Announcement

Collapse
No announcement yet.

Inflation and Deficits Don’t Dim the Appeal of U.S. Bonds

Collapse
X
 
  • Filter
  • Time
  • Show
Clear All
new posts

  • Inflation and Deficits Don’t Dim the Appeal of U.S. Bonds

    https://www.nytimes.com/2022/01/30/b...ry-yields.html

    This is a great article. It explains the benefits of owning treasuries even with negative real rates. I feel crazy for holding them but I can't think of a better safe, liquid place to invest.

  • #2
    I might have misread the article but I didn't really get that it supported the benefit of bond investment for individual investors.

    The takeaway points for me are that bond purchase have remained strong DESPITE a lot of forces that traditionally dissuade buyers.

    The explanations offered for the counter-intuitive bond purchase numbers are:
    1) baby boomers are prioritizing security rather than returns and thus settling for crummy return.
    2) bond buyers are anticipating that the fed will reign in inflation
    3) bond buyers are anticipating the stock market to slow down in the future
    4) The fed may see interest rate hikes as counter productive.

    It seems like they are describing a collective bet many investors are making rather than evaluating its merit. Was this your take?

    Questions for the group
    1) The article mentioned that with all the low-interest bonds being gobbled up, the US is in a great place to do a bunch of deficit spending. "If governments ever wanted to engage in an aggressive program of spending, now is the time". If this strategy were adopted, wouldn't this drive up inflation and screw over people who are holding nominal bonds?

    2) I posted on several i-bond threads and have yet to be dissuaded from pursuing a strategy that maximizes ibonds as my primary or even sole fixed income allocation.
    Yearly caps and clunky treasury websites aside, it seems to me like it comes down to a simple question: Would you sacrifice any extra money that you might make through a) beating inflation, b) lowering of future interest rates, c) inverse correlation w/ bear markets at time of retirement for the guarantee that you would not lose money due to inflation or interest rate hikes? When you add tax-protected growth and no local/state tax it seems like a pretty good deal to me. Any thoughts?

    Comment


    • #3
      there isn't a good alternative. if you want liquidity and safety where else can you go? as long as treasuries have the highest risk free return what choice do you have besides stomaching negative real rates?

      Comment


      • #4
        I do think there is some market distortion that makes Treasurys less appealing for individual investors. There are many huge institutions have have to buy the lowest credit risk bonds there are. Some endowments have investing policies that require this. Many insurance companies must do this to maintain their credit ratings or even just to pass muster with their regulators. Giant banks are often required to hold government bonds by their regulators. Major corporations cannot open 100,000 CDs. If they want to hold large amounts of ready assets, the T bond market is the main place they can go. Plus the Fed has been buying bonds. All these together before considering wealthy individuals or cautious boomers means a big market for T bonds.

        For those of us who do not operate under these constraints, the main appeal of T bonds is that they take credit risk off the table, pay more than the bonds of the few other countries that are equally safe, and for US investors avoid foreign exchange risk.

        Comment


        • #5
          there isn't a good alternative. if you want liquidity and safety where else can you go? as long as treasuries have the highest risk free return what choice do you have besides stomaching negative real rates?

          what is the difference between on an individual level holding cash vs treasury at this point ?

          A 1 year Treasury value will go down with rising rates, cash will stay the same, What you are giving up is .75% return for now

          Comment


          • #6
            Originally posted by Random1 View Post
            there isn't a good alternative. if you want liquidity and safety where else can you go? as long as treasuries have the highest risk free return what choice do you have besides stomaching negative real rates?

            what is the difference between on an individual level holding cash vs treasury at this point ?

            A 1 year Treasury value will go down with rising rates, cash will stay the same, What you are giving up is .75% return for now


            Ok but with i-bonds you would avoid both the risk of inflation and rises in interest rate and they are just as safe and liquid (after 1 year). You just have to be willing to to give up whatever real return you'd get averaged over the good and bad years. No guarantee that number would even be > 0.

            Comment


            • #7
              What would be the fidelity equivalent of BND ? Like a total bond fund
              is something like that more diversified thus less volatile than long term treasuries?

              Comment

              Working...
              X