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Learning, Sharing, and Teaching => Investor Alley => Topic started by: intotherealworld on March 22, 2020, 07:07:37 AM

Title: Why are bonds dropping in price?
Post by: intotherealworld on March 22, 2020, 07:07:37 AM
Seems like this crash/recession is also causing bond ETFs to drop?

From my (very limited) understanding, I thought bonds normally do better when there is uncertainty and stocks are losing value?
Title: Re: Why are bonds dropping in price?
Post by: vand on March 22, 2020, 07:35:17 AM
Because you have to be a bit daft to lend money with the expectation of a negative real return.
Title: Re: Why are bonds dropping in price?
Post by: GreatLaker on March 22, 2020, 08:48:57 AM
It could be supply and demand. Bonds are marketable securities.

If individual investors are rebalancing from bonds to equities, that increases the supply and decreases demand for bonds, driving prices down. Portfolio managers may be doing the same thing for balanced mutual funds or ETFs.

Corporations hold government bonds and may be trying to sell them for cash needed for operations and payroll, again increasing the supply without corresponding demand.

I'm retired and don't have any workplace pension so I depend on my savings and investments for living expenses. I keep about a year of expenses in cash, plus a 5-year GIC ladder to insulate myself from the whims of the equity and fixed income markets, specifically for times like this.

This is a good thread on a Canadian forum:

Especially this:
VAB's last trade was at $25.13. Last year, at a similar date, it closed at $25.59. That's a -1,8% reduction in price in one year, but during the year it paid approximately 2.6% in distributions. So, its total 1-year return should be close to +0.8%. In contrast, VCN's last trade last trade was at $25.13. Last year, at a similar date, it closed at $32.84. That's a -23.5% reduction in price. Even if you add a couple of percents in distributions, you get a total 1-year return worse than -21%. It seems that bonds are doing what they're supposed to do, dampen the volatility of stocks in a portfolio.

VAB has experienced a significant 5.8% increase in price between the end of December 2019 and March 10. Since March 10 VAB gave that away. There's nothing dramatic about this. If bonds can go up in price in a short term period, it's normal that they can go down in price too.

There's way too much attention paid to short-term price fluctuations of bonds. Bonds are marketable securities. Their price is subject to the Law of supply and demand, But, unlike stocks, they have known future coupons at known future dates, and they mature on a known specific future date at a known face value. This greatly limits the fluctuation in value of high-quality short-term bonds, as small changes in value of short-term bonds lead to big yield changes.
Title: Re: Why are bonds dropping in price?
Post by: ol1970 on March 22, 2020, 09:18:43 AM
This is why Iíve preached do not own bond funds, own the actual bond.  They get marked to market like everything else.  If you own the actual bond and hold it to maturity (and the company does not go bankrupt), you get all your money back.  In a fund the bonds are pricing in risk. I own a few million of bonds well diversified in chunks no greater than $30k, most less than that.  Higher risk from an individual default, but the government just said they are backing all corporate and municipal bonds for the first time in history.  My bonds mark to market lower in value, but that will be returned as they mature.  There could also be a total systemic failure and they are just wiped clean.

I would be willing to bet thatís not going to happen, but the fact the markets have been juiced by free money from the FED and stock buybacks is going to prove the whole 4% rule a farce.

Do people realize that more stock transactions over the past decade were from corporate buy backs than, individual investors/mutual funds/hedge funds combined?  The party might be over for the 100% VTASX FIRE crowd.  I hope not even though Iím an 20% stocks allocation guy.