Financial Samurai - Forums

General Investing => Fixed Income Focused => Topic started by: Sam on October 04, 2018, 07:40:05 AM

Title: 10 Year Bond Yield Surging To 3.2%
Post by: Sam on October 04, 2018, 07:40:05 AM
Unfortunately for bond investors, we are taking it relatively on the chin now as the 10-year bond yield surges to 3.2%.

I thought we'd be capped for the year at around 3% - 3.1%, but I am wrong. I guess bond yields could still fall back down by year end.

With money market rates and 12-month CD rates getting very attractive now at 2% - 2.65%, I'm not sure whether buying a bond with a 3.2% yield is worth the risk.

Thoughts?

Sam
Title: Re: 10 Year Bond Yield Surging To 3.2%
Post by: Kalliste on October 04, 2018, 09:33:37 AM
Sam, why would you care about 10y yield if you just want to hold your bonds to maturation? Or are you trying to trade your bonds?
Title: Re: 10 Year Bond Yield Surging To 3.2%
Post by: Sam on October 04, 2018, 11:54:56 AM
I plan to hold my bonds until maturity. That's fine. They just won't make as much money as I could up I guess. But my bond funds are down, but they're not down that much
Title: Re: 10 Year Bond Yield Surging To 3.2%
Post by: Bonsai on October 05, 2018, 12:32:54 PM
Quote from: Sam on October 04, 2018, 07:40:05 AM
Unfortunately for bond investors, we are taking it relatively on the chin now as the 10-year bond yield surges to 3.2%.

I thought we'd be capped for the year at around 3% - 3.1%, but I am wrong. I guess bond yields could still fall back down by year end.

With money market rates and 12-month CD rates getting very attractive now at 2% - 2.65%, I'm not sure whether buying a bond with a 3.2% yield is worth the risk.

Thoughts?

Could you expand on what "worth the risk" means?  The 3.2 yeild is for 10 year Treasuries which, by definition, are risk free vis a vis bonds?

Sam
Title: Re: 10 Year Bond Yield Surging To 3.2%
Post by: Sam on October 05, 2018, 06:23:02 PM
All is good if you hold an actual 10-year treasury bond until maturity.

What some people by bond ETFs.
Title: Re: 10 Year Bond Yield Surging To 3.2%
Post by: Eric on October 15, 2018, 07:41:10 AM
At the current interest rate differential - i'm a big fan of high yield savings / CDs.

CDs / shorter duration give you more liquidity if things change.
The shorter duration doesn't give you the potential offset (gain in bonds) if interest rates decline. This typically happens when stocks decline, but from last week, that correlation can certainly break down and the lower stocks /lower bonds (lower $ price, higher yield) is a very real scenario. Painful scenario for pension funds/insurance funds too. The biggest advantage of a bond fund is if the correlation  holds.

Also - don't forget to consider forward rates. You're not comparing 2.65% to 3.2%. Compare a 10yr treasury with rolling a 2 year CD 5 times. 2.65% for Year 1 and 2, and then the expected 2 year CD rate in 2years (2y forward 2 year rate), etc. With forward interest rates upward sloping, you should come out ahead in the CD vs. the 10yr treasury.

Technically -you're trading credit risk (bank risk is higher than government risk). But FDIC insurance (as long as you're under the caps) is stronger now than before. During 2008 - it was very uncertain whether the FDIC could cover losses if a bank as large as Citibank went under. Now with incremental bank capital requirements, it's a much more unlikely scenario.

In the forward curve - what you're essentially looking at is swap spreads, difference from swap rates (in a simplistic view, libor forwards, proxy for bank wholesale borrowing rates) and US treasuries. Where this math falls apart is in the 30 year space. For those looking for a long duration investment (more for the risk hedge than the higher rates) - Munis look pretty cheap versus treasuries.
Title: Re: 10 Year Bond Yield Surging To 3.2%
Post by: PandaAtlanta on November 03, 2018, 07:17:12 PM
Sam,
What is your forecast of the 10 year? Do you see it coming back down again if we fall into a deflationary cycle in 2019? The current economic environment feels a lot like the year 1937 where the FEDs starting back tracking and cutting rates after slowly raising them after the 1929 Great Depression. 1929 feels like 2009 where as 1937 feels like 2018 - 2019.

Triple AAA Corporate bonds and long term treasury bonds would appreciate outpacing any CDs in a deflationary environment. What are your thoughts on Triple AAA Corporate bonds like QLTA?

Title: Re: 10 Year Bond Yield Surging To 3.2%
Post by: Sam on November 04, 2018, 10:52:27 AM
Quote from: PandaAtlanta on November 03, 2018, 07:17:12 PM
Sam,
What is your forecast of the 10 year? Do you see it coming back down again if we fall into a deflationary cycle in 2019? The current economic environment feels a lot like the year 1937 where the FEDs starting back tracking and cutting rates after slowly raising them after the 1929 Great Depression. 1929 feels like 2009 where as 1937 feels like 2018 - 2019.

Triple AAA Corporate bonds and long term treasury bonds would appreciate outpacing any CDs in a deflationary environment. What are your thoughts on Triple AAA Corporate bonds like QLTA?

I don't forecast for 10 year bond kneeled breaking 3.5% for the next 10 years. How is bad for taking an aggressive stance despite the Fed raising interest rates? In other words, I see a flat-ish your curve or a flat yield curve over the next two years.

As a result, I am getting more and more conservative with my investments. I think there is a high chance we go into recession by 2020.
Title: Re: 10 Year Bond Yield Surging To 3.2%
Post by: PandaAtlanta on November 18, 2018, 09:43:52 AM
Sam, in this scenario where you don't see the 10 year breaking above 3.5% in the next 10 years, wouldn't be wise to load the truck of long term treasury bonds (25 year +) in this situation? If both the stock market and real estate market start to cater, we know that the FEDs will print money again with QE 4,5,6, reversing by cutting rates and not raising them. Do you see the similar scenario as I see it?

Quote from: Sam on November 04, 2018, 10:52:27 AM
Quote from: PandaAtlanta on November 03, 2018, 07:17:12 PM
Sam,
What is your forecast of the 10 year? Do you see it coming back down again if we fall into a deflationary cycle in 2019? The current economic environment feels a lot like the year 1937 where the FEDs starting back tracking and cutting rates after slowly raising them after the 1929 Great Depression. 1929 feels like 2009 where as 1937 feels like 2018 - 2019.

Triple AAA Corporate bonds and long term treasury bonds would appreciate outpacing any CDs in a deflationary environment. What are your thoughts on Triple AAA Corporate bonds like QLTA?

I don't forecast for 10 year bond kneeled breaking 3.5% for the next 10 years. How is bad for taking an aggressive stance despite the Fed raising interest rates? In other words, I see a flat-ish your curve or a flat yield curve over the next two years.

As a result, I am getting more and more conservative with my investments. I think there is a high chance we go into recession by 2020.
Title: Re: 10 Year Bond Yield Surging To 3.2%
Post by: Sam on November 18, 2018, 10:26:21 AM
Panda,

Yes. But stocks could perform even better if history is any guide.

But I will say about earning 3.2% during 2018 sure does feel pretty good.

I will be aggressively buying municipal bonds and some treasury bonds if the 10 year yield hits 3.5%.