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30-year U.S. bond yields less than S&P dividend rate

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Re: 30-year U.S. bond yields less than S&P dividend rate

#31

It's worth noting that most people nowadays don't buy bonds directly, you would normally hold them through an ETF/index fund like BND or TLT. Yields typically drop when there's a flight to quality (i.e., people selling stocks to buy bonds). The upward pressure on bond prices drives yields down because people are willing to pay more for lower yields. Bonds are almost like a future of expected return on capital. If bon…

> Bonds and stocks have been fairly non-correlated over recent years, but this hasn't always been so. It's great for modern portfolio theory (i.e., holding a portion of stocks and bonds and rebalancing periodically). There's no guarantee that it will stay this way.

This is true. This correlation has held for 30 years so we are conditioned into believing this is a sure trade - but it is not.

Re: 30-year U.S. bond yields less than S&P dividend rate

#32

Idk if this belongs at HN but if it does, then isn't this the greatest opportunity post 2008 crash to invest in to the markets?

That's a question of market timing, and of you try and time the market, you'll either be broke or lucky. Maybe stocks are insanely undervalued and we're on the cusp of a bull run. Or, maybe the markets are going to crash and the dividend rate isn't going to hold as we move into future as companies go bankrupt and stop paying dividends. Unlike treasury bonds, dividends aren't certain, so this one data point alone isn't enough to really conclude either way

Re: 30-year U.S. bond yields less than S&P dividend rate

#33
post #20

Earlier quoted context omitted.

I know someone who did this. It didn't work out and it's their single biggest financial regret in life.

I've seen 6 people in the last 2 weeks on wallstreetbets gamble away their student loans. The sad part is one guy will post their success of doubling their student loan, and it will just cause a bunch of younger inexperienced 19 year olds to lose tens of thousands to their own gambles. It's really sad. It's an addiction

For some, it is addiction. For others, they simply cannot fathom the risk they expose themselves to. They have no concept of the time, effort, and stress they will cost themselves over the course of their lives as a result of their error.

Try explaining to a teenager that the 50k bet that costs them their chance at an education is actually them putting 1m+ at risk if you compound the effect over the course of their life.

Re: 30-year U.S. bond yields less than S&P dividend rate

#34
post #16

Idk if this belongs at HN but if it does, then isn't this the greatest opportunity post 2008 crash to invest in to the markets?

I'm in an interesting position related to this. In Canada, most people lock into their mortgage rate for 3-5 years. After that, you've got to renegotiate a rate but you're also free to switch banks. It's like starting over again at whatever you currently owe. I locked into mine 4 and a half years ago, so renewal is coming up this summer. Meanwhile, my home's value has skyrocketed (thanks to an insane Toronto housing…

I don’t think you should. A safer bet is to let your house ride, and either sell it or rent it as part of your retirement.

Re: 30-year U.S. bond yields less than S&P dividend rate

#35

Idk if this belongs at HN but if it does, then isn't this the greatest opportunity post 2008 crash to invest in to the markets?

As an ex fund manager, albeit with little macro experience, here's some thoughts.

The time since the GFC is a sort of strange era. Again and again, we're told that central banks (and governments) are going to do whatever the heck keeps the market up. Buying the dip has more or less worked the whole time. A lot of asset classes look expensive if you take a longer-back view of things, but then again that longer view tended to not include "we'll do anything".

This virus thing could be quite a different thing to what traders and fund managers are used to. The kinds of things I used to look at were things like what do the brokers say about rates, or what do economists think about oil. Or more specifially for me what does the market think about the supply and demand of volatility risk. Even the GFC itself was something that many people in my circles had thought about. It was definitely in the financial arena; either you thought subprime was gonna be a mess, or you thought it would stay localized and not burst its banks.

Also keep in mind traders tend to be young, and there has been a trend towards juniorization particularly in the investment banks.

I'm in the UK at the moment, and the number of cases doubled in the last couple of days. It did the same a couple of days earlier. So then the question is whether this is an exponential process. And if it is, what's going to stop it being exponential? Public awareness isn't going to be it, because everyone in the whole world already knows they're supposed to wash their hands and stay away from old people.

Certainly we can't just pretend the virus is not here. An expert on the radio last night mentioned that if Twickenham was full for the match today, and the 80k people there all had flu, 8 of them would be expected to die. According to him with Coronavirus at 2-3% it would be in the ballpark of 2000. Chances are people who would be ill but recover would also be a fair chunk.

So something has to be done, governments aren't going to get away with just playing it down as the numbers double every other day.

And this is where fragility comes into play. We're used to the economy being coated in a thick layer of cheap money. Business models that were previously tenuous now seem solid, because there's always someone who will finance it. I'm sure you've heard of a few such businesses in the recent news. What this translates into is that you can motivate people to work in a certain way because you can borrow (and this is in the larger sense, not just loans) the firepower to pay them.

But what if a bunch of people suddenly cannot work? If you're properly ill, there's no amount of money that will make you able to work. And you will have to live with not earning money, and your boss will have to live with work not getting done. It doesn't seem like something that handing more money out for will help. At most you can help to make sure that peripheral issues are solved, like cash crises in people's private finances don't cause them to have to sell their house or business. But people not being able to work on a large scale will cause some kind of collapse somewhere in the system, and supply and demand isn't going to generate more supply, it will just raise the price of work. This is kinda like how historians write that peasants had a great time after the plague killed a third of Europe.

And of course companies are negotiating with labor over the spoils of production, so profits would seem to go down.

But this is all pretty sensitive to the size of the actual outbreak. If the top is today the death toll is similar to 9/11, and the economy will be fine. If it grows to shut down schools and workplaces all over the world, it's gonna be really interesting.

Re: 30-year U.S. bond yields less than S&P dividend rate

#37
post #33

Earlier quoted context omitted.

I've seen 6 people in the last 2 weeks on wallstreetbets gamble away their student loans. The sad part is one guy will post their success of doubling their student loan, and it will just cause a bunch of younger inexperienced 19 year olds to lose tens of thousands to their own gambles. It's really sad. It's an addiction

For some, it is addiction. For others, they simply cannot fathom the risk they expose themselves to. They have no concept of the time, effort, and stress they will cost themselves over the course of their lives as a result of their error. Try explaining to a teenager that the 50k bet that costs them their chance at an education is actually them putting 1m+ at risk if you compound the effect over the course of their l…

I think there’s a lack of understanding of markets as well.

Great, you can toss 10k towards at it if you burn your student loans. GP might be able to toss 100k with a refi and investing his home equity.

Market movers have plenty more zeros at their disposal. We are bugs and the best thing to do is to make decisions that don’t make us end up as splats on their windshield.

Re: 30-year U.S. bond yields less than S&P dividend rate

#38
post #13

Bonds are a commited fixed return, which means the value of bond goes up if the going rate for new bonds goes down. Thus bonds can be much more profitable than stocks when the marketing is going down. The central bank will drop rates, and thus any holder of existing bonds gets to sell their old bonds for more, maybe much more. Of course this is not the big driver for bond demand. Rather bonds are demanded by money ma…

> Bonds are a commited fixed return, which means the value of bond goes up if the going rate for new bonds goes down.

> Thus bonds can be much more profitable than stocks when the marketing is going down. The central bank will drop rates, and thus any holder of existing bonds gets to sell their old bonds for more, maybe much more.

> Of course this is not the big driver for bond demand. Rather bonds are demanded by money managers who are not allowed to take any risk. Think banks, and especially central banks.

> Said money managers want to never-ever lose so much as a dollar of principle. They are not paid to maximize total return, but rather to manage this pile of money in such a way to never let it shrink.

> You'll see this set of incentives all over the world if you know where to look: money which is not expected to be invested.

> Think of mega-corp's payroll. Every month they need to pay X large number of dollars by the end of the month. Missing payroll by 1% would be such an incredible disaster it would lead to lawsuits. So big-corp does the sensible thing, and keeps the money in a money-market fund. Said money-market fund in-turn holds various short-term bonds (1 year or less).

> Who borrows money for only 1 year or less? People who have a little bit of their own money with which to take risk and want to turn around and borrow longer term.

> Bit by bit money which needs to be 100% safe, gets lent its way up the value chain until you reach end users.

> My favorite example of this is how the large Japanese REITs finance themselves. These REITs will have a relationship with a single major bank. One might expect that since they have a special relationship said bank will provide all financing: but they do not. Instead the REIT borrows floating-rate loans from 10+ banks, including their special bank. Then the REIT turns around and offers these loans to the special relationship bank. Said special bank takes the 10+ float rate loans and provides the REIT a single (let same size) 30year fixed rate loan.

> In this way everyone gets what they want. The REIT gets to tell investors their loans are not due for refinance until 2050. All the banks get to lend out money at 0.5% interest, and the special bank gets to take the other bank's money and earn an extra 0.5% interest on top of it all in exchange for taking the interest rate risk.

> So if you are wondering why bonds are weird: it is because you are not the customer.

I believe your talking about a participation loan. These are very common in the US as well because some financials are capped at how much they can lend so they participate with other financials who maybe can't hedge the whole risk but may want a piece of it. The lead institution benefits because they don't need to lend a sizeable chunk of their cap and they get to build that relationship.

Re: 30-year U.S. bond yields less than S&P dividend rate

#40
post #33

Earlier quoted context omitted.

For some, it is addiction. For others, they simply cannot fathom the risk they expose themselves to. They have no concept of the time, effort, and stress they will cost themselves over the course of their lives as a result of their error. Try explaining to a teenager that the 50k bet that costs them their chance at an education is actually them putting 1m+ at risk if you compound the effect over the course of their l…

I think there’s a lack of understanding of markets as well. Great, you can toss 10k towards at it if you burn your student loans. GP might be able to toss 100k with a refi and investing his home equity. Market movers have plenty more zeros at their disposal. We are bugs and the best thing to do is to make decisions that don’t make us end up as splats on their windshield.

All true. Even without the concern of competing against big money, there's always the simple fact that you can just lose a bet.

Through a personal connection, I'm aware of a failed SAP implementation that cost a company their position on the DOW. You'd never consider that was a possibility as a teenager because SAP doesn't even exist in your universe yet.

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