Negative yields for 29% of Developed Market Sovereign Debt

[kellyfj]

"Overall, there is $7 trillion of negative-yielding debt in the world, which equals 29% of the Bloomberg Global Developed Sovereign Bond Index. "

http://www.businessinsider.com/interest ... ive-2016-3

If this continues to expand it will have far reaching impacts for
1) Government spending (encourages more spending)
2) Gold becomes more attractive
3) Asset bubbles
4) Bank profitability / viability

and probably a slew of other first and second-order effects.
For those Bogleheads in the accumulation phase I can imagine not much impact (unless Intermediate Term bonds go negative like they did in Japan just recent http://www.bloomberg.com/news/articles/ ... o-il8451ti )
but for those in retirement I can imagine it will create a perfect storm - forcing them to load up on riskier assets?

These are crazy times!

[dziuniek]

So instead you open up an Ally savings account that pays 1%. Done.

[nisiprius]

...for those in retirement I can imagine it will create a perfect storm - forcing them to load up on riskier assets?...

What, exactly, is there about being retired that would give someone a higher risk tolerance than they had before retiring? I don't see it at all.

But then I don't see those "negative yields." What is the term on this negative-yielding debt? I don't fund my retirement with overnight loans; in fact the average maturity of my Vanguard Total Bond Market Index Fund is 7.9 years, and the yield on the 7-year Treasury is 1.66%, while the SEC yield on Total Bond is 2.17%. When it comes to negative yield on a 7-year bond, I'll cross that bridge when I come to it. I think the short-term rate would need to do more than just be "negative," it would need go pretty deep into negative territory, for the 7-year rate to go negative.

Source


Another very important fact is that you do not necessarily need any return at all on your investment to fund retirement. 0% return is hardly ideal, but it is survivable. In fact, I did the math once and calculated that, based only on mortality data and mortality credits, an insurance company should be capable of providing a life annuity that pays a 75-year-old 8% of the premium every year.

[Valuethinker]

...for those in retirement I can imagine it will create a perfect storm - forcing them to load up on riskier assets?...

What, exactly, is there about being retired that would give someone a higher risk tolerance than they had before retiring? I don't see it at all.

But then I don't see those "negative yields." What is the term on this negative-yielding debt? I don't fund my retirement with overnight loans; in fact the average maturity of my Vanguard Total Bond Market Index Fund is 7.9 years, and the yield on the 7-year Treasury is 1.66%, while the SEC yield on Total Bond is 2.17%. When it comes to negative yield on a 7-year bond, I'll cross that bridge when I come to it. I think the short-term rate would need to do more than just be "negative," it would need go pretty deep into negative territory, for the 7-year rate to go negative.

Nisi it's mostly Euro debt, some Japanese, some Swedish, Swiss. Out to about 10 years on the yield curve. It's a function of the stagnation in the Eurozone (knock in effects on CHF and SKR markets) and Japan. Also Quantitative Easing by ECB-- they are buying bonds, and that's driving yields into the negative territory.

With USD securities like Vanguard TBM, this is currently less of a worry. There *is* a case for holding US IT Treasury bond fund, because yields could go negative in the USA (I don't have my FT to hand, from memory UST 10 year is not negative, but someone can correct me).

[kellyfj]

My point was effectively
1) Several developed market yields are going negative - even at 10 year maturities
2) If US Treasury yields go negative (even at intermediate term bonds) what would the knock-on effect be to Boglehead portfolios?

-Frank

[alex_686]

For those Bogleheads in the accumulation phase I can imagine not much impact (unless Intermediate Term bonds go negative like they did in Japan just recent http://www.bloomberg.com/news/articles/ ... o-il8451ti )

No, it has implications for those in the accumulation phase. Negative rates are a good indicator of weak GNP growth, and by extension, weak stock returns. It can also a casual effect on asset bubbles. So for long term investors it would indicate a lower return and more risk. People in the accumulation phase may need to increase their savings rate.

[hirlaw]

You can see a general preview of a negative rate outcome with the Vanguard Total International Bond Fund. It only yields .77% even with a rather lengthy 7.47 year duration. A healthy dose (about 22%) of Japan's negative interest debt contributes to this outcome.

[garlandwhizzer]

nisi wrote:

In fact, I did the math once and calculated that, based only on mortality data and mortality credits, an insurance company should be capable of providing a life annuity that pays a 75-year-old 8% of the premium every year

8% return sounds good but it's important to remember that the 75 year old who purchases it is getting only his own money back, dollar for dollar nominal until he is 87.5 years old. It is also important to remember that his real purchasing power with those annuity payments is eroded by inflation more and more every year unless we go into a prolonged deflationary period. So the customer is not even breaking even in nominal dollars until 87.5 and in inflation adjusted real dollars, the only kind that really counts at the store, until he's well beyond age 87.5 due to his annuity being non-inflation adjusted. The average life expectancy of a 75 American now is 11.8 years. That means that more than half of those who purchased this annuity at age 75 lose nominal dollars due to premature death and very likely significantly greater losses in real inflation adjusted dollars. The mortality curve gets pretty steep after age 87 so the number of surviving customers declines rapidly after that. Hence the insurance company has pocketed direct profits from over half the group due to early death before it pays a cent of its own money to the customers. It also has in effect had a negative real interest rate loan (due to inflation) for more than 12 years in which to invest that money and pocket the proceeds. Offering this policy is a no brainer for the insurance company and its salesman who typically gets a nice commission on the sale. It does not appear to be much of a deal for the 75 year old customer unless he/she is extremely risk averse and also clueless about financial markets.

Garland Whizzer

[bhsince87]

Here's an idea: Just don't buy any of that negative yielding debt. What do you need it for anyway?

If you expect deflation will erode prices more than you'll lose from the negative yielding bond, then it might make sense.

But in that case, you'be be better off just keeping your cash.

[Bill M]

What matters is not the nominal yield (negative, as OP says), but the real (after inflation) yield. The real yield on short term bonds has almost always been negative, and the real yield on longer (usually 2+) bonds has been positive. If inflation were to increase significantly, and bond yields stayed low or negative, that would be a big impact on retirement savings. As it is now, low inflation keeps down the spending increases, and low returns keep us in sync. Low inflation (or even deflation) actually helps non-COLA pensions and annuities.

[kellyfj]

So here's the real question

In the event that cash and 10-year bonds have negative yields - I can't just have an all-stock portfolio in retirement right?
Would I buy Gold and REITs and Corporate bonds?
What can diversify me to "zig" when stocks "zag"?
Or do I still even buy some bonds just for their anti-correlation?

-Frank

[Da5id]

Here's an idea: Just don't buy any of that negative yielding debt. What do you need it for anyway?

If you expect deflation will erode prices more than you'll lose from the negative yielding bond, then it might make sense.

But in that case, you'be be better off just keeping your cash.

Index funds will buy it if in the index being tracked however. For example, those of us directly or indirectly (say via LifeStrategyXXX funds) in the Vanguard Total International Bond Index Fund Admiral Shares (VTABX) will presumably get some of these unless we take steps to avoid it. e.g. by switching from LIfeStrategyXXX to a 3 fund strategy with just US bonds. Which will become tempting if the international bonds get too silly, but I'm hesitant to do that myself at this point.

[WasabiOsbourne]

what is the storage cost for $$$ at a bank? is there such a thing?

can i give JPM or State Street a billion dollars but they are just my custodian, therefore i end up with a billion later... and because they are the custodian, my money "should" be fine during a bankruptcy i.e. creditors have no claim to money - of course funny things happen when companies go bankrupt.

just trying to think of the reasonable alternative to negative yields? sort of like putting $$$$ under your mattress but having the bank do it for you

[in_reality]

You can see a general preview of a negative rate outcome with the Vanguard Total International Bond Fund. It only yields .77% even with a rather lengthy 7.47 year duration. A healthy dose (about 22%) of Japan's negative interest debt contributes to this outcome.

Vanguard Blog for Advisors
http://vanguardadvisorsblog.com/2015/05 ... egativity/

The currency effect should offset the yield differential between the domestic and the international bond. This is why in the chart below the U.S. yield-maturity curve (purple line) lies virtually on top of the German curve with the expected currency return (green line) over the life of the bond.

Look at their graph, German yields are negative up to six years out. Yet, the German yield + hedge return is identical to the US returns even for less than six years when German yields are negative.

Regardless of negative yields, when doing the right financial math, an investor should be indifferent between local and foreign bonds. Don’t just compare yields, and keep in mind that the hedge return will bring you back to parity.

Thus, holding international bonds can diversify you and mitigate rising rate risk. If US rates spike and bonds lose value, the German bonds very well may not have lost value (unless German inflation goes up at the same time).