Bonds have gone crazy

[Bumble]

The world of bonds just seems to get more and more crazy. According to Bloomberg and the FT, there is now more than $13 trillion worth of negative-yielding bonds in the world.

Nor is it just investment grade, sovereign bonds. There are now 14 euro-denominated junk bonds with negative yields.

So now you have to pay for the privilege of buying bonds with a serious risk of default, and still have a guaranteed loss in the event that they do not default.

The issue even extends to zero-coupon bonds. on 10 July Germany issued zero-coupon bonds and they were purchased at a premium of 2.64% over par. So now you can buy bonds with no dividend and be guaranteed to lose money whatever happens. I suppose this is an example of return-free risk.

I was also amused to note that the article in Investopedia on "Can a bond have a negative yield?" was recently edited and updated, because the previous version said "It is unlikely that a bond will have a negative yield but there are a few rare exceptions". I even have an old economics textbook that assures me that negative interest rates are impossible.

 

[sixgun]

I presume the logic is the yields will get even more negative and so the bond prices will go up and you can sell at a profit. It is the bigger fool principle to my eyes. A bigger fool will pay me even more for an even more negatively yielding bond.

[Elements]

Yeah it does seem crazy to me. This article was interesting

https://www.zerohedge.com/news/2019-07-12/theres-no-escape-one-japanese-bank-owns-over-half-trillion-us-corporate-bonds

Long article but summarising it says 0% yields in Japan meant big savings banks had to go abroad to find yield or else they’d go bust. What happens when the world goes Japan? At some stage surely it’s going to go horribly wrong, but for now the dance goes on

[Bumble]

I can understand why you might buy a bond yielding 1% in the expectation that rates will drop to zero and so its value will increase, but not why you would buy one at -2.64% and hope to sell it if rates go even further negative. If rates go further into negative territory, people will just buy whatever tangible assets they can and this will send asset prices soaring. There is no value in owning bonds in such an environment.

I can only suppose that the central banks themselves are the purchasers of these bonds. Having permanant negative interest rates is really a kind of debt jubilee by the back door.

[kimchi]

I'm so far from an 'expert' it's ridiculous, but the scenario intuitively strikes me as 'larger' forces at play behind the scenes that a humble individual would not even be able to begin to fathom.

Basically, big and unknown moves afoot.

We'll probably see it in hindsight when the likes of Soros or the Rothschilds (the latter being desperate for currency right now) manipulate it to make their blood money via a crash. Soros made a billion I believe crashing the pound out of the ERM on Black Wednesday. Even as a fledgling politics and economics student at the time at secondary school we all (well some of us) smelled that one coming from a mile away, and things haven't got any better since.

[goldmember44]

https://edition.cnn.com/2019/07/12/politics/mnuchin-congress-letter-debt-crisis/index.html

(CNN)Treasury Secretary Steven Mnuchin on Friday issued a warning Friday that the US government is at risk of running out of cash sooner than expected.

In a letter to Democratic House Speaker Nancy Pelosi, Mnuchin wrote that the US might default on its obligations as soon as early September, before Congress returns from its summer recess.

"Based on updated projections, there is a scenario in which we run out of cash in early September, before Congress reconvenes," Mnuchin wrote in a letter.

[KDave]

4 hours ago, Bumble said:

I can only suppose that the central banks themselves are the purchasers of these bonds. Having permanant negative interest rates is really a kind of debt jubilee by the back door.

Who are they stealing from by doing this, existing bond holders?

[Bumble]

I don't think they are stealing from anyone. They are acting as a buyer of last resort for bonds that nobody else would buy at such inflated prices. By doing this, they are keeping interest rates very low and causing asset values to rise. It is bad because assets such as real estate become so expensive that people cannot afford them, and also because it enables companies to issue huge quantities of debt to buy back their own shares, which creates instability.

[KDave]

 

4 hours ago, Bumble said:

They are acting as a buyer of last resort for bonds that nobody else would buy at such inflated prices. By doing this, they are keeping interest rates very low and causing asset values to rise.

It sounds like QE. Does this not devalue the currency? 

[Bumble]

A popular meme of the present is that the next big financial blow-up will be mainly concerned with corporate bonds. Companies have been taking advantage of extremely low rates and borrowing vast amounts. This leads to the companies being downrated in their credit rating score. There has been a huge increase in BBB rated corporate debt in the last ten years. The gap between BBB and BB is the difference between investment grade and junk grade. Many investment funds, including pension funds, cannot invest in junk grade debt, so any company that is downgraded to BB triggers a forced selling, pushing the price down. In a recession, or even the expectation of a recession, companies will be desperate to avoid being downgraded to BB, so they will sell assets and slash dividends to keep their earnings up.

 

[Pipers]

@Bumble So i take it that you are still buying Gold then, even at this high price?

[Bumble]

I own about as much gold as I plan to hold. I am buying into gold miners, since even with the recent rises, they are extremely cheap in proportion to the price of gold itself. Mining is a risky investment though.

[vand]

So much for the bond bubble bursting...

Bond funds have gone ballistic in recent weeks. TLT is pushing new highs:

 

Investors are now falling over themselves to lend money to the US Government over 30 years for less than 2%:

[Elements]

Take a look at Austria 100yr bond 😂😂

https://www.wsj.com/articles/stocks-for-income-bonds-for-speculation-11565878820

 

[JB3]

I just buy into my asset allocation, dollar-cost averaging on the way in and selling the winners on the way out.

That means I've got some bonds but buy fewer of them as the price rises / yield falls.

 

[vand]

Double top in TLT?

 

I trimmed by Bond position last week. Now just 4.5% of my portfolio.

[Minimalist]

On 15/08/2019 at 21:36, Elements said:

Take a look at Austria 100yr bond 😂😂

https://www.wsj.com/articles/stocks-for-income-bonds-for-speculation-11565878820

Not surprised. Wasnt it Coca Cola who issued a 7% 100yr bond not long ago

[Elements]

6 minutes ago, Minimalist said:

Not surprised. Wasnt it Coca Cola who issued a 7% 100yr bond not long ago

Not sure about that but wouldn’t surprise me, maybe the rate might though since 7% appears high at the moment. A year later on from my link and Austria participating once again. Why not I suppose at such low rates but all this borrowing, I can’t ever see it being repaid

https://www.bloomberg.com/opinion/articles/2020-06-24/austria-100-year-bond-pays-less-than-1-interest-it-s-normal-now