Realistic Expectations for Long Bonds

[mathjak107]

Tlt fell 5.13% today. 8.78 a share ...nasty day for bonds

Shy was down almost a half percent

Gld down 2.10%

[boglerdude]

How low can the 30 year go before investors just pay to warehouse gold/cash

[Kriegsspiel]

How low can the 30 year go before investors just pay to warehouse gold/cash

That's the way I see it too. Negative interest rates are akin demurrage currencies of the middle ages, where paper was backed by slowly decaying wheat.

[dualstow]

Home safes were reportedly very popular in 1980s Japan.

[mathjak107]

How low can the 30 year go before investors just pay to warehouse gold/cash

think about it . what would it cost us to insure cash if we could , in a safe so protected that fire or the firemen if in your house cant breach it and steal it , plus alarm it .... it would cost us an awful lot of money so a bank baby sitting it and us paying may not be a bad deal

[sophie]

I think even if rates dip near zero, institutions would still buy long bonds not for yield, but for potential gains if interest rates go negative.

Time for a simple thought experiment. What happens if interest rates drop near zero and investors stop buying bonds in consequence? By definition yields would start increasing again, and bond values would drop.

However, there's more to the story. If institutions/investors stop buying bonds they'd have to do something else with their money. There are just three choices: stocks, gold, and cash. If they sock it all into cash, then that pretty much defines a tight money recession and no portfolio will do well - but fortunately that won't last long. It'll also bring short term bond rates down near zero, making that choice less appealing. If they buy stocks, that will push their prices back up. If they buy gold, well, we have that too. The beauty of boiling the market down to these basic assets is that all others (e.g. corporate bonds) correlate closely with one or more of them, so there is literally nowhere else for the money to flow.

In other words, I don't think you would lose by just blindly buying bonds according to plan, because your portfolio does not depend solely on bond yields. If you want to tinker with the situation, try putting very low interest long bonds into taxable, since there's not much interest to worry about (less than stock dividends, in fact) and you can tax loss harvest if rates go up.

[jhogue]

sophie,
For the most part, I agree with your thought experiment, but I think that a concrete example of a country that has dealt with negative interest rates for years might be useful. That country is Switzerland.

1. One result of years of negative interest rates is that Switzerland is now experiencing a real estate bubble. Swiss homeowners have put money into their homes instead of negative yielding savings accounts. Many middle class Swiss have 100 year mortgages with very low interest rates that can be assumed by their children-- also an effective form of inter-generational wealth transfer.

2. The Swiss National Bank prints 1,000 Swiss franc notes, the highest denomination paper note in the world. It is popular with both Swiss nationals and non-Swiss as well. Older Swiss and those who live out side the major cities especially prefer cash transactions.

3. Swiss banks have been reluctant to impose nominal negative interest rates on domestic retail customers. Accounts under 2 million francs are rarely charged those rates on cash deposits. Non-Swiss depositors are changed these rates in order to discourage foreign money from causing the Swiss franc to appreciate in the FX markets.

4. Gold ownership is more common in Switzerland than in the US. The country never banned the ownership of gold between World War I and World War II, as occurred in the USA.