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@jemeriah2467
5 жыл бұрын
Never understood bonds, yields/prices, effects, now clear as mud. Will have to watch this one again with a fresh head.
@Pensioncraft
5 жыл бұрын
I hope it makes sense eventually jemeriah. Let me know if it doesn't, thanks, Ramin
@cliovxr
5 жыл бұрын
jemeriah Me too😂.
@Pensioncraft
5 жыл бұрын
Hi jemeriah I have a beginners course on bonds which you might find helpful "How To Choose A Bond Fund" pensioncraft.com/register/investment-for-absolute-beginners/how-to-choose-a-bond-fund/ Thanks, Ramin.
@tc9634
5 жыл бұрын
I took ages but once it clicks you'll never forget
@santiagojavier9742
5 жыл бұрын
@@Pensioncraft great video. Massive explosion in the 20-30 year US bonds in the last few days. I still don't get it why people is chasing negative yielding bonds. Thanks, keep bringing this type of videos
@kamilo4989
4 жыл бұрын
I appreciate how slow and concise you are with your explanations. Thanks.
@Pensioncraft
4 жыл бұрын
Thank you Kamile O! I appreciate you taking the time to comment. Ramin
@alexbright7735
5 жыл бұрын
Excellent learned a lot. Understood theory of bonds before but this video helped me understand the practical side of bonds. I have recently added 10% bonds due to high value of shares.
@Pensioncraft
5 жыл бұрын
That's great Alex, I'm glad the video was helpful. Thanks, Ramin
@Peter.F.C
5 жыл бұрын
Get out of both quick! It's obvious what the only safe liquid investments are in the current environment, and they both shine. The mega-wealthy have been offloading for several months. Berkshire Hathaway is all cashed up, as it was before the GFC.
@supremegifbot6880
4 жыл бұрын
I clicked on your vid looking to understand bond bubble and I didn't know this is the educational video I needed in my life. Bonds have always been hard for me to understand and you have made it easy. Instant sub.
@Pensioncraft
4 жыл бұрын
Hi Supreme GIFbot, Thank you for your feedback, i'm pleased you found it useful. Ramin
@kanokpornpoomsirivilai7018
5 жыл бұрын
This makes me really understand bond markets better. Thank you.
@Pensioncraft
5 жыл бұрын
Hi Kanokporn, I'm glad it helped! Thanks, Ramin.
@wadeswades2659
5 жыл бұрын
A natural teacher this chap.
@Pensioncraft
5 жыл бұрын
Hi Wades Wades that's very kind, thank you, Ramin
@Mackenway
5 жыл бұрын
A wonderfully lucid presentation as ever, thank you. What remains unanswered for me though is *who* (other than central banks) would ever choose to buy a bond in the secondary market at a price that makes it negative-yielding? As the income is fixed, it's a guaranteed loss (unless someone with an even higher appetite for loss comes along later and buys it off you at a higher price)! I can understand a money-printing central bank can be completely insensitive to price (and therefore to loss) in its bond purchases, if it is aggressively committed to crushing yields on govt bonds down to zero and below, in pursuit of its monetary policy objectives. But which private sector entities buy at a negative yield, and why? One candidate that comes to mind is automatically rebalancing retail funds which promise to maintain a fixed ratio of govt bonds in their portfolio relative to shares and non-govt bonds. If stock prices surge relative to govt bonds, then am I right in thinking that such funds are effectively forced to sell stocks to buy govt bonds even if the yield on the latter is negative? Sorry for the long question and thanks again
@Pensioncraft
5 жыл бұрын
Hi R Mack institutional investors don't intend to hold a negative yielding bond to maturity. The idea is that the yield may fall further so they can sell at a profit. Some banks have a strong incentive to buy government bonds like bunds because under Basel banking rules they carry zero risk weighting and shore up the regulatory capital of the bank. Insurance companies often buy government bonds for a similar reason. There's a huge demand for bunds and not much supply because the German government is being quite frugal and doesn't issue a huge amount. Hence the demand is outstripping supply and this forces up price and pushes yield down. Thanks, Ramin.
@rf9562
5 жыл бұрын
im really happy with my VEMT, decent monthly dividend pays which covers the annual fees for the rest of my investment. Great and complex video !
@Pensioncraft
5 жыл бұрын
Hi Róbert Fenyvesi I also like the juicy dividend, but I'm aware of the risks of lending my money to EM governments. But I think it's less risky than buying EM equity. I might reconsider my bond allocation if the US actually shows signs that it's going into recession. Thanks, Ramin.
@rf9562
5 жыл бұрын
@@Pensioncraft US recession prevent video would be really useful and wanted Thanks :)
@bmwofboganville456
5 жыл бұрын
Good level-headed video. I am wary of commentators moaning about the Fed or stating that interest rates are too low. Who knows, and if one is diversified, who cares!
@Pensioncraft
5 жыл бұрын
Thanks Forestman.
@Lawliet734
4 жыл бұрын
One year after this video was published, yields are even lower and the amount outstanding (national debt) is even higher!
@jrpasinski
5 жыл бұрын
Loving the content. PensionCraft my new favourite KZitem Channel! :D
@Pensioncraft
5 жыл бұрын
Hi James, that's great! Thank you, Ramin.
@trollface1994
5 жыл бұрын
Thank you for this lovely informative video. But please explain to me why this Federal Bond at 08:19 has a 0% Coupon? What is the purrpose of this, and why would anyone buy this?
@Pensioncraft
5 жыл бұрын
Hi Troll Face thank you! Zero-coupon bonds are bought primarily to preserve capital i.e. given the choice between buying equity and bonds investors are choosing to buy safe assets due to fears about global growth. Some institutional investors (pension funds, insurance companies, hedge funds...) may buy these bonds with a view to sell at a capital gain if they think yields are going to fall further before the bond matures. Thanks, Ramin.
@AniishAu
4 жыл бұрын
@@Pensioncraft Dear Ramin. Specifically in the case of Troll Face's question: Are you saying that institutional investors buy a 0% bond because if interest rates go negative they can sell them for a profit? and/or if there is a stock market crash, at least 0% is better than -10% from equities? Or does one imply the other: a stock market crash is likely to lower interest rates and result in a profitable bond sale? Thanks for your efforts! Aniish
@liangfen
5 жыл бұрын
Thank you so much for this clear explanation! Subscribed.
@mikesmith3235
5 жыл бұрын
Ramin - thankyou that was great, informative and reassuring in equal measure. I have been pondering at great length on VLS40 v VLS60 or even VLS80 and this has helped me a lot in reaching a decision (VLS60). Keep up the good work!
@Pensioncraft
5 жыл бұрын
Hi Mike that's great to hear the video was helpful for you. Thanks, Ramin.
@GowthamNatarajanAI
5 жыл бұрын
Very well explained
@Pensioncraft
5 жыл бұрын
Hi Gowtham thank you! Ramin.
@zerokelvin3626
5 жыл бұрын
Thank you for this crisp explanation
@wildlifeireland9514
5 жыл бұрын
Get alot.of knowledge from your videos. Thanks
@Pensioncraft
5 жыл бұрын
Hi Wildlife Ireland thanks, Ramin.
@ChadFi
4 жыл бұрын
What a fantastic video, great job! Thanks for your time.
@Pensioncraft
4 жыл бұрын
So glad that you enjoyed it K H. Thank you for your comments.
@jbullionaire2749
5 жыл бұрын
Excellent explanation!
@Pensioncraft
5 жыл бұрын
Thanks J BULLIONAIRE!
@matthewapps3465
Жыл бұрын
It would be great to see a retrospective on this
@x2x3456
5 жыл бұрын
People worry too much. The main thing is having time in the market and reinvesting your income! If rates do rise, and rise on a consistent basis, at least we will be in a higher income scenario. If they fall prices go up. Start early, reinvest your dividends, and play the long game!
@Pensioncraft
5 жыл бұрын
Hi Nathanial, I agree completely. As long as bonds aren't much above the speed limit that I discuss you can even make a total return gain while rates rise. But I think many people don't appreciate that what constitutes a catastrophic drawdown for government bonds (say -10%) would just be a minor correction and shrugged off by equity investors for whom a big drawdown is more like 50%. Thanks, Ramin.
@sanjay1983
5 жыл бұрын
Another great video. Really interesting to hear about the neutral rate estimate from the Bank of England, especially given a lot of people are trying to lock in long term mortgage rates because of a fear of rates jumping back to those 5% levels.
@Pensioncraft
5 жыл бұрын
Hi Sanjay yes that's why I wouldn't fix my mortgage personally. One reason why the Bank of England might raise rates is to stop capital flight and to shore up the currency if things turn south, but hopefully that's not going to happen. Thanks, Ramin.
@gerry2345
4 жыл бұрын
I like this vid. Good insight.
@Pensioncraft
4 жыл бұрын
Thank you GerrysPlace
@nubianra6965
5 жыл бұрын
My good fellow you are a great Speaker.
@Pensioncraft
5 жыл бұрын
Hi Nubian Ra thank you very much. Ramin.
@kevalpatel2106
5 жыл бұрын
Excellent. Very informative! Butm if the BoE going to keep the rate arround 2~3%, how they are going to stabilize the economy in recession? QE?
@Pensioncraft
5 жыл бұрын
Hi Keval, 2% to 3% is just the equilibrium rate and policy may overshoot. However, even if Bank Rate just reaches 2%-3% it still leaves some room for cutting. There are also other unconventional monetary policies that could be used to stimulate inflation such as asset purchases an programmes like the Troubled Asset Relief Programme (TARP) which were effective in the US during the 2008/9 financial crisis. Thanks, Ramin.
@Peter.F.C
5 жыл бұрын
@@Pensioncraft The IMF has been telling the central banks to tryout deep NIRP in the next crisis, that is, deep negative interest rate policy. They've been peddling this latest madness for a few years now. Alan Greenspan, the principal architect of the GFC, has recently been on TV spruiking it in the US.
@Winchester001
4 жыл бұрын
"seek independent financial advice"? I had a financial advisor before the last crash. Well, it crashed as we all know. My portfolio crashed accordingly, and I now realize that he should have advised me to move into bonds or gold before the crash. He didn't, I lost out, he took his fees, eventually, I told him his services were no longer needed. It's a case of I'll take your £500 a year and give you dud advice. For goodness sake, did he not know there was an almighty housing bubble?
@christianc8265
4 жыл бұрын
that is because most advisors don't know anything better than you do. they have been told to make a scoring and sell you equity or bond funds based on that score. the sad truth is that only with a lot of money you get to better advisors. most of the time you will be better of looking for a robot advisor and change your riskawareness from time to time. there is no PhD need to see that we currently are in a very weired market and you would be better of getting more conservative.
@davidramsbottom7703
4 жыл бұрын
£500 pa - you got off very lightly. Typical IFA running a £1m portfolio (which sounds huge but it is what you want if you are 60ish coming up to retirement, and your household wants to be able to draw a taxable income of £40k pa, increasing with inflation...) would be charging more like £6k to £10k, and the funds they pick and those funds' costs will eat up about the same again, maybe rather more.
@philltomlinson1
5 жыл бұрын
I do agree that the UK Government like all major economies will keep interest rates low for a long time as they have little or no option. Mortgages, high levels of Government Debt, sluggish growth/productivity and Brexit all prevent them rising. However what happens, not if, but when inflation returns at some point even to 3-4% levels and Governments can't raise rates easily due to the problems listed above. The temptation is to still keep rates low and bond buying programs in place, in which case feedback loops can develop, inflation feeds on itself, interest rates rise but at a slower pace than inflation. While the UK government may not technically default on the original principle of a bond they can partially default in the form of inflation, exactly what they did in the 1970's. I think this is the real worry to medium and long term bonds. Its quite clearly a bubble (40 year bull market, lots of speculation and actively inflated by central banks) and like all bubbles, it will pop at some point and will pop badly as panic and human emotions can exaggerate moves to the downside. Only no one knows when this will happen next year, 5 years, 10 years time etc. There is some quote where Warren Buffet was asked are bonds like picking up a nickel in front of a steamroller and he said its even less than a nickel. He has been on the record if he could easily short medium to long bonds he would. For me equities are far less risky, I don't like bonds at all. By the way, great videos some really good analysis in them. Keep it up.
@Pensioncraft
5 жыл бұрын
Hi Phil, inflation seems to be very reluctant to return even though we are at the lowest levels in unemployment in the UK and the US for decades. Central banks are now very diligent about keeping inflation in check and would have to act aggressively to stave off very high inflation if there were signs it was returning. Unlike equities bonds seldom deviate from fair value so I don't think it's meaningful to say that bonds are overpriced. Sure - yields are low but the reasons for that (e.g. low growth) aren't likely to go away in the near future. Asking an equity fund manager like Warren Buffett about bonds is going to get a predictable response. Thanks, Ramin.
@philltomlinson1
5 жыл бұрын
@@Pensioncraft I suppose my real point is, no asset class is riskless and thats one of things I have a different opinion about in your videos when you state bonds are low risk. Bonds can in fact be very risky and have historically been risky at periods where the temptation to inflate has been present. Central banks were around in the 1970's and everyone knew that something needed to be done about inflation but it was harder then expected to get back under control. Just because Central banks have a remit on inflation does not mean it will be easy to control if it does rise in the future, or they may even want/change inflation remits if households/governments have high levels of debt that require low interest rates to service it. Central Banks have a mission statement of ensuring financial stability but we still had the 2008/09 banking crisis, the worst crisis in a lifetime. Bonds have been risk free and in a bull market for 40 years so people now believe them to be risk free and think they will always be able to make money, but conditions can change. For me a 10 year bond with an interest rate of only just over 1.5% return just seems like a massive risk - especially when no one know whats rates will be or inflation. And especially since bonds have been in a bull market for 40 years, as your graph on interest rates showed, they started off at historic highs in the early 1980's and are now at historic lows so the current bond bubble we have in unprecedented. Regarding Warren Buffett he did say regarding the early 1980's he wished he had bought a load of long bonds as the returns were so good and Paul Volker eventually got inflation under control. He also said around 1998/99 equities were grossly overvalued and over the next tens years Investors are going to be very disappointed in their returns which proved to be very accurate. So he is pragmatic and does not always talk up stocks, he does not need to do the hard sell. But everyone has to make their own call on these things and as you have said in past videos most people should just but the lifestyle or pension target date funds that will include bonds. But I don't agree with the statements bonds are safe or low risk. Bonds can be just, if not more risky than having money in a low interest current account. At least the money in a current account if conditions change you can buy other assets quickly, while in medium/long bonds you are stuck until maturity in something that has little to no compensation compared with long term inflation rates.
@Pensioncraft
5 жыл бұрын
Hi Phil you're absolutely right - bonds, like any asset class, are not riskless. But compared to equity government bonds are safer over the short term. Of course, it depends on the duration of the bond, so short-term government bonds are more cash-like and you're taking less interest rate risk. But do you really think the risk of, say, a UK gilt fund is bigger than the risk of a FTSE 250 tracker? I'm not sure how that could be justified. In terms of liquidity, there is a huge secondary market in government bonds and so it is very easy to sell your government bond or, more likely, your government bond fund. Equity has also seen a decade-long rally and valuations in the US are getting difficult to justify given corporate earnings are weakening. I'd say that in two likely scenarios i.e. an equity selloff or a period of extended sluggish growth without much inflation then bonds would make sense for many people as part of a diversified portfolio. Thanks, Ramin
@philltomlinson1
5 жыл бұрын
" But do you really think the risk of, say, a UK gilt fund is bigger than the risk of a FTSE 250 tracker?" I do believe that FTSE250 tracker is better than a bond tracker and I have a couple of reasons for that. 1) UK equities are undervalued due to the uncertainty of Brexit. The index has gone no where for the past 2 years and the yield on it is actually quite high. 2) 10 years may seem like a long bull market (although technically there has been around 20% pullbacks along the way - depends on the definition of bear market) however bonds have been in a 40 year bull market. So I could say why would a bull market in stocks end after only 10 years when bonds have been win-win for 4 times that duration. The 1980s-90s was a two decade bull market and any pullback in the US market was brief and recovered in no time. 3) I think the bull market in stocks can easily go on for another 5-10 years and the big reason for this is Central Banks. They are traumatised by events of the great crash in 2008/09 as it shook their credibility and consequently I believe will do whatever it takes to ensure the stock market does not sell off in any substantial way. Its now the Central Bank "put". We have already seen this in the US where late 2018 the stock market had a sharp 20% pullback when Powell and others were continuing with raising rates. Since then they have done a full 180 turn and said they are now looking to cut rates when in conventional terms we are near the end of the business cycle (low unemployment, long period of growth, confidence). But I believe like many others they will prop up stock prices due to the fear of history repeating itself. Same applies for all Central Banks. The UK has now said it will look to cut and the EU central bank there is more chance of pigs flying before they raise rates and will continue with more monetary easing. In doing this however they are raising the risk of higher inflation in the future. Also with stocks I get dividends, the FTSE250 is over 3%, above many bond returns. Stocks may selloff but as we saw in 2008 it only took around 3-4 years to bound back (and if you pound cost average you buy low priced stocks and still get all the dividends).
@gigiduru125
5 жыл бұрын
@@philltomlinson1 yeah, FTSE all world index has a dividend yield of 2.2%. Don't see that going to less than 1.5% in any recession, but I don't care that much about it anyway. SP500 has 1.7%. The interest rate risk on bond funds which already have negative yielding bonds in them is kinda high. I trust all the businesses of the world more than the government 😂
@dunk8157
4 жыл бұрын
This is excellent, thanks, have been thinking I shouldnt be buying bonds but it seems they are safer than I thought.
@Pensioncraft
4 жыл бұрын
Hi Duncan Haskell, Thank you for taking the time to comment. Ramin
@andrewhennessy8864
5 жыл бұрын
Very interesting. Have you done a video on the value of options, and how it changes over time? Thanks
@Pensioncraft
5 жыл бұрын
Hi Andrew, no I haven't done a video on that but I've written a book for professional investors called "A Financial Bestiary" which has lots of options stuff (equity options, interest rate options, FX options etc.) nakisa.org/financial-bestiary/ Thanks, Ramin.
@mutton_man
5 жыл бұрын
Hello pensioncraft, I wondered what your thoughts are on holding cash rather than bonds. As cash has zero correlation to share and no worries of capital losses. Some saving account at 1.4%. do you think it fulfills the role of lowing risk of a portfolio better than bonds or do you think cash returns are too low that it's pointless keeping it in cash?
@Pensioncraft
5 жыл бұрын
Hi Mutton Man that's a good point which is that given low government bond yields if you can get cash returns which are higher than bonds then cash is a good diversifier (almost zero volatility, zero correlation with equity) and if it's in a cash ISA it gets the FSCS guarantee. Thanks, Ramin.
@victorquirola7277
5 жыл бұрын
Really good explained!
@MiloBowman
5 жыл бұрын
very good video, thanks.
@Pensioncraft
5 жыл бұрын
Hi Milo, thank you very much, Ramin.
@Sir_Pumpington_Of_Dumpenshire
3 жыл бұрын
I don't get it. If the yield is negative, does that mean that the value of your money, sitting in a the form of a bond, is decreasing by that negative percentage?
@sunshinejones8643
5 жыл бұрын
This only dawned on me this week. Rebalancing my vanguard portfolio buying short term uk bond. As I am 50, I will do 50% in s&p and 50%in short term bond
@Pensioncraft
5 жыл бұрын
Hi Sunshine Jones that's interesting. Are you buying short term bond funds to reduce your interest rate risk? Thanks, Ramin
@tc9634
5 жыл бұрын
Do you mean Vanguard UK Short Term Investment Grade Bond Index Fund? I like that but it doesn't diversify much against equity swings and it's a global non-goverment bond fund. Also why not buy UK equity? With a completely average valuaton, a yield of 4%, and inflation and real growth in the 1-2% range, I expect a total return over the 2020s of 6-8%.
@Sylvan_dB
5 жыл бұрын
Do you need access to 50% of your portfolio at any time? That is the only reason I'd put that much in bonds, even short term. I'm well under 20% cash and bonds now, and wondering if I should up that a little bit. First goal though, is to increase portfolio income. If the income is sufficient (and sufficiently stable) I won't need as much available in cash and bonds. However at current bond yields (what yield?), company dividends are my choice.
@sunshinejones8643
5 жыл бұрын
@@Pensioncraft whilst not currently at risk of any interest rate rise. I am mindful that I need to hedge what I have to mitigate any potential volatility.
@sunshinejones8643
5 жыл бұрын
@@Sylvan_dB ordinarily they say take away your age from 100 to get your bond ratio. Which is why I am doing 50% bond investment.
@investmenttudor1659
3 жыл бұрын
1st March 2021: Bonds remain unappealing and should be avoided says legendary investor Warren Buffett
@RandomGuyOnYoutube601
5 жыл бұрын
I am not saying that the bubble must burst right now, but I am still not buying bonds with this yield.
@johnd4348
5 жыл бұрын
Now I understand bonds. at least better than I did.
@Pensioncraft
5 жыл бұрын
Hi John that's great! Thanks, Ramin.
@notme855
5 жыл бұрын
Excellent! Lots of information. I am rethinking my bond allocation.
@Pensioncraft
5 жыл бұрын
Hi Not Me, thank you! Ramin.
@jingleole
5 жыл бұрын
Hello Ramin,thank you for this video which has clarified a lot of misinformation about negative yielding bonds. I wanted to ask you if you have a link or know of where I can get access to that stock/bonds matrix for the US like the one you showed for the UK in 4:20 of this video? keep up the good work! Thanks,Steve (newly subscribed)
@jaiho1177
5 жыл бұрын
I would also like to view a similar matrix
@2711marcus
3 жыл бұрын
Hi Ramin I have a question. If there was a crash would there be a demand for bonds being as the yield is just above zero? 🤔
@2711marcus
3 жыл бұрын
Maybe it would be a better idea to not buy bonds right now and keep that part of your portfolio in cash or maybe even buy some Bitcoin dare I say it 😁
@MrMercury07
5 жыл бұрын
Dont you think eventually nefative yielding bonds should go to their long term value which is really zero since there is no incentive really to hold assets which have a guaranteed negative value? Or is there a floor on the value of a bond
@Pensioncraft
5 жыл бұрын
Hi Manoj the reason why investors would buy, say, a German bund with zero coupon (remember the coupon can't go negative) is capital preservation. In other words, they want to buy something safe that won't lose their capital because they believe that equities and other risky assets will lose value. When a bond is about to mature you get your £100 principal back so the price always returns to £100, it's called "pull to par" (the par value is £100). So no the value of a German Bund, a UK Gilt, or a US Treasury bond will never fall to zero even if rates are negative. Thanks, Ramin.
@mithra2396
5 жыл бұрын
thank you...
@warrenapepuffet4612
5 жыл бұрын
it is a great explication
@Pensioncraft
5 жыл бұрын
Hi Pc Ng thank you! Ramin.
@MrRyanmcmahon
5 жыл бұрын
Do you always want to sell your bond before it hits maturity?
@Pensioncraft
5 жыл бұрын
Hi MrRyanmcmahon no you don't. You always have the choice of waiting to maturity. If the yield is negative when you buy the bond then you will almost certainly make a loss by holding to maturity. Most investors get exposure to bonds via bond funds. These often have to sell bonds before maturity e.g. because the size of the fund shrinks if people sell their holding so the fund has to sell its assets to keep in line. Thanks, Ramin.
@MrRyanmcmahon
5 жыл бұрын
@@Pensioncraft Ramin, Thank you for t he response. I just bought VTEB through vangaurd which is tax exempt. I feel i bought at the high end but had to start somewhere....It 's yield is positive...... $53.40 30day SEC yield as of 09/19/2019 1.64%A Expense ratio 0.08% 52-week high $54.10 on 08/28/2019 52-week low $49.91 on 11/06/2018 ........I want to invest in S & P 500 but now it's a bit high at $276/ share......
@philiproth3676
5 жыл бұрын
A sovereign selling bonds at a negative interest rate is essentially defaulting on debt.
@mskmsk7174
5 жыл бұрын
Well put.
@MrFill
5 жыл бұрын
How did you compare us 10 treasury vs sp500? Where did you get the chart for us10 bond?
@Pensioncraft
5 жыл бұрын
Hi nitro cams I generated the graph in the statistical language R using the ggplot library. In fact, it's part of my course "(Almost) Everything You Need To Know About Finance from Robert Shiller’s Data" pensioncraft.com/register/know-finance-from-shiller-data/. Robert Shiller kindly provides that long-term time series but doesn't give a total return index for equity or bonds. For the 10 year Treasuries I have to make a few assumptions about coupon and duration which I spell out in the course. Thanks, Ramin.
@FedericoLov
5 жыл бұрын
The incredible fact in the UK is that any retail investor can buy equity easily but bonds which are safer are always out of reach
@Pensioncraft
5 жыл бұрын
Hi FedericoLov the more surprising thing is that bonds get almost no coverage in the media, so few people understand them. Now that we have ETFs it's really easy to get bond exposure very cheaply. But you're right single bonds are seldom within reach of most investors, but given the lack of understanding of bond pricing that might be just as well. At least with a bond fund you get some diversification. Thanks, Ramin.
@russelllowry1061
5 жыл бұрын
When you artificially keep rates too low, for too long, inflation will show up somewhere, and the bond market is inflated beyond belief. The government is telling us that there is no inflation, but look at autos, housing, medical costs. Low mortgage rates have inflated housing and rental costs. The stock market is also inflated, but nothing like the bond market. When the bond market collapses, and it will, that money will have to go somewhere, and it may ultimately help the stock market, where you can still get some yield. As bond rates eventually rise, then money will flow back out of stocks, and some sort of equilibrium will be found. When the bond market crashes, it will be quick and painful. A rise in mortgage rates will also cause a correction in real estate, which we need. A rapid rise in interest rates will impact our national debt, big time, that is my worry.
@johnblaker2454
5 жыл бұрын
Exactly! The inflation exists, just not in CPI. Its in auto loans, housing, student loans and asset prices. Thats what drives me nuts about the progressives right now. They are focused so hard on inequality but they are so blinded by ideology they can't see that government intervention is what is fueling all this "debt for poor people, asset inflation for rich people". The gap is increasing, because of government intervention; specifically central bank intervention.
@MyFootballfootball
5 жыл бұрын
Good evening Ramin! I was wondering if you could help me with something. With how unstable the pound is would buying into stocks and shares guard against any future fluctuations? I'm currently invested in Vanguard 100 and FTSE Global All Cap Index Fund and moving more into the latter. Hypothetically If I invested 5k now would it be worth more than say in 4 months should a no deal brexit occur or is the fact the investments are USD denominated mean that fluctuations in the pound would weaken it regardless. Hope you understand what I mean and thank you in advance :)
@Pensioncraft
5 жыл бұрын
Hi MyFootballfootball my article and video on How To Invest During Brexit may be helpful: pensioncraft.com/how-to-invest-during-brexit/ Thanks, Ramin.
@jayyyzeee6409
5 жыл бұрын
I still don't understand how an increasing bond price causes a bond holder to lose money and, assuming a government doesn't default, why there could be any risk whatsoever. Putting aside dividends, if you buy a bond for $100 at 0% interest for 2 years, you'll get $100 when it matures regardless of its price fluctuation during the term, right? Where's the risk? What am I still missing?
@Pensioncraft
5 жыл бұрын
Hi Jayyy Zeee as I explain in my not-paid-much-for course on bond funds the risk is opportunity risk pensioncraft.com/register/investment-for-absolute-beginners/how-to-choose-a-bond-fund/ i.e. if you lock in a rate (even 0%) then you lose out if rates fall during your locked-in period. The longer you're locked in the longer you miss out which is why the duration of a bond increases its price volatility. But you're right that if you buy a government bond with almost no credit risk then your risk of capital loss if you hold the bond to maturity is almost zero. Bond funds are continually buying and selling bonds and so they are affected by movements in the yield curve just like single bonds, and so the effective duration (which is roughly the fixed-rate lock-in period) is a good measure of interest rate risk. Then there's also the risk due to inflation which erodes the capital value of your bond, and this is particularly important for long-lived bonds. That's why I talk about inflation-linked bonds in the course too. I'm happy to discuss this further ramin.as.me if you want a quick chat (ten minutes is free!). Thanks, Ramin.
@markusass
5 жыл бұрын
Economics is such a complex picture, and everything seems interconnected today, with the main concern being contagion effects. The bond yields and thus interest rates in the west appear to be fake. I realize governments around the world, especially in Europe and the USA, need low rates/bond yields to stay in operation, but surely at some point, either a currency crisis or something else, is going to pop the bond markets (and by extension, government?)
@JasonStevenRyan
5 жыл бұрын
excellent
@Pensioncraft
5 жыл бұрын
Hi Jason, thanks!
@fin2064
Жыл бұрын
it is 2023, amazing how much things have changed!
@jamesr.9943
5 жыл бұрын
Could the dividend not be negative in a climate of negative interest rates?
@Pensioncraft
4 жыл бұрын
Hi James, government bonds aren't issued with negative coupons. The lowest a coupon would be is zero. Consequently a government bond fund will never have a negative dividend. I've never come across a fund with a negative dividend, I imagine it would't be very popular! Thanks, Ramin.
@petersplants
4 жыл бұрын
march 18. The bond market seems to be in freefall along with stock market , why is this?I thought in a stock market crash the government bonds were a safe haven?
@joecurran2811
4 жыл бұрын
How can the coupon be zero if the yield is negative?
@Lawliet734
4 жыл бұрын
@Joe "How can the coupon be zero if the yield is negative? " Yield does not depend solely on coupon. If there is no coupon, the yield is negative if the price is above par.
@Sylvan_dB
5 жыл бұрын
In the history of bonds which shows minimal losses, how many times have we just before the loss had $12 Trillion invested at negative rates? How many times have we had more than $12 Trillion at negative rates? Maybe now the historical record of bonds is less applicable? In addition, the "efficient frontier" risk vs return curve is based on the assumption that risk is the same as volatility. Volatility is only a risk if you assume you must sell at any point in time. Inflation is a different risk not accounted for by the "efficient frontier." There are others. As for the U.K. "has never not paid its debt," "never" is a very long time. Maybe you meant in the modern monetary era? Unfortunately having burned the split tally sticks prior to 1600 the accounting has often been questioned.
@Pensioncraft
5 жыл бұрын
Hi Sylvan Butler you're right there has never been this amount of negative yielding debt in the past. But in order to make a large loss with bonds yields would have to rise rapidly. My point is that the reason why yields are low (aging population, low productivity) are unlikely to go away any time soon. Also there were some very extreme financial conditions during that 70 year period such as the Vietnam War which cost $1 trillion in today's terms, 14% US inflation in 1980, and ten recessions including the worst US corporate earnings recession in living memory. You're right about volatility not equalling risk but I was trying to illustrate the different risk for the _coupon_ of a UK government bond, which is almost zero, and the capital gain of a bond which is dependent on duration and much larger. I love This Time Is Different by Reinhart and Rogoff which shows that the UK did default but as you say that was long ago. For example in 1749, 1822, 1834, and 1888 the UK re-denominated its debt to a lower coupon (a haircut in modern bond parlance). For those who don't have the book there's a nice paper here on the "Forgotten History of Domestic Debt" www.nber.org/papers/w13946.pdf Thanks, Ramin.
@TDUNKS21
5 жыл бұрын
Where did you get the chart on vanguard funds and their respective correlations?
@Pensioncraft
5 жыл бұрын
Hi TDunkz I use R and the ggplot and ggdendro packages. It's all open source software which you can download for free, but it's a bit of a steep learning curve if you're not used to it. I've got some R courses if you want to have a go pensioncraft.com/courses-we-offer/ Thanks, Ramin.
@NUFCMVFC
5 жыл бұрын
Thing is Bonds don't have to move far beyond the 5% mark he says isn't so bad in order to have a significant adverse impact on the property market for example. Not sure Equities is the most valid comparison here?
5 жыл бұрын
NIRP bonds will reach $ 20 trillion, at the end of 2019 - It now rises exponentially...
@bulalirozani4392
5 жыл бұрын
5:51 How would one calculate the minimum risk portfolio?? To obtain that 75% to 25% ratio?
@desertshadow72
5 жыл бұрын
Put 3/4 of your investment into bonds and the rest in a major index. I dont' understand your question
@Pensioncraft
5 жыл бұрын
Hi Bulali for two funds you can solve the minimum risk portfolio exactly, but for more complicated portfolios I use some code written in R for solving constrained quadratic optimisations (it's called the "quad" package but there are other R packages that can find the minimum volatility portfolio or risk parity portfolio). Thanks, Ramin.
@bulalirozani4392
5 жыл бұрын
Thanks Ramin, can I use Python instead of R for quadratic optimisation??? And thanks for the amazing content keep up the good work.
@Pensioncraft
5 жыл бұрын
Hi @@bulalirozani4392 sure I think there's an example here towardsdatascience.com/efficient-frontier-portfolio-optimisation-in-python-e7844051e7f Thanks, Ramin.
@aurelian2012ify
5 жыл бұрын
R* seems like one of those bubble justifications we saw before the housing bubble (housing prices only go up and they are not making any more land) or before the dotcom bubble, or the 1980s oil bubble (we will run out of conventional oil in 10 years), or the 1960 (managed growth/Phillip's curve/the fed can prevent any down turn), etc. The video promises to tell us what will happen if the bond bubble bursts, but then says in the end, we wont because it never will. It is only informative in that it tells what mythology bonbons traders are pedalling to themselves and their clients. Not what the downside risk is if the federal reserve post financial crisis balance sheet explosion ($800 billion to $4.35 trillion) ever comes home roost with any number of scenarios (increased monetary activity, war, loss in faith in the government, increased economic activity, or another downturn that will make the fed increase its balance sheet 5 fold again).
@Peter.F.C
5 жыл бұрын
R* is just another Rudyard Kipling “Just So” piece of theorising. A highly speculative “theory” without any real justification underpinning it. There are numerous “Just So” theories that economists dream up, and, I expect this one, which has little empirical support, will end on the scrap heap like the others. That said, it will still have adherents, they all do, long after empirical evidence has refuted them. In fact the refusal of erroneous economic theories to die has caused the coining of the term “Zombie Economics”. See, for example: www.blackincbooks.com.au/books/zombie-economics I think the term was originally dreamt up by Paul Krugman, but I could be wrong.
@FARBOLUOS
5 жыл бұрын
William Bauer I am with you. The situation is insane. But in most scenarios governments are going to inflate. Just don’t keep other than hard assets. No debt and enough cash for at least 6 months.
@joecurran2811
4 жыл бұрын
In fairness, he does say there will be a bond decline, just not a huge one.
@lucasatilano8008
5 жыл бұрын
Good analysis. However, I think you’re underestimating the speculative forces driving bond valuations at the time. Also, I was OK with government debt having negative yields but now there are $1 Trillion in corporate debt with negative yields. Good luck to those “investors” if we have good economic news like cancel brexit or US-China trade agreement
@gigiduru125
5 жыл бұрын
Yeah, bonds seem a bit fishy to me at this point in time. I'm still young and have 100% stocks, wanted to have something like 10% bonds so I can rebalance into stocks as they go up but they seem too risky. If I was old I would probably buy them anyway. When you've already hit negative rates, I don't see how you can still have any future capital appreciation on them and the interest is very low. I'll buy some bonds once we have more normal rates like 2%.
@dunk8157
4 жыл бұрын
@@gigiduru125 Im fairly young and have never been through a proper "crash", I suspect that people who saw the value of their shares go down 40 or 50% in 2008 think a bit differently and want to preserve part of their capital. People with pensions for example need a fixed income to rely on. Bonds are usually looked at for the fixed return part which is reliable.
@jeffreeOH
4 жыл бұрын
Is there anything preventing the funds that normally get invested into bonds from getting invested in Bitcoin or some other cryptocurrency given the fact that there now exists Bakkt, an platform designed for institutional investors? Wouldn't it make sense for institutional investors to invest in Bitcoin on a platform such as Bakkt where the market cap is so small that they can cause the price to rise simply by their investing, for example, $40 billion all at one time? Am I missing something? Why wouldn't that be a souond investment strategy? If it were, then it could really take off as other investors would see it working and follow suit, making the price rise even more. Am I thinking about this correctly?
@Boingyuk
4 жыл бұрын
Really interesting, thanks. You had me until the r* bit and then my brain melted. Will watch again....
@Pensioncraft
4 жыл бұрын
Hi James Joyce, Thank you for taking the time to comment. Ramin
@tc9634
5 жыл бұрын
I divide my bond allocation (currently 25% because I'm 25 :) equally 5 ways between gilts, inflation linked gilts, UK investment grade, US treasury hedged, and US investment grade hedged (Jack Bogle suggests spliting your bond allocation 50:50 between government and investment-grade corporate, I just add in the inflation linked-gilts because we are a very trade dependant country and the 70s and 80s inflation could happen again). US treasuries yield ~2%, US investment grade yields 3.3% vs 1.2% and 2.5% for the UK £ equivalents. The hedged funds are just as high quality as the £ equivalents but yield more and have lower durations. I don't hold any global bonds. Frankly I don't see the point in buying an asset guaranteed to lose money when you can buy another asset guaranteed to make money that does the same thing as the negative-yielding asset. I can't think of a legitimate economic/investment reason not to do this, or to hold negative-yielding bonds.
@Pensioncraft
5 жыл бұрын
Hi Tim the reason why some hedgies and bond fund managers buy negative yielding bonds is in the hope that yields will get more negative and they can sell at a capital gain before maturity. It doesn't make much sense to buy a negative yielding bond and hold it to maturity unless you are forced to for regulatory reasons. Thanks, Ramin.
@tc9634
5 жыл бұрын
@@Pensioncraft exactly, so either you're speculating on a capital gain or investing in a guaranteed loss. Either way there's no reason for a retail investor with all the choice to hold such an asset when there are decently positively yielding ones with no currency risk of equivalent or arguably better quality.
@Pensioncraft
5 жыл бұрын
Hi Tim I don't imagine European government bond funds are very popular at the moment because of their low yield. As you know, I've gone for VEMT but there I'm taking quite a bit of liquidity risk and EM sovereign credit risk in return for a higher yield. Thanks, Ramin.
@tc9634
5 жыл бұрын
@@Pensioncraft see I just don't think that's worth it because you're also talking $ currency risk and the $ is super high right no Vs £. The ytm is only about 1% higher than vucp I would swap vemt for the hedged us investment grade credit fund and split half of your vgov allocation with the hedged us gov bond fund. Also what's your current equity/bond split? *This is not advice or a recommendation
@Pensioncraft
5 жыл бұрын
Hi @@tc9634, I laughed out loud: "*This is not advice a recommendation". If we get a no-deal Brexit, which is looking increasingly likely, the dollar will get even stronger versus sterling. The yield on VEMT is 4.6% and for VUCP it's 3.5% and as the Fed's talking about cutting rates again I'm happy with that for now. I don't have any VGOV at all, I have just three funds: VMVL (the global minimum volatility equity factor fund, 40% of my portfolio), VEMT (EM Sovereign Bonds 20%) and the U.K. Investment Grade Bond Index Fund (40%). I'm still cautious. Thanks, Ramin.
@wildwest9395
5 жыл бұрын
Someone recently explained bonds to me as "a store of value". Which can be very valuable in risky and uncertain times. Not for me personally though, not at the moment anyway.
@Pensioncraft
5 жыл бұрын
Hi Elias that's a good point, many people see developed market government bonds as a safe store of value when there's a crisis. Thanks, Ramin.
@andy-ti9zf
5 жыл бұрын
people have went broke betting on a bond market collapse.
@Peter.F.C
5 жыл бұрын
But Central Banks have never displayed this level of stupidity except in a few cases, Germany, Zimbabwe... And it never ended well. Western countries'central banks have been kicking the can down the road since the GFC. Let's see if they can kick it down the road one last time. I doubt it! I very much doubt it will hold things together until November!😱
@mskmsk7174
5 жыл бұрын
@@Peter.F.CI have the opposite view. I'd very much doubt if they CAN'T hold things together until November.
@Peter.F.C
5 жыл бұрын
@@mskmsk7174 You could be right. But Central Banks have no bullets left in their guns. Below 2% interest rates, cuts have no impact on the general economy, at best they support the bubble in asset prices and contribute to the historically record debt bubble. But there are Bail In Laws now in several countries in preparation for what policymakers see as inevitable. Most people don't know about bail in, which was used in Cyprus in 2013. en.m.wikipedia.org/wiki/2012%E2%80%9313_Cypriot_financial_crisis Since then its happen in Spain and Italy, and Bail In has been recommended by the IMF as what should happen in all countries. It's very much in line with the Neoliberal ideology. www.quorumcentre.com/reports/recent-italian-and-spanish-bank-bail-ins-are-the-beginning-of-bigger-bank-bail-ins-to-come/ I think as people start to understand what is planned with the Bail In Laws, the bank runs will start. First in, best dressed. There are plenty of other potential triggers. Trade War, Brexit, Deutsche Bank collapsing, some other collapse, stock market collapse... But, then again, maybe you're correct and the biggest debt bubble in history will make it to November.
@mskmsk7174
5 жыл бұрын
@@Peter.F.C I'm talking about the USA. They can still go to zero rates and they can quantitatively ease as they have been withdrawing liquidity while Europe has been expanding. Europe can still go further into negative territory. Therefore the collapse (worldwide) is still 12-24 months always. The share market will still rise but with a lot of volatility. The dollar will rise against all others. When that happens the end is near.
@Peter.F.C
5 жыл бұрын
@@mskmsk7174 “08/01/2019 2.00%” The current rate in the US. Who do you think I'm talking about? And I'm completely aware of the remaining “tools” they have in their arsenal, and their very silly ideas about going negative, as has been discussed and recommended for many years by the IMF and others. Except, they haven't done the preparations for deeply negative in most places yet. Some Europeans have, and a Bill, as part of the preparations, is about to be introduced to the Australian Parliament within days. Already there is substantial opposition being mounted in Australia to stop that Bill. I don't see Americans or Australians wearing negative interest rates. I imagine even the typically more compliant Europeans won't put up with central bank cr-p much longer. Wait for the bank runs. You can imagine how much I've got left in a bank.
@SynergyOfTwo
5 жыл бұрын
If USA (and other countries) increases fiscal spending dramatically, would that cause a major bond sell off of more that 10%? USA deficit spending is already at $1.3 trillion and could increase further with $1-2T infrastructure spending in 2020-2021 to boost the economy.
@skiddybop780
5 жыл бұрын
Thanks for this video. Very well put. But is this video now already out of date? As quoted below does this mean Germany is now selling bonds that will yield a negative return if bought at auction and held to maturity? Or as Trump put it. "Germany is being paid to borrow money?" "LONDON/BERLIN Aug 21 (Reuters) - Germany sold 30-year bonds with a negative yield for the first time at an auction on Wednesday, a milestone for a fixed-income market where the entire curve now yields less than zero."
@Pensioncraft
5 жыл бұрын
Hi Jeremy a negative yield is not a negative coupon. Thanks, Ramin
@skiddybop780
5 жыл бұрын
@@Pensioncraft so in the case I quoted above the coupon would be 0? And the capital gains if held to maturity would be what is negative returning?
@Pensioncraft
5 жыл бұрын
Hi Jeremy Cheshire if the article is this one uk.reuters.com/article/germany-auction/update-1-germany-sells-new-30-year-bond-with-negative-yield-a-first-idUKL5N25H29G then in the second paragraph it says "The euro zone’s benchmark bond issuer sold 824 million euros of the new long-dated bonds against a target of 2 billion euros, with an average yield of -0.11%. The coupon on the bond was set at 0% earlier this week." So that's right the coupon for this bond was 0%. And as you say if you bought a zero-coupon negative-yielding bond to maturity you would make a loss. Investors would buy this either for capital preservation (because they believe that it would be preferable to their expected loss with equities) or because the yield would fall further and then they could sell for a capital gain. Thanks, Ramin.
@FreePizza007
2 жыл бұрын
But we have corporate bonds to consider also.
@lowengkok3562
5 жыл бұрын
Bond,,yield all attack together it is really unfortunate that it is really frustrated.So,my friend get ready to the battlefield.
@joanblond8527
5 жыл бұрын
I thought that it was generally agreed by experts that over a long period (several decades), the total return on equities far outstripped the return on bonds. (This assumes reinvestment of dividends/interest). I do own some bond funds (strictly out of caution), but always considered equities to be essential to successful long run investing. (Isn't that what Jeremy Siegel advocates?)
@Pensioncraft
5 жыл бұрын
Hi Joan that's right equities outperform bonds over the long term. There were some periods after particularly sharp equity falls where you would have been better off investing in US Treasuries than US equity. In fact, I use Robert Shiller's huge US data set to find these unusual periods in one of my courses pensioncraft.com/register/investment-for-absolute-beginners/how-to-choose-the-best-funds/ But developed market government bonds provide safety during equity selloffs which is why diversification is a good idea and why the percentage equity in your portfolio is such an important determinant of the risk of your portfolio. For example, LifeStrategy funds are risk-graded according to the amount of equity in the portfolio (LifeStrategy 20%, 40% and so on). Thanks, Ramin.
@obcane3072
5 жыл бұрын
So we are in a bond bubble because if FED policy. We are in a equity bubble because of retirement plans with an soon retiring Boomer generation soon selling their equity holding for income. And an equity bubble because of passive fund investing overtaking active investing. What's their to invest in?
@Peter.F.C
5 жыл бұрын
The Equity bubble is due to low interest rates (inverse relationship between asset prices and interest rates), as well as share buybacks (which had been made illegal after the Great Depression but were again made legal by Neoliberal financial deregulation). mavenroundtable.io/theintellectualist/news/stock-buybacks-were-once-illegal-why-are-they-legal-now-sHh6HZjtyk2styG-qLgnQg/ In recent times, the share buybacks have been fuelled, in part, by issuing debt at low interest rates, and other borrowing. The bubble has absolutely nothing to do with the retirement plans of the soon retiring Boomer generation. There will be selling, as what the inverted yield curve is predicting, becomes more widely anticipated (Winter is Coming). And that is always the terminal destination of all bubbles, the final stage where everyone rushes to find bigger suckers to sell to, and to avoid being the last sucker to sell.
@MartinJG100
5 жыл бұрын
Ramin. Were you involved with Motley Fool (UK) podcasts at one time? Your voice and style seems very familiar!
@Pensioncraft
5 жыл бұрын
Hi MartinJG100 I was a strategist for an investment bank for several years so you might have seen me on Bloomberg or CNBC if that was on in the background? But I've never been involved with Motley Fool. Thanks, Ramin.
@MartinJG100
5 жыл бұрын
@@Pensioncraft OK. Quite possibly. Sorry for the mix up. Thanks
@ihague4568
3 жыл бұрын
Except that the bond bubble is bursting.
@chefmarv6499
5 жыл бұрын
Nice explanation on how bonds work. But the bubble part isn't exactly explained or disproved. IMO, you've got trillions of taxpayer's money worldwide being shoved into the bond market for these public pension funds portfolios. So the price of the bond is somewhat "artificial" as it's taxpayer subsidized. Then you've got people speculating on ever lower yield (making yields go lower in the process of doing so) with all the liquidities sloshing around that were added to the system post Great Recession. This also applies to the corporate bond market too. But I still hold bonds though, I think the trade will unwind as boomers pass away and the fund managers' obligation to buy bonds lessens.
@Pensioncraft
5 жыл бұрын
Hi PC Principal the money for QE is not taxpayer money, it's newly created money produced by the central bank. The primary upward driver of developed market government bond prices is demand from investors and this is driven by a need for capital protection as I say in the video under Reasons to Buy Bonds at 1:10 Maybe I should have made that a bit clearer? Also I don't think the disappearance of baby boomers will drive rates higher, as John C. Williams (President and CEO of the Federal Reserve Bank of San Francisco) said in a speech in 2018 "increased longevity and propensity to save are the key demographic drivers keeping r-star low, and they’re not about to reverse" www.frbsf.org/our-district/files/Williams-Speech-Economic-Club-Minnesota-R-Star-Future-Fortunes.pdf There's a beautiful article on the (brilliant) Bond Vigilantes blog that goes through reasons why demographic models of yields aren't working very well at the moment www.bondvigilantes.com/blog/panoramic-outlook/breakdown-demographic-bond-valuation-models/ Thanks, Ramin.
@chefmarv6499
5 жыл бұрын
@@Pensioncraft I know QE is not taxpayers' money. But your tax dollars and A LOT of it is going into different government pension funds who in turn buy all kinds of bonds, including government treasuries. Sorry for not being clearer. As for boomers, they usually have benefit defined plans (those plans that need 7.5% return but have got only 6% for the last 20 years) whereas younger generations have contribution defined plans or no plans at all because at 20yo they are 100k in debt already. But my theory might be wrong but I'm always trying to see "what could possibly force investors to liquidate a certain type of asset", in this case, long bonds.
@mamartin2966
5 жыл бұрын
Thank you for explaining it, I always wondered how it's being calculated. However, if you could please clarify something. In the movie you said, that to calculate Yield To Maturity you take a Coupon minus Capital loss per year. The latter is already negative, so effectively you would have: 0.25 - (-0.6) = 0.25 + 0.6 = 0.85 Didn't you mean, that you need to add both? Then it would be: 0.25 + (-0.6) = -0.35 Thanks.
@Pensioncraft
5 жыл бұрын
That's right yield is (roughly) coupon plus capital gain. In this case it's a capital loss so you subtract the 0.6. Thanks, Ramin.
@mamartin2966
5 жыл бұрын
@@Pensioncraft Thank you Ramin. If you would be so kind, can you please answer whether my thought process is right: I buy a bond at the price of 100 euro, 10y, coupon 0,25% like in your example. Then the price rises to 106 after 3 years. At this point I have collected 3 coupons (3x0,25 euro = 0,75 euro) and I can sell the bond at the price of 106 euro. My profit is 6 euro plus 0,75 euro minus taxes. So even if there are capital loss per year of negative 0,6% and yield to maturity is negative 0,35%, I still manage to have this investment profitable. Am I right? And similar goes if the price drops 6 euros during the first year, down to 94 euro per bond, I buy it and at this price and then sell it at the end of a 10 year period when the bond matures. In this example, I would have a profit of 10x0,25 euro (coupons) plus 6 euro out of what goverment/corporation has to pay me, which is 100 euro. My profit would be 2,5 euro plus 6 euros minus taxes when the bond matures. So either way, I have a profit. The only time I can loose on bonds (except the inflation) is when I buy at the higher price than the bond was sold in the first place by some government (or when I sell to someone else at the lower price I have bought it). Is this correct? If above is right, then simply buying a bond with a goal to hold it for 10 years and then sell it doesn't require from me to count the yield or anything else, I simply buy and hold, collect coupons and then sell in the end and nothing else matters. Or I wait until price of a bond drops and I buy it from a second market, then collect coupons and sell it in the end to the goverment. Sorry for a bit long questions, but I wonder if it works like that. Best regards, AMartin
@Pensioncraft
5 жыл бұрын
Hi @@mamartin2966 the first example is right (sell at 106 after three years, the capital gain is 6 euros, the coupon is 0.75 euros) and your gross profit is 6.75 euros. The second example is an 11 year bond which falls from 100 to 94 in the first year at which point you buy it for 94, collect 0.25 * 10 = 2.5 euros coupon over the coming decade. If you wait until maturity you never have to sell, the bond just matures and you get the 100 principal back. You would make 6 euros capital gain (100-94) and the coupon of 2.5 euros or 8.5 euros gross profit. You didn't consider a case where you bought at a premium where you could make a loss. For example, if the bond is trading at a premium after one year, say 106, and you buy it at that price then wait until maturity you will receive 100 principal back making a capital loss of 6 euros but your coupon would reduce the loss by 2.50 euros so your total loss would be 3.5 euros. Usually, investors who buy a bond with negative yield hope to sell the bond at a higher price rather than hold it to maturity for a loss i.e. they expect yields to fall further (and prices to rise further as yield and price move in opposite directions). You may find my bond course helpful pensioncraft.com/register/investment-for-absolute-beginners/how-to-choose-a-bond-fund/ and I'm always around for a quick chat ramin.as.me Thanks, Ramin.
@mamartin2966
5 жыл бұрын
@@Pensioncraft And that's the situation you described happening right now, with all the negative yields in some countries. I actually did mention the last case: "The only time I can loose on bonds (except the inflation) is when I buy at the higher price than the bond was sold in the first place by some government (or when I sell to someone else at the lower price I have bought it)." But you have explained it in great detail above, for which I thank you very much. I do howerver have some thoughts on bonds - yields goes down (not everywhere, but the tendency is that people buy more expensive bonds), and yet there seems to be a great bubble not only in equities (stock market) but this time around also in the dept market (bonds) - especially that some banks bought many 'bad bonds' during the last recession (2007-2008). If that is true, plus some indicators show (like inverted yield curve) that crisis or recession is coming, shouldn't we avoid both stocs and bonds? How does it corelate to your 2 portfolio scheme build with both stocks and bonds (which I liked to see and it's a realy well presented data)? Isn't better to buy something else (what? real gold and silver, real estates, currencies, something else) or just sell everything and have cash on hand waiting for prices to go down and then buy some stocks? Best regards, AMartin
@Pensioncraft
5 жыл бұрын
Hi @@mamartin2966 sorry yes you did mention that. I don't think people should avoid bonds and stocks. For long term investors, this kind of "noise" is usually irrelevant. They can build a globally diversified portfolio with stocks and bonds, maybe some real assets like globally diversified Real Estate Investment Trusts (REITs) and domestic inflation-linked bonds and just switch off the news for the next thirty or forty years and get on with their lives. They should save as much as they can over that period. For most people this will generate a pretty good outcome. There's lots of poor information out there about the bond market and the imminent collapse of fiat currencies which is the financial equivalent of anti-vax content i.e. harmful misinformation. What I was trying to show in this video is that yes, yields are low, but that's not a good reason to avoid incorporating bonds in your portfolio, particularly if you've got a shorter investment horizon or a low risk appetite. The trouble with waiting for a disaster to happen is nobody knows when or even if it will happen and experience shows that it's best to have a long-term mindset and be in the market as long as possible. Thanks, Ramin.
@tubaljohn1
5 жыл бұрын
I'm not asking for financial advice, just an opinion from anyone. I have pulled out of bonds, and I'm hedging with gold (BAR), REITS, and looking into investing in gold mining.
@alexanderhowarth6460
5 жыл бұрын
@@jimmyhua731 as long as nothing unprecedented happens like governments increasing spending as the economy slows, while the banks give away free money... If you take into account the rising probability of default and the effects of inflation, the actual risk is far, far greater than the model accounts for
@andy-ti9zf
5 жыл бұрын
there seems to be a casino like environment in bonds as people gamble on price appreciation.
@Pensioncraft
5 жыл бұрын
Hi andy fortunately bonds are far less exciting than casinos which is part of their appeal. For most retail investors speculating on a single bond is not feasible, most people buy bond exposure through a bond fund. And buying a bond fund for capital appreciation wouldn't be a good idea, it's usually to diversify the equity component of a portfolio and to reduce the overall risk of a portfolio. That's why funds like LifeStrategy are risk-graded according to their equity/bond split. Thanks, Ramin.
@uturniaphobic
5 жыл бұрын
you want the triple Cs. that can be a casino at times. Junk Bonds
@Pensioncraft
5 жыл бұрын
Hi @@uturniaphobic good point, in the case of a recession the safe harbour is developed market government bonds not corporate bonds and certainly not high yield (junk) bonds. Thanks, Ramin.
@Peter.F.C
5 жыл бұрын
@@uturniaphobic Remember. Before the GFC a lot of rating agencies gave bonds which were, in fact, junk bonds, a triple A ratings. It was because so many financial institutions were unknowingly holding this junk, when everybody suddenly found out they were in so many cases junk, that the system ceased up. Normal interbank loan activity stopped. Because financial institutions refused to lend to each other, because they didn't know if the institution wanting the loan had a lot of junk and might fail as a result before it could repay the loan. Counterparty risk was just too great. So ratings are never as absolutely dependable as the spruikers would have you believe.
@chrisf1600
5 жыл бұрын
I just discovered your channel. Thank you ! Your content is excellent, and the explanations are clear and concise. The chart of Vanguard correlations was a real eye-opener, it has made me rethink my fund allocations. I also enjoyed the slides about the minimum risk portfolio; I vaguely remember the theory but it's the first time I've seen plots using actual market data. Subscribed !
@yttean98
5 жыл бұрын
I watched the whole video. So you don't believe there will a Bond Bubble coming?
@Pensioncraft
5 жыл бұрын
Hi tean tan the word "bubble" implies that the bond market is going to pop with huge losses which I _don't_ believe. US Treasuries and UK gilts provide greater capital protection than equity which is why they remain a good hedge for an equity market selloff. As I show in the video a government bond "crash" is usually much smaller and lasts a shorter amount of time than an equity market selloff. Thanks, Ramin.
@ihague4568
3 жыл бұрын
Here in Canada, too much of the GDP is dependent on housing. So when rates flat line and housing stops rising (and people stop borrowing incrementally more to splurge) of course growth stops! Then, central bankers convince themselves that they need an even lower 'neutral rate' (their licence to keep tinkering around). The problem is not subpar growth in and of itself. The problem is that too much of the growth is phony. If they stopped continually trying to juice the economy with ever lower rates then (after a protracted period of adjustment) growth would start to be directed towards more natural forms and hence be more sustainable. The economic patient has become increasingly insulin resistant. The solution is not more insulin, it is a monetary fast (and less monetary sugar) to improve insulin sensitivity.
@allen9111
5 жыл бұрын
There cannot be a bubble in the bond market. Taking the mathematical definition of a bubble, the prices must be unbounded as time goes to infinity. The yield on a bond is definite at maturity; it is a contract. You always know what the yield will be on a bond as long as you hold till maturity (by definition a bond's price and yield is bounded). Bond bubbles don't exist, most of the time people just use the "bubble" term when they think the price is "too high". Let's go back to being careful about using the bubble term
@Matthew-bb9dk
5 жыл бұрын
Ok, so why would anyone buy a 10 yr bond at 0.25% for 106 euro? Why does a bonds price increase like this? It doesn't seem to make any sense.
@Pensioncraft
5 жыл бұрын
Hi Matt D an institutional investor would buy such a bond because they believe its yield will fall further so they can sell before maturity. Other investors might buy it simply for capital protection i.e. they're more worried about losing money in equities and want a relatively safe investment. One of the primary drivers of low and negative yields is investors de-risking their portfolios, selling equity and buying bonds. Thanks, Ramin.
@sabriath
5 жыл бұрын
If only bonds were sold similar to futures, then we would have proper market balances, having to borrow bonds just to short them is pretty dumb, in my opinion....if the net is negative, there should be many people willing to sell more bonds into the market at the inflated price in order to place a wall to the pricing and keep it reasonable, it makes no sense to pay interest on that considering they already would have to pay the yield anyway for the privilege of "lend" marking. For example, if people are willing to pay $106 in order to get back $100 in 2 years while getting $1.25 per year in interest, then I should be able to take the opposite side of the trade and say that I am willing to sell the $2.50 in interest accumulation and $100 close out fee in order to sell the bond and get $106 now, letting me keep $3.50 per trade with an open bond on the sell side (which I could either close on my own, or let it go to expiration and clear automatically at zero difference). And if it takes no effort, then EVERYONE would have trades set up because it's basically free money, which, as I stated, would put a barrier to the top end pricing, making it harder for negative net to occur naturally. But instead, we have this stupid system by which you need to borrow and place on margin, allowing dumb shit pricing to occur. I completely understand the reasoning, because you don't want rich people to move the market in overwhelming positions by pushing it in either direction, but at the same time, is it really that bad? In order for someone rich to push the markets down, they would have to fill ALL of the orders, bond-per-bond, paying for each net difference, in order to move it.....and that means the other side of the trade is someone who is gaining a net trade position. On top of that, some other rich guys will probably be waiting below the market to create another wall there, for maximum gains....so you end up with rich-vs-rich and the system stabilizes ANYWAY (with a top price and a bottom price). And with futures, there's somewhat a "fair trade" that occurs when you have multiple people at the same price position because it isn't first-come-first-serve like the stocks, but rather it's a basket division, allowing even the small accounts to get in on the action. The markets just need a more modern update, and we need better education in schools, rather than trying to regulate the markets to death.
@zarni000
5 жыл бұрын
the only investment worse than a bond is a CD or savings account. More risk and lower rate generally. Bonds are not an investment unless you can time them and especially not in this environment. I only view bonds as a little bit safer than a savings account with a bank.
@Inbal_Feuchtwanger
5 жыл бұрын
I think one point to add to the economic drivers is that population growth can be controlled through immigration. In the US it amounts to about half of the population growth. Helps a little bit at least.
@ThorRavnsborg
5 жыл бұрын
Great explanations but a part of it may have to be rewritten. Negative coupons do exist. A 10 year mortgage bond with a -0.5% coupon was recently rolled out in Denmark for example. I'm also not a 100% convinced that the current beliefs about equilibrium rate will guarantee that we are not going to see larger spikes in interest rate in the future. Only time will tell.
@Pensioncraft
5 жыл бұрын
Hi Thor, unfortunately you can't replace a video on KZitem like you can with Vimeo. But I doubt that other countries will do the same thing as Denmark, as a negative coupon fits with the rather specialised Danish mortgage market. For example I doubt very much that we'll be getting bunds with negative coupon. But thanks for letting me know about that - it's really interesting! Thanks, Ramin.
@ThorRavnsborg
5 жыл бұрын
@@Pensioncraft Hi Ramin, thank you for replying and I also need to thank you for educating everyone here. I just found your channel and after having watched a few more of your videos today I can certainly vouch for the quality of your work. The information you provide is of a very high standard and your channel is quite possibly the best of its kind I've come across. I'm now subscribed but more people deserve to find it.
@BenBurkeSydney
5 жыл бұрын
excellent presentation - thank you. If I was in UK, I'd be signed up with your Patreon already.. (I'm in Australia - I'd like to find your level of expertise in my home markets)
@Pensioncraft
5 жыл бұрын
Hi Ben, thank you! I actually spoke to some people from Australia but they were UK ex-pats. Thanks, Ramin.
@andy-ti9zf
5 жыл бұрын
buy stocks corporations are propping up with buybacks.
@alexanderhowarth6460
5 жыл бұрын
You're a bit late to the party, buddy
@zarni000
5 жыл бұрын
just because countries havent defaulted in history doesnt mean they won't. they also said that housing market never went down but it did. right now we have the highest debt to gdp we've ever seen in history for many developed countries like the UK. not that i expect it to happen soon but it will. it's inevitable.
@zarni000
5 жыл бұрын
@Thomas Headley true but difference is it's secured debt.
@zarni000
5 жыл бұрын
@Thomas Headley i dont disagree that the value of the asset can prove to be lesser than the obligation. that is obvious. but it cannot be 0 like that of an unsecured debt situation.
@zarni000
5 жыл бұрын
@Thomas Headley true that.
@almor2445
5 жыл бұрын
What would happen if (due to oil shocks or trade wars) the price of goods and services went up faster than expected? Would the central banks see the inflation in prices as a sign that they need to increase rates? Would this not then put companies and governments in a position where they could not service their high levels of debt? Whenever I see something people think will go one way because it has "always" gone that way, I am skeptical. If there weren't major reasons why, hundreds of governments in the past would've printed trillions to stimulate their economies or to fund high levels of debt for wars or social security. Surely at some point the bill comes due.
@dunk8157
4 жыл бұрын
We did it before in the UK in the 70s, the Labour government printed money, led to a major fall out in the early 80s.
@yogathan1
5 жыл бұрын
Consumer debt is increasing 60 billion a month and the federal reserve decided to buy 60 billion worth of treasuries a month. The debt market is a massive joke right now.
@barnstar2077
5 жыл бұрын
I think bond funds are being inflated by people expecting an equity crash. But what happens then? If we get that crash then some people will sell their bonds to buy equities cheap. While others will buy more bonds because they think equities are too scary. So will the price of bond funds go up or down?
@Pensioncraft
5 жыл бұрын
Hi Barn Star I agree that bond funds have been boosted by investors worried about global growth and fading US equity earnings. During equity market crashes the price of US Treasuries and UK gilts usually rises. Bond prices don't go up in percentage terms as much as equity goes down, but the important thing is that bonds preserve capital in those extreme equity selloff scenarios. That's not _always_ true e.g. during the Taper Tantrum but that was unusual. Thanks, Ramin.
@luxushauseragency
5 жыл бұрын
This is why income generating real estate is becoming more and more attractive for some investors.
@trollface1994
5 жыл бұрын
not when they foreclose it isn't.
@charlesvincett84
5 жыл бұрын
The UK government suspended Bond payments during the great depression....therefore throwing the bond holder under the bus... great ready for this to happen again...
@Pensioncraft
5 жыл бұрын
Hi Charles, suspension of bond payments on UK government bonds is _extremely_ unlikely. The global economy is slowing down but it is worlds apart from the catastrophic drop in growth which occurred in the 1930s. Thanks, Ramin.
@charlesvincett84
5 жыл бұрын
@@Pensioncraft they are rare I agree, but it did happen and history repeats it self. Given that the EU implodes next year, interest rates will spike and confidence in most government paper will fall dramatically who will want to hold any government paper? The video seems very linear in its thought process and does take into account larger economic cycles such as sovereign debt crisis that happen every 89 years, whick we are due for one. Unfunded government pension liabilities, rising interest rates and the effect on sovereign debt, The Break up of the EU and the eventual rise of China to the number one spot the demise of the USA as an economic power. For individuals who need income for 20 plus years it would be prudent and proper to have this in one's analysis?
@Peter.F.C
5 жыл бұрын
@@charlesvincett84 Apparently these clowns 🤡 🤡 have never heard of Knightian uncertainty. en.m.wikipedia.org/wiki/Knightian_uncertainty Or what Keynes had to say. www.futurelearn.com/courses/complexity-and-uncertainty/0/steps/1824 They're pretending they have it all under control with nonsense models that never have worked. The only people they're fooling are themselves. But even the wiser among them don't really believe. If governments, regulators, and central banks are not anticipating the possibility of banks failing and a general systemic collapse of the financial infrastructure, why the secret meetings? And why did all these developed countries agree to quietly pass “Bail In” Laws? They did, so they can do next, what's already been done in Cyprus (2013), and in Italy and Spain, except on a massive scale. If you don't know what these laws are, Google it. If things are so Rosy, why is Berkshire Hathaway now more cashed up than it was just before the GFC? Warren Buffett is no fool. Why have the rest of the mega-wealthy also been quietly liquidating their share portfolios? Why have Gold and Silver risen so much since the beginning of the year? Why are they trying to trap everyones money in the banking system by making cash transactions above a relatively small amount illegal? Currently they're trying to quietly pass such a law in Australia. Similar laws were passed in several EU countries. For example, Germany: www.theguardian.com/world/2016/feb/08/german-plan-prohibit-large-5000-cash-transactions-fierce-resistance And now Australia: cecaust.com.au/media-releases/morrison-banning-cash-so-australians-cant-escape-bail-negative-interest-rates The trick is, they say the legislation is for large transactions. But the transaction limit can be reduced overnight simply by a regulatory change. No need to pass any new legislation through parliament. And drop the limit is what they did. They need to keep your money in the bank to get their hands on it, in an emergency. If they need to do Bail In, or they wish to use deeply negative interest rates policy. But sure. Everything is fine. And bond prices will never collapse.
@alexanderhowarth6460
5 жыл бұрын
@@charlesvincett84 to assume makes an ass of u and me
@pfschuyler
5 жыл бұрын
Quite involved, but I think its pretty solid analysis. There are some scary graphs in there though. Specifically the steady decline in productivity with the G7 over time. The reasons seem sound (age, population, etc). Really if true growth is the ultimate driver, are we heading toward a world with shrinking economies, and ballooning FIAT currencies? A sinking tide seems to sink all ships, whether they be bonds or stocks (the latter remaining the more volatile). The real question (for all economies) is when and how we will increase per-capita productivity.
@Pensioncraft
5 жыл бұрын
Hi Paul Schuyler thanks. I agree that the Productivity Puzzle is a huge problem in developed markets. Ultimately lower growth means lower earnings growth and lower equity market returns. So hopefully this is a puzzle we are going to solve! Thanks, Ramin.
@MsJNix
5 жыл бұрын
Government liabilities are too high in the west and bonds are useless because of this. Your advice may have worked in the past but not anymore. Stocks and bonds will both be useless as soon as the crash hits.
@Pensioncraft
5 жыл бұрын
Hi MsJNix a crash of both equity _and_ bonds is extremely unlikely. Thanks, Ramin.
@MsJNix
5 жыл бұрын
@@Pensioncraft What about pensions and health care? There is not enough money in the west to cover everything. They cannot print more money, that will create an even bigger problem. No one can fix it. Everything is borrowed money. Nothing is real except gold and silver.
@MsJNix
5 жыл бұрын
@Thomas Headley Well in 2000 we bought gold, the price of gold was $292.90 per ounce. This is equivalent to $437.23 in 2019 dollars. As you know the price is much higher today and I wish we had bought more. It has steadily risen in value unlike other investments which go up and down. How is this a failure as a primary holding?
@MsJNix
5 жыл бұрын
@Thomas Headley What if the banks start printing so much paper money (fake money) and it becomes worthless? (it has happened before in other countries). Gold will never be worthless because you cannot print it out of thin air and then lend it out. You have to mine for it.
@MsJNix
5 жыл бұрын
@Thomas Headley I have done my research kzitem.info/news/bejne/lI2Z0o2rbp5lemU
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