Can Long-Term Bond Rates Go Any Lower?
Posted: Thu Sep 10, 2020 9:33 pm
Can Rates Go Any Lower?
Rates can go even lower than they are now. In some European and Asian nations, negative yields have prevailed for years.
https://www.kiplinger.com/article/inves ... lower.html
"The mystery of negative rates. Realize that rates can go far below where they are now. In some European and Asian nations, negative yields have prevailed for years. The trend was ignited when the European Central Bank cut its rate below zero as a stimulus to borrowing. In mid March, the yield on 10-year bonds issued by the government of Switzerland was minus 0.51%; Germany, –0.46%; Netherlands, –0.13%; Japan, –0.01%. In effect, the lender is paying the borrower for the favor of taking the lender’s money.
How does this work? You don’t send a check each half-year to the Deutsche Bundesbank. Instead, a bond is said to carry negative interest if the premium—that is, the amount you pay above face value—is greater than the interest you earn over the bond’s life.
These bonds are surprisingly popular. In August, global negative-yielding debt reached a milestone, exceeding $17 trillion, which is the amount that the U.S. Treasury owes to all its public creditors. Why not put your cash under the mattress and get ahead of the game by earning zero? Some bondholders are speculators who are betting they can profit when interest rates get even more negative. Others, including institutions with reserve requirements, keep government bonds on their balance sheets for safety.
The recent regime of super-low interest rates and moderate economic growth has been wonderful for both stocks and bonds. The danger for stocks is when “moderate” becomes “negative”—a growing possibility, and one that’s reflected in recent market volatility. For that same reason, I would be wary of corporate bonds, which add more risk with not much more reward.
Government bonds offer an excellent hedge against a serious slowdown or recession. If you really want to play it safe, then buy a bond fund whose maturities aren’t too extended, such as Fidelity Intermediate Treasury Bond Index (FUAMX), a mutual fund with an average maturity of six years and an expense ratio of just 0.03%. The fund’s returns are lower than those of long-term bond portfolios, but so is its risk.
We are in uncharted territory. We have never seen rates this low, and, although the benefits are obvious, the dangers are fraught. The low rates are trying to tell us something, and it’s not necessarily a pleasant story. Just remember when anyone says that rates can’t go lower … they can."
Rates can go even lower than they are now. In some European and Asian nations, negative yields have prevailed for years.
https://www.kiplinger.com/article/inves ... lower.html
"The mystery of negative rates. Realize that rates can go far below where they are now. In some European and Asian nations, negative yields have prevailed for years. The trend was ignited when the European Central Bank cut its rate below zero as a stimulus to borrowing. In mid March, the yield on 10-year bonds issued by the government of Switzerland was minus 0.51%; Germany, –0.46%; Netherlands, –0.13%; Japan, –0.01%. In effect, the lender is paying the borrower for the favor of taking the lender’s money.
How does this work? You don’t send a check each half-year to the Deutsche Bundesbank. Instead, a bond is said to carry negative interest if the premium—that is, the amount you pay above face value—is greater than the interest you earn over the bond’s life.
These bonds are surprisingly popular. In August, global negative-yielding debt reached a milestone, exceeding $17 trillion, which is the amount that the U.S. Treasury owes to all its public creditors. Why not put your cash under the mattress and get ahead of the game by earning zero? Some bondholders are speculators who are betting they can profit when interest rates get even more negative. Others, including institutions with reserve requirements, keep government bonds on their balance sheets for safety.
The recent regime of super-low interest rates and moderate economic growth has been wonderful for both stocks and bonds. The danger for stocks is when “moderate” becomes “negative”—a growing possibility, and one that’s reflected in recent market volatility. For that same reason, I would be wary of corporate bonds, which add more risk with not much more reward.
Government bonds offer an excellent hedge against a serious slowdown or recession. If you really want to play it safe, then buy a bond fund whose maturities aren’t too extended, such as Fidelity Intermediate Treasury Bond Index (FUAMX), a mutual fund with an average maturity of six years and an expense ratio of just 0.03%. The fund’s returns are lower than those of long-term bond portfolios, but so is its risk.
We are in uncharted territory. We have never seen rates this low, and, although the benefits are obvious, the dangers are fraught. The low rates are trying to tell us something, and it’s not necessarily a pleasant story. Just remember when anyone says that rates can’t go lower … they can."
