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Old 21.08.2018, 13:16
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Question for bond investors

Do you invest in bonds? Why do you do this?

I see for example US Treasuries yielding just under 3% for 30 year zero coupon. It seems plausible that this wouldn't even keep up with inflation over 30 years and provides no income, so why buy it?

Are people betting on lower interest rates/deflation?

Last edited by Phil_MCR; 21.08.2018 at 14:16.
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Old 21.08.2018, 14:07
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Re: Question for bond investors

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Do you invest in bonds? Why do you do this?

I 'invest' the way I 'trade', I look for opportunities in the short term in products with tight liquid markets. I'm indifferent to product. US bond futures are a great product for this with tight spreads and huge liquidity, as well as some of the associated ETFs which are okay. I have a personal bias in that I expect US interest rates to increase (yields up) so I am usually net short the bond future in some capacity (bond prices to go down), outright future or option spreads. (2,5,10,25,30+ year Bonds) Recent volatility in the bond market has made this a good bond trading period for me.
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I see for example US Treasuries yielding just under 3% for 30 year zero coupon. It seems plausible that this wouldn't even keep up with inflation over 30 years, provides no income, so why buy it?

Correct, this buy and hold approach without some sort of cost basis reduction is going to be a losing trade with all things included. You're capital is 'secure' but will in essence depreciate.
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Are people betting on lower interest rates/deflation?

I'm expecting US rates to rise (EU rates from next year) , so the actual bond price to decrease (inverse relationship.) That's how I'm looking at it in the short/medium term.


Last edited by bill_door; 21.08.2018 at 14:08. Reason: formatting
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Old 21.08.2018, 14:10
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Re: Question for bond investors

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Do you invest in bonds? Why do you do this?

I see for example US Treasuries yielding just under 3% for 30 year zero coupon. It seems plausible that this wouldn't even keep up with inflation over 30 years, provides no income, so why buy it?

Are people betting on lower interest rates/deflation?
I keep some money in an intermediate term corporate bond ETF. Current yield is over 3.

Purely because it's a better yield than cash and I would certainly move it into stocks when I find the next opportunity.
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Old 21.08.2018, 14:35
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Re: Question for bond investors

You know, I thought the US yields were low and I just looked at UK Gilts:

https://www.bloomberg.com/markets/ra...nment-bonds/uk

<2% for a 30 years. why?

how can this be?

in fact the uk yc is inverted. the 50 year rate is lower than the 30 year.

the UK can borrow at around 1.6%. 50 years. wow.
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Old 21.08.2018, 18:05
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Re: Question for bond investors

The market pricing in long term deflation? Or just central banks price manipulation?
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Old 21.08.2018, 18:10
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Re: Question for bond investors

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Or just central banks price manipulation?
It's government manipulation pure & simple, interest rates should exceed inflation by 2%, so they are roughly 5% below what they should be in the UK & 2% too low in CH.
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Old 21.08.2018, 21:02
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Re: Question for bond investors

Why not invest in bonds? They can offer decent interest over the years compared to money sitting in a savings account making nothing. There are other types of bonds besides treasuries - corporate bonds for example.
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Old 22.08.2018, 06:54
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Re: Question for bond investors

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Why not invest in bonds? They can offer decent interest over the years compared to money sitting in a savings account making nothing. There are other types of bonds besides treasuries - corporate bonds for example.
In a lot of cases you have to start with 100k to buy? At least that is the minimum with our company bond
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Old 22.08.2018, 10:01
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Re: Question for bond investors

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Do you invest in bonds? Why do you do this?

I see for example US Treasuries yielding just under 3% for 30 year zero coupon. It seems plausible that this wouldn't even keep up with inflation over 30 years and provides no income, so why buy it?

Are people betting on lower interest rates/deflation?
Zerobonds accumulate the imputed interest earned. There's no interim interest payout but that doesn't meant they don't earn any income.

One reason to buy and hold them is predictability and plannability by/around the expiration date. If you have an obligation 25 years out or longer (insurances and pension funds for example) you may not just want but actually need to know what you get paid then.
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Old 22.08.2018, 10:24
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Re: Question for bond investors

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In a lot of cases you have to start with 100k to buy? At least that is the minimum with our company bond
To buy an individual bond yes but corporate bond ETFs are a great vehicle, even better than stock ETFs in a lot of ways.

This was also explained by Jason Zweig in the revised Intelligent Investor book.

If you're worried about interest rates increasing, can go for short or intermediate bonds that will be less affected by that and generate around 3% annual income.

Of course compared to the bull market stock gains since '09, it's nothing, but all depends on your risk tolerance and the bond yield beats cash.

You can also argue a lot of stocks act as bond proxies but with higher yields (and more price volatility of course), such as JNJ, Philip Morris, P&G. They don't grow but continue to spit out cash.

P.S. Happy longest US bull market ever day
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Old 22.08.2018, 11:03
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Re: Question for bond investors

100,000 with the interest reinvested for 30 years will give about 2.5 million. It also gives pension funds certainty as they have liabilities they must meet, and in a rising interest rate scenario bonds start to become more attractive over dividend yields which in the US are often low, especially with some of the high prices we see today.

Most investors have a mix of bonds and equities to smooth out the bumps over time. During the crash of 1987 bonds were my saving as my equity portfolio crashed but my bonds went up as interest rates were cut.
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Old 22.08.2018, 11:33
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Re: Question for bond investors

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100,000 with the interest reinvested for 30 years will give about 2.5 million. It also gives pension funds certainty as they have liabilities they must meet, and in a rising interest rate scenario bonds start to become more attractive over dividend yields which in the US are often low, especially with some of the high prices we see today.

Most investors have a mix of bonds and equities to smooth out the bumps over time. During the crash of 1987 bonds were my saving as my equity portfolio crashed but my bonds went up as interest rates were cut.
please show your workings.
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Old 22.08.2018, 11:47
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Re: Question for bond investors

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To buy an individual bond yes but corporate bond ETFs are a great vehicle, even better than stock ETFs in a lot of ways.

This was also explained by Jason Zweig in the revised Intelligent Investor book.

If you're worried about interest rates increasing, can go for short or intermediate bonds that will be less affected by that and generate around 3% annual income.

Of course compared to the bull market stock gains since '09, it's nothing, but all depends on your risk tolerance and the bond yield beats cash.

You can also argue a lot of stocks act as bond proxies but with higher yields (and more price volatility of course), such as JNJ, Philip Morris, P&G. They don't grow but continue to spit out cash.

P.S. Happy longest US bull market ever day
Pretty much this. You're not going to make massive gains with bonds like you could with stocks, but that's sort of the point. Stick a few thousand in a 5-year bond that pays 3% and you'll come out ahead of a typical savings account in Switzerland that's paying 0.05% or whatever.

Basic maths: 5,000 Francs in a bond paying 3% earns 150 a year. The same 5,000 in my Migros savings account earns me 25.

Edit - Of course 150 still is peanuts in the big picture but I'll take it over 25 any day.
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Old 22.08.2018, 12:23
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Re: Question for bond investors

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Pretty much this. You're not going to make massive gains with bonds like you could with stocks, but that's sort of the point. Stick a few thousand in a 5-year bond that pays 3% and you'll come out ahead of a typical savings account in Switzerland that's paying 0.05% or whatever.

Basic maths: 5,000 Francs in a bond paying 3% earns 150 a year. The same 5,000 in my Migros savings account earns me 25.

Edit - Of course 150 still is peanuts in the big picture but I'll take it over 25 any day.
You can also use it to 'store' your cash while you wait for opportunities in the stock market, and get a better interest rate.

I fully intend to invest all of it in stocks when the time comes. Prices across most of the board are just quite inflated right now.

Of course, market timing is for suckers, etc. etc. It's more about risk tolerance I guess.
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Old 22.08.2018, 12:52
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Re: Question for bond investors

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Pretty much this. You're not going to make massive gains with bonds like you could with stocks, but that's sort of the point. Stick a few thousand in a 5-year bond that pays 3% and you'll come out ahead of a typical savings account in Switzerland that's paying 0.05% or whatever.

Basic maths: 5,000 Francs in a bond paying 3% earns 150 a year. The same 5,000 in my Migros savings account earns me 25.

Edit - Of course 150 still is peanuts in the big picture but I'll take it over 25 any day.
is there a specific 3% Swiss bond you are talking about, or is it hypothetical? because if were talking hypothetical, then i could put it in the hypothetical Cogros bank earning 300 chf per year.

i'm just wondering, when it comes to reality, what yield can you get? do you need to take FX risk (e.g. if you refer to USD bond instead of CHF bond)? what is the spread between the buy and sell price, and can you even sell it (liquidity, esp. for corporate bonds) and will you get your principal back (default risk)?
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Old 22.08.2018, 13:16
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Re: Question for bond investors

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is there a specific 3% Swiss bond you are talking about, or is it hypothetical? because if were talking hypothetical, then i could put it in the hypothetical Cogros bank earning 300 chf per year.

i'm just wondering, when it comes to reality, what yield can you get? do you need to take FX risk (e.g. if you refer to USD bond instead of CHF bond)? what is the spread between the buy and sell price, and can you even sell it (liquidity, esp. for corporate bonds) and will you get your principal back (default risk)?
Well, take VCSH as an example (USD):

https://investor.vanguard.com/etf/profile/VCSH

Maintains a dollar-weighted average maturity of 1 to 5 years. 0.07% expense ratio, over 3% yield. Small spread, I just tried to check on my brokerage but markets aren't open yet. It's a huge ETF ($26.3 billion) and very liquid. Default risk is minimized by the number of bond holdings (2195). Average bond maturity of 3 years (short term - they also have intermediate and long). I don't know why anyone would buy an individual bond with these cheap and easy products available.

Swiss bonds, I have no idea. UBS would probably charge some ridiculous fee of 1% or something for holding 1% yield bonds :P
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Old 25.08.2018, 12:18
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Re: Question for bond investors

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please show your workings.
Should have added compounded at 3.25%
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Old 25.08.2018, 13:08
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Re: Question for bond investors

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100,000 with the interest reinvested for 30 years will give about 2.5 million.
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Should have added compounded at 3.25%
1.0325^30 = 2.6, so 100k becomes 260k after 30 years at 3.25% compounded not 2.5 million

Last edited by DUTCH; 25.08.2018 at 13:09. Reason: -
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Old 25.08.2018, 13:10
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Re: Question for bond investors

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Should have added compounded at 3.25%
The future value for $100’000.- bond that pays %3.25 after 30 years is as follows:

For annual compounding:

FV = PV . (1+r) ^ t

=> Value after 30 years = 100k x 1.0325 ^ 30 = $261’036.84

For continuous compounding:

FV = PV . e ^ rt

=> Value after 30 years = 100k x e ^ (30 x 0.0325) = $265’116.72

NB:

- Tax is ignored
- Reinvestment rate is constant
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Old 25.08.2018, 15:37
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Re: Question for bond investors

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100,000 with the interest reinvested for 30 years will give about 2.5 million.
If the annual interest is around 11.3%.

Or, you change the period to 109 years (at 3% growth)

Last edited by HIAO; 25.08.2018 at 15:40. Reason: add stuff
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