Bond Bubble?

[KDave]

Some of you will have seen this already no doubt; the first half of the video identifies a problem the BoE ran into regarding its latest round of QE. It seems no one wanted debased money for their low yield bonds initially;

So bonds are in high demand - holders do not want to sell. Why is this? Are they expecting lower, possibly negative interest rates into the future? Are they expecting sterling to continue to devalue? What is so attractive about bonds that is not as attractive from a good dividend paying stock? Please enlighten me, I am really struggling to understand the logic behind wanting bonds. 

[HelpingHands]

Pension firms are obliged to hold a certain percentage of 'high quality' 'low risk' investments so there isn't much choice.

I suspect hedge funds and other investment groups have similar requirements.

[Scuzzle]

There is the argument that with all this constant money printing there will come a time when they run out of stuff to buy with it and I can see the validity in this.

[KDave]

Does anyone know why funds are obliged to hold so many bonds? Is it self imposed/open to change or will we see them holding enormous amounts of negative yielding bonds in the future?

To be fair I can see the similarities of such bonds to previous metal in this environment - for example, it costs money to hold large amounts of gold/silver/platinum in a vault - we could arguably say that precious metals are already negative yielding in such case and that people hold them because the capital value is likely to increase or stay the same, or for speculative purposes. So in theory, bonds could also go negative yielding and still be viable in principle, so long as the capital value continues to rise? Is it likely that negative yielding promises will continue to increase in value? Or in other words, at what point though do people say enough is enough and look else where? 

There are some obvious differences between precious metals and bonds/paper promises that we are all familiar with, but it seems the majority do not share this perception yet. Perhaps it could be some many years, if ever, that negative yields become a problem? 

[HelpingHands]

I'm kind of guessing now but I assume it is to do with some regulations or other.  That way they will take less risk and not need bailing out by the tax payer should they go bust. 

[NumisNewbie]

12 hours ago, HelpingHands said:

I'm kind of guessing now but I assume it is to do with some regulations or other.  That way they will take less risk and not need bailing out by the tax payer should they go bust. 

As I understand it pension funds in particular have pretty tough guidelines in terms of investment. They're also not allowed to hold physical precious metals: ETF's are as good as it gets in terms of exposure. I don't think they're even allowed to hold mining shares, whether Barricks or juniors

[Scuzzle]

As as side note yesterday the S&P500, the Dow and the Nasaq all hit record highs together on the same day, the last time that happened was in December 1999 just before they all collapsed in the Dot Com crash.

[NumisNewbie]

23 hours ago, KDave said:

Some of you will have seen this already no doubt; the first half of the video identifies a problem the BoE ran into regarding its latest round of QE. It seems no one wanted debased money for their low yield bonds initially;

So bonds are in high demand - holders do not want to sell. Why is this? Are they expecting lower, possibly negative interest rates into the future? Are they expecting sterling to continue to devalue? What is so attractive about bonds that is not as attractive from a good dividend paying stock? Please enlighten me, I am really struggling to understand the logic behind wanting bonds. 

He's a very interesting character actually, Christopher Aaron: an ex CIA whistleblower who worked in the 'drone' department as an analyst for 5 years -up til 2009- then left in disgust at the futility and inaccuracy of drone strikes in the so called War on Terror. He's a peace activist now. Call it his day job.

Not to get too political of course. Carry on.

[KDave]

22 minutes ago, NumisNewbie said:

He's a very interesting character actually, Christopher Aaron: an ex CIA whistleblower who worked in the 'drone' department as an analyst for 5 years -up til 2009- then left in disgust at the futility and inaccuracy of drone strikes in the so called War on Terror. He's a peace activist now. Call it his day job.

Not to get too political of course. Carry on.

Agreed he is interesting, he seems to have a good understanding of the PM markets and a good gut/intuition so far given his analysis on the TA side since the bottom in December. Everyone is wrong eventually though.

[Scuzzle]

He is pretty good, I can never get my attention to last the duration of his vids though, they start off great and I'm there then slowly it becomes like the teacher in the Charlie Brown cartoons "wawawawah" which is a shame because as said he knows his stuff.  I do the exact same thing with Mcilvenay Finance vid every Wednesday.

[Bumble]

Commentators have been saying that bonds are in a bubble for several years now, and with good justification. The problem is, they keep going up anyway. The price of a bond varies inversely with the prevailing interest rate, so as rates progress to zero and on to negative, bonds can still go higher. The limit to the upside for bonds depends on just how negative rates can go. One would think, not more than about -1%, but who knows?

Pension funds are constrained to invest in high quality rated securities only. Depending on the jurisdiction, they may be unable to invest in real estate or commodities. They are mostly limited to high rated bonds and blue chip equities. They need long term investments, and they need a safe dividend. Bonds qualify on both counts, though the yields are so small, money is being progressively chased from bonds into equities.

Government bonds are also safer than cash. If you had a large bank balance and you were worried about a possible bank collapse, buying a bond effectively transfers the risk from you to the issuer.

The main risks to owning bonds are:
1. The issuer could default. Bonds issued by a government that controls its own currency need never default, because the government can print money to cover the debt.
2. Price inflation could lead to negative real returns. This can be avoided with index-linked bonds.
3. Interest rates could rise. This is unlikely in the present environment given the huge level of indebtedness of governments, corporations and households.

So the rationale for bonds is that AA-rated government issued index-linkers are better than a bank balance. It's not much of a case, but better than nothing.