extreme" that diminishes their own self-importance and power of being "needed".

[buddtholomew]

MG, what happened to all your models and gold bottoming out at 1170? Seriously, you know everything there is to know in the world. Tell us, when will gold bottom again, how stocks and bonds will do and whether the Golden State Warriors will win the championship. Give me something I can use.

[MachineGhost]

MG, what happened to all your models and gold bottoming out at 1170? Seriously, you know everything there is to know in the world. Tell us, when will gold bottom again, how stocks and bonds will do and whether the Golden State Warriors will win the championship. Give me something I can use.

I recall I said if it bottomed.  It was looking really good for a while for it to do so, but it ultimately did not.  Dat's dem breaks.  Back to the siesta.  There's only a point of action or not once a month.

[img width=800]http://i.imgur.com/jQoGdXN.png[/img]

[Greg]

I love rushing to judgment though. I'd like to see a MachineGhost vs PointedStick election for president. (also I realize in the dissident opinions thread on the PP, they speak about threads veering off the OP. I certainly don't help ).

I would much prefer to be PS's right hand man and he can be the puppet in the spotlight.  Besides, he has much better emotional control than when I'm feeling sadistic (which is often, although it's all for a good cause!).

Ahh so you want to Rubio PS. Or this relevant 18 second clip (https://www.youtube.com/watch?v=5ogVr3yXJ2A) from Scrubs

[ochotona]

Seen in SeekingAlpha

Stay on the Shorter End of the Yield Curve

"One of the things that we have noticed in long interest rate cycles is that the reversal from rising rates to falling rate cycles have been very sharp inverted 'V'-affairs because the Fed usually comes in to curb inflation and jacks up interest rates and then things subside. But the transitions from falling rate cycles to rising rate cycles have been multi-year saucer like affairs that have lasted from 2-14 years. If you think about the 1929 decline into '32, we didn't see the rise in interest rates until 1946 and that was 14 years after the bear market low so I think we are initiating a new rising rate cycle. I think it will probably be slow moving but I would suggest that one not be terribly long out on the yield curve. If you ladder 2-year, 5-year bonds - something like that - or 1-year, 2-year bonds, you'd be able to rotate into whatever the new higher rate cycle is once your Treasuries come due but I don't think I'd want to be out 10 years or longer at all."

My interpretation of this concerning the Permanent Portfolio is that if you hold 10 Year Treasuries and Cash in equal measure, you're roughly in the maturity range she refers to as optimum. Personally, I'm holding 7 year Treasuries, and cash, so I'm even shorter, 3.5 years out. IEF or SCHR and Cash would the ETF options. I have price alerts set for TLO (similar to TLT, not quite as long duration).

[fi50@fi2023]

Thanks for this post.  I started a PP this year and bonds are the most confusing part for me given the status of interest rates and their potential to start the long slow climb you speak of.  Could you help a new member out and explain your strategy in more detail?  Any help from members of this forum would be much appreciated.  I struggle to understand how it makes sense that I'm buying 30 year bonds at current rates.

[rickb]

My interpretation of this concerning the Permanent Portfolio is that if you hold 10 Year Treasuries and Cash in equal measure, you're roughly in the maturity range she refers to as optimum. Personally, I'm holding 7 year Treasuries, and cash, so I'm even shorter, 3.5 years out. IEF or SCHR and Cash would the ETF options. I have price alerts set for TLO (similar to TLT, not quite as long duration).

Optimum for what?  The point of holding long term bonds in the PP is twofold.  1) you receive the dividend payments.  2) their value goes up in a deflationary environment during which the value of stocks will in all likelihood be going down.

Looking at them in isolation and adjusting this one asset because you think rates have nowhere to go but up is predicting the future.  Doesn't similar logic apply to stocks at this point, by which I mean aren't many pundits saying stocks are in a bubble?  So, which is it?  Are we headed for further deflation and perhaps a stock market bubble bursting, or have we turned the corner on this whole deflation thing and are now on the brink of a period of rising rates and inflation?

Repeat after me: No one can predict the future.