Author Topic: Bonds - what if they are over 10% again  (Read 2593 times)

boarder42

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Bonds - what if they are over 10% again
« on: February 05, 2018, 01:34:09 PM »
So bonds particularly the 30 year note have hit 10% or higher before.  Maybe i dont completely understand how bonds work - but why would someone particularly a Retiree not just throw their full nest egg into a guaranteed 10% annual return.  You're going to lose to the market avg return of closer to 11% but when you add sequense risk to the scenario it allows your SWR to increase to 10% - whatever inflation is.

unless i'm not understanding how bonds work here.

dandarc

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Re: Bonds - what if they are over 10% again
« Reply #1 on: February 05, 2018, 01:40:57 PM »
If you can hold to maturity, your yield will match the percentage.  If you have to sell before maturity, you may ultimately do better or worse.  Or if you're in a bond fund, rather than individual bonds, you likely won't get that guaranteed 10% as rates are likely to change.

Also, inflation has been at 10% or more as well in the past - 10% - inflation could be negative.  Often correlates somewhat, as raising interest rates is often done to try to curb inflation.

Finally, if there is a 10% bond yield to be had, a lot of money will flow into bonds for the reason you've said - a 10% guaranteed yield is a pretty attractive investment to lots of people and firms.  That money will in large part come from stocks and therefore lower the price of stocks.  So you might see much lower multiples in the stock market than what we're used to today.

boarder42

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Re: Bonds - what if they are over 10% again
« Reply #2 on: February 05, 2018, 01:53:26 PM »
so do bonds not pay out the interest over time? they must be held to maturity? from what i read you could start cashing in your interest after 5 years

dandarc

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Re: Bonds - what if they are over 10% again
« Reply #3 on: February 05, 2018, 02:00:10 PM »
Depends on the terms of the bond.

Most bonds are coupon bonds - they pay the "coupon" rate every year.  Then when the term is up, the principal is repaid.

What I was saying is that if you buy a bond at a yield of 10%, you only get "10% guaranteed" if you hold that bond to maturity, or if prevailing interest rates are the same when you sell.  If you've got a 10% bond and a few years in, you need to sell, but similar bonds are yielding 12% at that time, you won't get full face value for the bond - why would someone pay par for your bond when they can get a better yield elsewhere?  Can work the other way too - if you're holding a 10% bond when prevailing rates are 8%, you're able to demand a higher price for that bond than face value.

Telecaster

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Re: Bonds - what if they are over 10% again
« Reply #4 on: February 05, 2018, 02:51:08 PM »
So bonds particularly the 30 year note have hit 10% or higher before.  Maybe i dont completely understand how bonds work - but why would someone particularly a Retiree not just throw their full nest egg into a guaranteed 10% annual return.  You're going to lose to the market avg return of closer to 11% but when you add sequense risk to the scenario it allows your SWR to increase to 10% - whatever inflation is.

unless i'm not understanding how bonds work here.

In addition to what dandarc said, the bond price basically reflects the perceived amount of risk you are taking for giving up control of your money.  US Treasuries are considered risk-free, in the sense there is no perceived risk of loss, but there is inflation risk and so tend to trade at about the rate of inflation, with maybe a small premium.

In order to get anything close to 10%, you need a high inflation environment or invest in riskier bonds.  That said, people who invested in bonds back when they were super cheap in the early 1980s or late 1990s made a bundle of money.  Only thing is, they didn't seem like good investments at the time. 




NoraLenderbee

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Re: Bonds - what if they are over 10% again
« Reply #5 on: February 05, 2018, 02:56:09 PM »
If bonds were paying 10% today, I'd be all in. Remember risk vs return. Guaranteed investments don't provide high returns. When bonds did pay 10%, inflation was 10% (or higher) and you could get 8% on a savings account.   In ye olden days, it worked more like you said--you put retirement money in bonds, and lived on the 4-6% interest. But with interest rates so low, it doesn't pencil out any more.

2Birds1Stone

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Re: Bonds - what if they are over 10% again
« Reply #6 on: February 05, 2018, 04:24:37 PM »
If bonds go to 10%+ it means a few things.

The yield rising that much means the NAV of existing bond fund would plunge, and the interest rate being 10%+ means inflation is nearly as high. It's not a good thing for the economy or investors.

Radagast

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Re: Bonds - what if they are over 10% again
« Reply #7 on: February 05, 2018, 08:10:30 PM »
Here's what I said earlier (a few improvements):
Quote
Interest rates are fundamentally based on perceived risk, and the extent to which people are willing to assign less importance to the future than the present. Bill Bernstein (The Four Pillars of Investing) give a brief history of real annualized interest rates which is approximately:
100% Hunters/gatherers
25% Ancient Greek marine insurance during times of war
12% French feudal usurers
4% Roman Empire at peak
2% British Empire at peak
0% Europe and Japan today.

Where do you think the US stands on this conceptual scale? I'd say 4% is the upper limit. Interest rates above 4% for a large stable nation such as the US are an anomaly, a "deep risk" which is not expected. The bond market seemingly agrees, as 30 year zero coupon treasury bonds are yielding about 3%.
A 10% yield indicates bond traders anticipate a serious risk to real capital within a decade.

Radagast

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Re: Bonds - what if they are over 10% again
« Reply #8 on: February 05, 2018, 08:15:30 PM »
so do bonds not pay out the interest over time? they must be held to maturity? from what i read you could start cashing in your interest after 5 years
What? They usually pay interest regularly beginning shortly after issue, except for a rare breed called "zero coupon" bonds which never pay interest. Bond funds pay out dividends every quarter or every month. You take dividends immediately in cash. After the bond matures you get your principal back (minus inflation).

PDXTabs

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Re: Bonds - what if they are over 10% again
« Reply #9 on: February 05, 2018, 09:08:05 PM »
Shit is bad if bonds are yielding 10%. With that said, my grandfather purchased 30 year treasury bonds with double digit yields in the early 80's and told me that he regretted not buying more.

I might start buying if the yield on the 30 year goes above 6%.

Radagast

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Re: Bonds - what if they are over 10% again
« Reply #10 on: February 05, 2018, 09:16:54 PM »
I might start buying if the yield on the 30 year goes above 6%.
I'd be interested if the ten year treasury yield minus trailing ten year inflation was greater than the inverse CAPE10 ratio!
(who can tell whether or not I'm serious?)

Bicycle_B

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Re: Bonds - what if they are over 10% again
« Reply #11 on: February 06, 2018, 04:17:37 PM »
I might start buying if the yield on the 30 year goes above 6%.
I'd be interested if the ten year treasury yield minus trailing ten year inflation was greater than the inverse CAPE10 ratio!
(who can tell whether or not I'm serious?)

@Radagast, I can't tell!  But it sounds like a logical position.  You're sort of saying if you could lock in bonds with a real return greater than stock earnings, you'd take it?

------

On the OP's question:
I'm assuming that when OP said "the 30 year note", he/she referred to the sale of 30 year bonds by the US Treasury.  The last time new US Treasury 30 year bonds were over 10% for very long appears to be 1979-1985.
http://www.macrotrends.net/2521/30-year-treasury-bond-rate-yield-chart
By eye, yields on the 30 year note during that time averaged in the neighborhood of 12%. 

But if memory serves, inflation was very scary at that time.  I was a kid then; that's what the TV news seemed to be saying.  So bonds were probably scary.  Looking back, prospective bondholders at the time probably had to worry about the risk of a hyperinflation destroying the value of the bonds, reducing the purchasing power of the bond's payments almost to zero.  US had just experienced the highest inflation in its history (1970s).  Inflation 1979-1985 was lower but still averaged about 6.8%, with lots of volatility:
http://www.in2013dollars.com/1979-dollars-in-1985

So bonds were offering a real (meaning, inflation-adjusted) return of maybe 5% pretax, with significant risk due to uncertainty about inflation.  But at the time, the S&P 500 had dividend yields close to 5%, without counting any capital appreciation:
http://www.multpl.com/s-p-500-dividend-yield/table

Underlying earnings for stocks on the S&P back then were between 9% and 13% of purchase price (P/E ratios from 7.x to 11).  So there were reasons to buy stocks instead of bonds at the time, even though stocks had just finished a decade (1970s) of terrible returns.
http://www.multpl.com/table

We have a long way to go before we would reach 10% returns on a new 30 year Treasury note.  If we ever get there again, I suspect things will feel differently than they do today. 

« Last Edit: February 08, 2018, 12:48:53 PM by Bicycle_B »