Bond Market - The “Most Overpriced, Oversupplied, Over-owned Market in History”

[tomsang]

Interesting article and video on the board market. 

http://finance.yahoo.com/blogs/daily-ticker/most-overpriced-oversupplied-over-owned-market-history-125751538.html?vp=1&l=1

[Joet]

How is this doomsday scenario any different than the pending govt debt catastrophe I've been reading about since the 80s? So we are super serial it's going to pop this time? 2015-16, got it. /sets watch

I'm an amateur investor in the total bond market [like many here] and the things I watch for are any changes in policy from foreign central banks. The move away from US treasuries will require stability in other regions. My understanding is that the ECB, BOJ, and most 1stworld nations are all in a printing spree at the moment and nobody knows when/if it will ever be able to stop. A similar argument could be made to be extremely bullish in treasuries for this very reason [indeed, it is priced into the bond market today]. Will this change? Perhaps? In 3 years? Maybe.

Reminds me of every doom/gloom scenario I've been reading since the middle of Reagans first term [when I was barely literate, heh!]. "THIS TIME ITS DIFFERENT! I REALLY REALLY MEAN IT!" :)

[I mean no offense OP]

[daverobev]

The question is, WHEN will bonds start going back to normal... and, where will the money from them, go?

Stocks? Or gold? Bit of both, bit of real estate..

Maybe the US will just go 'bankrupt', have hyperinflation, and be ok. Seems to have worked ok for Iceland...

Or perhaps corporate America will buy up the rest of the country. I reckon those who hold a lot of US debt are probably going to lose money, anyway.

[KingCoin]

The bond market may well be overpriced, but anytime some trots out the "America is just like Greece" argument, I have a very hard time taking them seriously.

[tomsang]

Joet, no offense taken. I wasn't the author just sharing another perspective. I do believe that the risk reward for bonds is out of whack, but I don't have a lot of emotion around people investing in them as long as they understand what happens when rates/inflation goes up.

[Mr Mark]

So, instead of talking about hyperinflation and gold, which I say are both 'sky falling / this time it's Armageddon" esque...

Yes, bond markets are at a long term high, with the assistance of the FED. If rates go up, say, .5%, the  10 yr treasury bond market would go down quite a lot. About 20%.  But short term bonds won't change much. Maybe 5%?

But if rates drop a wee bit more, if USA goes more Japanese, then bonds could double.

So, I'd say, if you're worried about rates going up
- have a low allocation of say 15% -20% max in short to medium bonds, not total market
- take the other side of the trade by having a 30 yr fixed mortgage on just enough equity to avoid PMI, pref in a rental property
- have some but not too much nonUS stock, say 20-25%

But minimum cash and no f%£king gold!!!!

[rjack]

My bond portfolio currently consists of short-term corporate bonds. However, Vanguard is about to launch a hedged international bond fund that I plan to add to my portfolio.

[Joet]

do you consider corporate aggregate bonds to be a lower risk profile than treasuries at this point? or are you looking more at the yield for the corp side? what duration of corp do you hold?


<---curious. I just use 'BIV', the vanguard total bond fund (intermediate) about a 6-yr mean duration, and roughly 50% treasuries

[KingCoin]

If rates go up, say, .5%, the  10 yr treasury bond market would go down quite a lot. About 20%.  But short term bonds won't change much. Maybe 5%?
But if rates drop a wee bit more, if USA goes more Japanese, then bonds could double.

You might want to re-run that bond math. A 0.5% rise in 10yr rates would result in ~4.4% price drop.  If 30yr bond matched the 30yr Japanese rates (2.8% -> 1.6%), you'll see ~22% pop. Good, but not amazing for a very good case scenario.

[Mr Mark]

Thanks for correction. I guess short term bonds would fall even less then. no drama.

[KingCoin]

Thanks for correction. I guess short term bonds would fall even less then. no drama.

Yeah, bonds shorter than 3yrs are more or less enhanced cash at this point. You might see a 1 or 2% wiggle in price if rates (or credit spreads) really go into motion.

[rjack]

do you consider corporate aggregate bonds to be a lower risk profile than treasuries at this point? or are you looking more at the yield for the corp side? what duration of corp do you hold?


<---curious. I just use 'BIV', the vanguard total bond fund (intermediate) about a 6-yr mean duration, and roughly 50% treasuries

Good question! At this point, I consider interest rate risk to be higher than credit risk and I'm chasing slightly better yield with corporate bonds. I wrote a post on it if you are curious:

http://assetallocationcentral.com/is-your-bond-allocation-risky/

Of course, I could be wrong - it wouldn't be the first time. :)

[Joet]

Good stuff, I'm certainly no prognosticator and I do like the analysis on your post, but how is the fed going to be able to raise interest rates with our current ~1t deficit? I don't see it as being feasible (unless inflation shows up I suppose, then no choice), otherwise my amateur opinion is we are looking at a Japan scenario

Of course I could be wrong, too

[jamccain]

http://www.marketwatch.com/story/the-shocking-truth-about-bond-forecasting-2013-03-12

Bonds have no upside left...I sold out

[mm31]

There are still great bond deals out there, both from the government:

* for the short-term: I-bonds, which will match inflation
* for the long term: EE bonds, which are guaranteed to double in value in 20 years

You can defer capital gains on both, or even none at all if used for specific purposes.

[tomsang]

Buffett says economy on mend, bonds 'terrible' investment

http://www.reuters.com/article/2013/05/06/us-berkshire-buffett-idUSBRE9450AO20130506?feedType=RSS

[MouseStash]

Bah. It figures. Having had 100% of my retirement money in stocks for years now, I finally realized that that might be too aggressive, since I just turned 40. So I put about 16% of my retirement money into bonds a couple weeks ago - VBMFX and VIPSX. Apparently this was a bad idea. :P

[Kayano_55]

MouseStash -
Don't feel bad - just did the same thing. . .thinking about switching back to stock. 

[tomsang]

U.S. Bond funds lose $47.2 billion in June

http://www.reuters.com/article/2013/06/23/investing-fundflows-trimtabs-idUSL2N0EZ08B20130623?feedType=RSS&feedName=financialsSector&rpc=43

[NYD3030]

You take some lumps today, but the higher rates mean you have a better parking lot for your cash going forward.  It's going to take max seven years (according to longtermreturns.com) to be "made whole" by the increased rates over the jack shit we're getting right now for holding bonds.  This seems like a good thing to me, if what you want bonds for is stability and income streams, rather than speculation.

[Joet]

I'm not so sure this rise in interest rates is sustainable, I wouldnt have to break out my shocked face for a resumed QE*. after this little reduction/pause/China Implosion/unemployment staying high/etc

[NYD3030]

I'm not so sure this rise in interest rates is sustainable, I wouldnt have to break out my shocked face for a resumed QE*. after this little reduction/pause/China Implosion/unemployment staying high/etc

Nail meet head.  I've felt kind of befuddled by this whole last week.  So the Fed comes out and says, "We expect the economy to significantly improve" and the response is SELL SELL SELL!

The asterisk of course is that they aren't tapering QE until that improvement takes place, and their predictions have been consistently WAY too rosy.

[tomsang]

Some pretty meaty stuff in here.  I think I need to read it again, but interesting on the potential impact of the bond market.

http://www.minyanville.com/business-news/markets/articles/Why-China2527s-Liquidity-Crisis-Could-Lead/7/29/2013/id/51022?camp=syndication&medium=portals&from=yahoo

[livetogive]

I will continue to put more money in bonds as rates rise and the funds tank to keep my asset allocation correct.  What I'm trying to say is look at the bond market as an opportunity more than a threat, and watch your stuff go way up when the stock market corrects again.  In 2007 people looked at me like I had a 3rd eye for being a younger person with bonds. In 2008 those funds made a good deal of money. 

As far as the US Doomsday argument goes I think the points are very valid long term, but also think it's a chicken little argument short term. When the US was downgraded rates went down. That's a pretty strong indicator that the world still views the dollar as a safe haven IMO. 

[Kazimieras]

I will continue to put more money in bonds as rates rise and the funds tank to keep my asset allocation correct.  What I'm trying to say is look at the bond market as an opportunity more than a threat, and watch your stuff go way up when the stock market corrects again.  In 2007 people looked at me like I had a 3rd eye for being a younger person with bonds. In 2008 those funds made a good deal of money. 

The bond market is a very different animal than the stock market. Stocks are typically affected by earnings of companies and the economy, whereas bonds is just debt with an agreed upon rate of return. Bonds tend to move with the interest rates - which are set by the Federal Reserve. In 2008 bonds went up because interest rates decreased, that is how they work. If rates go up, bond values will drop. And if you are having bonds for diversification - be sure to buy outside your own country. There are lots of other markets out there and you do not want to end up with an undiversified group of bonds completely dependent on the US.

As far as the US Doomsday argument goes I think the points are very valid long term, but also think it's a chicken little argument short term. When the US was downgraded rates went down. That's a pretty strong indicator that the world still views the dollar as a safe haven IMO.

When the US was downgraded the Federal Reserve did something a bit unusual. It did 'operation twist' which basically depressed the 10 year bond market, while inflating the short-term bond market. The world does still view the dollar as a safe place, but rest assured it is looking for alternatives. Canada was added to the world currency reserve list this past year, because the US was seen as too risky.

[tomsang]

Interesting article on rates. Is the future less dire for rates and bonds?

http://www.minyanville.com/trading-and-investing/fixed-income/articles/Interest-Rates-Are-Normalizing-ben-bernanke/8/12/2013/id/51249?camp=syndication&medium=portals&from=yahoo

[aclarridge]

Good article about performance measurement of bond ETFs.

http://canadiancouchpotato.com/2013/08/07/is-your-bond-fund-really-losing-money/

[tomsang]

Good article about performance measurement of bond ETFs.

http://canadiancouchpotato.com/2013/08/07/is-your-bond-fund-really-losing-money/

That was insightful.  We have not had extreme interest rate increases this year, so if interest rates increase in a steady manner then the pain may not be to terrible.  The Three year return is at inflation, so not really a win, but also not a loss.