Bond-age

bear-tea

DOUG By Guest Blogger Doug Rowat

Bond returns have been falling for decades. Here’s the proof (I use the US bond market to illustrate as it’s the world’s largest and has the best long-term data):

US Bond Returns By Decade
doug-1
Source: Turner Investments, Bloomberg

Bond yields, of course, have also been falling for decades. We’ve long been taught that as bond yields fall, bond prices rise. So yields declining for decades is good, right? Not for long-term investors. The problem is that bonds regularly mature and if you’re constantly reinvesting funds from maturing bonds into newer bonds offering a lower yield to maturity, naturally, your expected return is going to steadily diminish over time. Thus the chart above.

An intriguing question becomes why have yields (and hence returns) consistently fallen for so long? Sometimes the explanation is cultural combined with comparatively unattractive alternatives. The Japanese, for instance, have always been strongly encouraged to buy domestic bonds and the long-term returns of Japanese equity markets have been dismal—the Nikkei 225 has lost about 1% per year over the past 25 years. The Japanese therefore have been more receptive to lower bond yields. But still, this explanation doesn’t apply to most other parts of the world.

Actually, the main cause of the ever-diminishing bond market returns is central banks. Their continuous slashing of interest rates has driven bond yields to the basement. But central bank action must itself have an underlying cause. Drilling deeper, slowing global economic growth likely explains central banks’ how-low-can-we-go interest rate policies. Like central bank benchmark interest rates, global GDP growth has similarly trended lower over the decades. For instance, in the 1960s it was not uncommon to have a 5–6% annual growth rate. Now we’re going to be lucky to get half that. But moving ever closer to the lowest common denominator, what then explains the declining economic growth?

You guessed it: demographics. Underlying it all—slower economic growth, lower central bank rates and weaker bond returns—is simply old age. The world, particularly the developed world, is aging rapidly and as we age, like it or not, our productivity and consumption declines. What makes it worse for bondholders is that as we age our risk aversion also increases. Simply put, when we get older we want bonds more. The chart below, which shows the increase in average US worker age versus the declining yield on US 10-year Treasuries, illustrates this relationship perfectly:

Demographics Have Driven Bond Yields Lower

doug-2

Source: Turner Investments, Bloomberg

It’s hard to see this relationship changing. The United Nations estimates that the number of older people (60 years or over) globally will double by 2050 to more than 2 billion. Therefore, long term, bond yields and overall bond returns, are destined to decline further. With so many Methuselahs in the world all chasing safer returns is it any wonder that the global bond market topped US$100 trillion (with a “t”) for the first time in 2013? And with so much demand, governments certainly don’t need to offer much in terms of yield. In many parts of the world bond yields aren’t even covering the inflation rate, so real returns are negative. And in some countries, such as Japan and Germany, yields for certain maturities are outright negative.

So with this dismal backdrop, why bother holding bonds at all? Well, there’s a case to be made for going 100% equities. Former chief economist at Sanford C. Bernstein and New York Times contributor David Levine compellingly makes that case here. However, I don’t agree, mainly because the average Joe can’t keep his or her you-know-what together when equity markets are melting down. Another highly respected market historian and economist, Peter Bernstein, explained the importance of bonds by highlighting his—and, by extension, our—basic human nature when faced with market volatility:

When [equity markets] are cascading downward, keeping one’s cool is almost impossible…. Even if we could imagine a person blessed with sufficient longevity to have been active in the market ever since 1925, how likely would it be that even the most experienced and sophisticated investor would have the self-control to stay 100 percent in stocks, without trading in and out as the market rode up and down its roller coaster? I know I could not have been so calm through depressions, inflations, banking and currency crises, wars and political disruptions.

So bonds give you very little in terms of return, but a great deal in terms of peace of mind. They stabilize your portfolio and therefore stabilize YOU, preventing you from making rash decisions out of fear.

If you want to read this blog on Saturdays, you have to learn to love charts, so here’s one more. It shows the difference in volatility been the US equity market and a broad US bond index over the past 10 years:

Rolling Standard Deviation: US Equities Versus US Bonds

doug-3

Source: Turner Investments, Bloomberg.

Standard deviation measures the amount of variation or dispersion within a particular index. In other words, it measures the risk of owning that index.
Think of it as a heart monitor: if you held an equity-only portfolio during the credit crisis, you, like many investors, might have sold at the worst possible moment out of fear. And if you didn’t? Good for you, but you probably now have a pacemaker because your heart exploded.

You need bonds in your portfolio. They’re uninspiring and don’t offer much, but they generally keep you safe and thinking more clearly. Basically, they’re your portfolio’s Hillary Clinton.

Doug Rowat,FCSI® is Portfolio Manager with Turner Investments and Senior Vice President, Private Client Group, Raymond James Ltd.

116 comments ↓

#1 Garth Turner on 10.01.16 at 2:51 pm

The comments feature seems to be working again. Here is your opportunity to tell Mr. Rowat what you think of him & his bonds. — Garth

#2 Penny Henny on 10.01.16 at 3:16 pm

My plan is to go 100% equities in index fund ETFs. Well I guess 100% is inaccurate because I plan to have 3 years of spending money in GICs and I am hoping that this will be a long enough of a time frame to ride out a down market and if not I can always go back to work part time if need be. The key is to be willing to be flexible with one’s spending. Bonds have no place in my portfolio.

#3 Penny Henny on 10.01.16 at 3:21 pm

#86 PR on 10.01.16 at 2:48 pm
The Government of British Columbia hoped to calm its property market boosted with the imposition of a 15% tax to foreign buyers.

It was served.

In Richmond, a wealthy suburb of Vancouver popular Chinese buyers, the number of transactions has melted from 310 to 10, and their value of 335 to 6.4 million.

Throughout the Vancouver market, the proportion of international buyers rose from 13.2% before tax to 0.9% in August.
///////////////////////////////////

Proof! Chinese don’t like paying taxes.

Mark has nothing on me when it comes to connecting the dots.

Oh yeah!

#4 Mr. Frugal on 10.01.16 at 3:21 pm

I’m all for holding bonds in my portfolio but I don’t want Hillary Clinton anywhere near my money!!!

#5 BobC on 10.01.16 at 3:22 pm

For the risk you take with bonds in a taxable account aren’t you better off with cash?
Also going deeper isn’t all the low/slow growth caused by debt and doesn’t that mean we’re stuck with it for the rest of our lives anyway?
Not trying to be a doomer but making the right investment decisions has to come from having the right information.

#6 Gasbag Boomer on 10.01.16 at 3:28 pm

Very nicely put argument, thanks Doug. Is there a secret message in having a bear in the photo? :-)

#7 LP on 10.01.16 at 3:35 pm

The comments feature seems to be working again. Here is your opportunity to tell Mr. Rowat what you think of him & his bonds. — Garth
****************************

Like him well enough, learning to understand bonds (slow process), hate charts.

#8 Mark on 10.01.16 at 3:41 pm

The economy isn’t growing much, but it isn’t really shrinking either. If bond returns are to be suppressed, say, for the next few decades due to boomers piling into them and being willing to accept negligible returns, then stocks should do much better than they have in the past.

Throw in some performance chasing, which is inevitable (remember income trusts!!), and the normal sort of earnings growth, and a TSX index level of 50,000 – 60,000 seems quite plausible a decade from now.

Think about it. TSX’s earnings are currently around 1000 for the composite, for a P/E of ~15. If the earnings grow to 1700 in the decade (at a typical growth rate), and the P/E multiple expands to 35 (ie: the multiple for Canadian residential RE reached at the 2013 peak), 35*1700 = 59,5k.

#9 wendi1 on 10.01.16 at 3:50 pm

Mr. Rowat: correlation is not causation.

And when bond yields increase, it will not be due to a sudden die-off of the elderly.

I like graphs, too, so when someone shows me a financial graph with a very short timeline, I ask myself, “if I drew this graph with a few more decades in it, would I get a different result?”.

#10 understood by few on 10.01.16 at 3:58 pm

I think Mr Rowat is sexy and bonds aren’t.

No wait, it’s houses that are sexy. Back to binge watching fixer upper. Mr Rowat is ok, but he’s no Chip Gaines.

#11 Debt's Dark Embrace on 10.01.16 at 4:11 pm

Peace of mind ? Hahah. You are a funny guy ! I get diddly squat return on my investment and now I have peace of mind….I sure feel good now……get out of town you bozo.

#12 Doug Rowat on 10.01.16 at 4:13 pm

#9 wendi1 on 10.01.16 at 3:50 pm
Mr. Rowat: correlation is not causation.

And when bond yields increase, it will not be due to a sudden die-off of the elderly.

I like graphs, too, so when someone shows me a financial graph with a very short timeline, I ask myself, “if I drew this graph with a few more decades in it, would I get a different result?”.

You show me your graph, I’ve shown you mine. Almost 50 years of data isn’t enough to draw a conclusion? As you get older, you take less risk. Just a fact of life. Check auto insurance premiums by age if you don’t believe me.

–Doug

#13 TurnerNation on 10.01.16 at 4:21 pm

Speaking of lifetime streams (alimony?) One of life’s lessons here. There’s always someone younger, fitter or better looking than you.
Tag this #FreedomFirst?

http://www.cbc.ca/amp/1.3785136

‘The face you make when you’re married to a prince but you meet Justin Trudeau’

#14 Bank of Millenial on 10.01.16 at 4:23 pm

Has the fed run out of road to kick the can down?

QE/ZIRP/NIRP have encouraged too much investment and “pulling forward of production” when demand fundamentals wouldn’t warrant increased capacity.

Eventually excess supply cannibalizes price and the result is the much postponed deflationary pressure.

Listen to the Costco earnings call on Sept. 29 and other retailers – they reported mild deflation in some of their staple product lines such as gasoline, food (protein) and sundries.

Where do we go from here, I think we see government policy drive toward creating more demand through tax code changes and regulatory reform served with a side-dish of “Populism.”

Indications of this sentiment are apparent through how disgusted Congress/Senators seems in their discussions with CEOs from Wells Fargo, Mylan, Turing, Valeant.

We should hope that policy makers and central banks have the ambition to make the adjustments necessary. If they don’t, it is your responsibility to go out and vote and if that doesn’t work, vote with your dollars.

#15 Bond-Demo? And Garth...Barn-Burner on 10.01.16 at 4:33 pm

Ryan, are there not a fixed number of bonds issued? If so, it makes no sense that their yield correlate to the median age of a US worker.

T-Bill bond yields represent the risk free rate in calculations such a CAPM, so when did they become a measure of productivity and consumption? Makes no sense to me.

Also, median worker age is selective, they are not the only one’s buying bonds if we buy your age hypothesis. Correlate average US population age to bond yields, different story. Here is median age of US population:

https://www.statista.com/statistics/241494/median-age-of-the-us-population/

By your logic, yields should have peaked in 1970, steadily risen to 2010 and then flat lined ever since.

______________________________

And Garth, indeed TD made the barn-burner announcement and before GDP July was released. Here it is (TD, Sept 22):

http://www.cbc.ca/news/business/economy-td-q3-forecast-1.3774405

RBC even earlier (Sept 14):

http://www.cbc.ca/news/business/economy-rbc-outlook-1.3761688

…yes, yes, I know you do not read CBC Business…I do, nice to know what the Birkenstock crowd is thinking.

bsant54

#16 Bram on 10.01.16 at 4:36 pm

I agree,
100% stock needs a certain mentality.
I find the best way to deal with this is:

-1- make sure your stock holdings pay dividend.

-2- even if your portfolio has a dismal decade, you just wait, and while you wait, you get paid dividend.

A miserable market tends to recover, typically sooner than later.

So no bonds in my portfolio.

#17 Marcus on 10.01.16 at 4:36 pm

Bonds are bonds but the real action is occurring in the Derivatives market. Deutsche Bank just got rocked again this morning. Massive market manipulation with many DB employees being indicted. Monday is a holiday in Germany so Tuesday should be very interesting. http://www.zerohedge.com/news/2016-10-01/deutsche-bank-charged-italy-market-manipulation-creating-false-accounts

#18 Re: Bond-Demo? on 10.01.16 at 4:38 pm

My bad, rates should have *fallen* since 1970 then flat lined after 2010.

bsant54

#19 skube on 10.01.16 at 5:02 pm

This was an excellent post Doug. I’m a Saturday convert. Keep the charts coming!

#20 Russ on 10.01.16 at 5:02 pm

More cowbell!

And charts. Both are fun.

#21 Standard Deviation is Low on 10.01.16 at 5:09 pm

By definition, the S&P 500 has a β of 1. Your chart shows that most times the S&P σ is < 3% which is very low and to be expected; otherwise, throw β out the door as a measure of a stocks volatility if the baseline you measure against is volatile itself.

Bonds we expect to have a near 0 σ since after all, they represent the risk free rate and as you say, σ measures risk.

Good chart, for a moment there you had me going on the usefulness of stock's β.

BTW, sorry Doug I called you Ryan before.

bsant54

#22 Self Directed on 10.01.16 at 6:06 pm

Apparently, rebuilding Fort Mac is going to give cdn GDP a boost in Q3. What is the case to rebuild housing in Fort MacMurray? Where is the demand? Do non oil patch people actually live there? Is oil planning to recover this decade. This isn’t the same as rebuilding new orleans after katrina, even though that i feel is a different kind of mistake. All im saying is, if my house burnt down there, i wouldnt go back.

#23 Doug Rowat on 10.01.16 at 6:11 pm

#15 Bond-Demo? And Garth…Barn-Burner on 10.01.16 at 4:33 pm

Ryan, are there not a fixed number of bonds issued? If so, it makes no sense that their yield correlate to the median age of a US worker.

Also, median worker age is selective, they are not the only one’s buying bonds if we buy your age hypothesis. Correlate average US population age to bond yields, different story. Here is median age of US population:

This website is an advertisement, correlations don’t “make sense”– either there’s a correlation or there isn’t, I’m Doug not Ryan, and the point of my post is that you need bonds in your portfolio to control emotion regardless of yield direction.

–Doug

#24 Self Directed on 10.01.16 at 6:11 pm

#16 Bram yeah i think you’re right. But only if you have good discipline. If you have faith in the capital markets (Turner Investment kind), then load up on blue chip stock with dividends.

#25 Old Dog on 10.01.16 at 6:20 pm

I’m a believer in 100% equities with the majority producing dividends. I don’t really care what the market is doing today or what it will be doing next year. What I care about is the business of the companies I own.

#26 Almost fell asleep reading this. on 10.01.16 at 6:22 pm

Wow, this post was so boring! Maybe I should skip the weekend read.

#27 long enough charts on 10.01.16 at 6:34 pm

#12 Doug Rowat on 10.01.16 at 4:13 pm

how do you explain the collapse in US long term interest rates from 1815-1827, from 1861-1900, from 1921-1946?

demographics?

#28 Doug Rowat on 10.01.16 at 6:42 pm

#26 Almost fell asleep reading this. on 10.01.16 at 6:22 pm

Wow, this post was so boring! Maybe I should skip the weekend read.

Did I force you to come here on Saturdays? You act like I charged you and you didn’t get your money’s worth.

–Doug

#29 Doug Rowat on 10.01.16 at 6:51 pm

#27 long enough charts on 10.01.16 at 6:34 pm

how do you explain the collapse in US long term interest rates from 1815-1827, from 1861-1900, from 1921-1946?

demographics?

Sorry, I missed this. I was at Ezekiel’s barn raising.

–Doug

#30 Fed-up on 10.01.16 at 6:59 pm

hang on to bonds just for s**** and giggles got it

#31 Sheane Wallace on 10.01.16 at 7:25 pm

The comments feature seems to be working again. Here is your opportunity to tell Mr. Rowat what you think of him & his bonds. — Garth
———————————-

Sure.

Bond returns have nothing to do with growth.
Stop repeating this stupidity and non-sense.

In the 80-es in the big recession, rates hit 18 % while there was no growth.

Is it time to go back to school to learn the bond fundamentals?

Bond rates in normal markets are driven by the creditworthiness of the debtor and be willingness of the creditors to lend/e.d. risk to get their money back and by the inflation.

There is no real government bond market today, as no sane parson will lend at rates lower than the official inflation and much lower than the real inflation so the central banks have to step in and ‘buy’ government bonds.

Today the only sane reason to buy government bonds is the expected ‘capital gains’ as central banks ‘drive’ interest rates further lower.

It is pure fraud by non-elected officials and has nothing to do with perception of money and rules of the money markets.

Central banks can not determine the cost (aka interest) of money. Markets determine that. Otherwise is not money but coupons with expiration dates.

It will be interesting to see how long this can go for before currencies getting completely obliterated.

It will be nice when this unravels to see at least one central banker in jail.

————————-

The reason for bond rates going lower is demographics?

Excuse me? This is the main reason for the bonds to go higher. Who will lend to bankrupted countries at peak public and private debt? We are at peak consumption due to debt!

If there were real savings to be spent by baby-boomers, this will drive the economy up – health care, drugs etc.

——————————–

We live in an increasingly productive and effective world. We should be working 20 hours a week, enjoying live, have savings and no debt and have bright future for the young.

If our economy was bases not on debt but on real fundamentals we would have positive, not negative trade balance, surplus, not deficit and stability, not crises after crises.

#32 WUL on 10.01.16 at 7:26 pm

It is time for we Boomers to put their shoulders to the wheel to increase bond yields. I will strive to do my part. I am 60 and I promise that between now and the age of 70, I will double my productivity (won’t be hard) and my consumption (new hips, knees, Viagra and thick spliffs). Any takers to join me?

#33 Sheane Wallace on 10.01.16 at 7:29 pm

In this post I see mostly repetition of Wall Street and mainstream media myths that are popular lately and have nothing to do with fundamentals of money, bonds and rates.

Nice try, you can certainly fool some filth graders.

But hey, keep repeating it, it could eventually become truth!

#34 Terry on 10.01.16 at 7:31 pm

Great article Doug!……………

Why did you have to ruin your message by mentioning Hitlery?

I’m almost ready to give up reading these Blog articles anymore.

Go Trump!

#35 Sheane Wallace on 10.01.16 at 7:36 pm

You show me your graph, I’ve shown you mine. Almost 50 years of data isn’t enough to draw a conclusion? As you get older, you take less risk. Just a fact of life. Check auto insurance premiums by age if you don’t believe me.

–Doug

———————

You conveniently miss the real inflation in your chart.

Trying to correlate bond rates to growth while they again, depend on inflation, savings, debt level!

Come on, they teach this in the first semester in general economy fundamentals classes!

It is good that you are not working for me (Donald Trump statement here: You are fired!)

#36 Freedom First on 10.01.16 at 7:39 pm

Excellent Post Mr. Rowat.

Yes. Risk tolerance. Everyone is different. I know mine. Real Return Bonds and Corporate Bonds. (not counting Preferreds or Reits)

I too would be unable to go 100% Equity. Or 100% Fixed Income. Or 100% anything. Always be the Bear in the middle. Probably cubs too.

Freedom First
007
PHD/Freedomonics

#37 A Yank in BC on 10.01.16 at 7:42 pm

So if demographics determine interest rates, aren’t central banks just going along for the ride?

#38 Sheane Wallace on 10.01.16 at 7:44 pm

Here is some information for starters:

https://www.fidelity.com/learning-center/investment-products/fixed-income-bonds/bond-prices-rates-yields

Bond yields depend on:
– Financial health of the issuer:
– inflation

the word ‘growth’ does not exist in the article (source – fidelity investments)

Capishe?

#39 Rational Optimist on 10.01.16 at 7:52 pm

1 Garth Turner on 10.01.16 at 2:51 pm

“The comments feature seems to be working again. Here is your opportunity to tell Mr. Rowat what you think of him & his bonds. — Garth”

Bonds are for old people like Rowat (he looks, like, almost 50). It’s a very good point that bonds help to stabilize a portfolio during tough times (at the expense of overall returns), but that’s for a different audience. Read the comments: these blog dogs obviously have iced vodka flowing through their veins. They’re not going to get all panicky at the littlest 20% correction. Maybe “normal” people are suffer from “emotions.” Not the supermen (and women) who come here.

#40 Mark on 10.01.16 at 7:58 pm

“Apparently, rebuilding Fort Mac is going to give cdn GDP a boost in Q3. What is the case to rebuild housing in Fort MacMurray? Where is the demand? Do non oil patch people actually live there? Is oil planning to recover this decade.”

The ‘case’ is that the oilsands projects are relatively labour intensive, and people are needed to run them even if they’re not being expanded. So much housing was destroyed in the Fort McMurray disaster than Suncor had to come to a deal with WestJet to significantly upgrade the capacity of their in-house airline to move people from other cities in Alberta and Saskatchewan in which the workers live. In the long run, these commuting programs will be wound down.

Suncor can run their oilsands projects for $20/barrel cash. So at $50/barrel, they’re still reasonably cash-flow positive, and will continue to operate. The longer-term problem for a Suncor shareholder is whether or not the company will be able to repay the cost of capital investment in the projects and provide a meaningful return on equity. I believe that this question will be answered in the affirmative, even if in the short term, subprime-financed shale wells (with very high depletion rates) pressure prices.

And yes, of course non-patchers live there. The workers need doctors, dentists, and the whole cornucopia of professions to support them and their families. Its not just middle aged tradesmen in Fort McMurray, that’s for sure.

#41 WUL on 10.01.16 at 8:07 pm

#22 Self Directed on 10.01.16 at 6:06 pm

Apparently, rebuilding Fort Mac is going to give cdn GDP a boost in Q3. What is the case to rebuild housing in Fort MacMurray? Where is the demand? Do non oil patch people actually live there? Is oil planning to recover this decade. This isn’t the same as rebuilding new orleans after katrina, even though that i feel is a different kind of mistake. All im saying is, if my house burnt down there, i wouldnt go back.

()()()()?????

Selfie:

I will craft a response to your questions (good ones, by the way) as I watch the recap of today’s Ryder Cup matches, Jays/Sox and Redblacks/Lions games. It will be a long post (about 2/9ths of the length of Mark’s average post). My Tony Lama boots are on the ground up here in the second largest Newfoundland city in Canada.

I will submit it about 23:30 MDT and you will be able to read it with your breakie. A starting point is the insurance industry is on the hook for about $3.6 billion in the Taiga.

#42 mouldyinYVR on 10.01.16 at 8:08 pm

Thanks Doug….a very informative read….and yes….some of us at a certain point welcome a ‘smooth(er) ride’ – because our hearts may be in the right place, but they ain’t what they used to be and we sure don’t want them exploding! So count me in for Saturdays and thanks again…….

#43 TurnerNation on 10.01.16 at 8:13 pm

Unfortunately credit does not work on standards of deviation. You buy a stock using margin loan from broker you get full margin always – even if stock price is trading say 5 SD above it should be.

#44 Smoking Man on 10.01.16 at 8:14 pm

Doug. How you going to rebalance with a Trump White House? Have you even thought about it.

Today’s number one topic on Twitter was # Basement Dwellers.. Apparently Hillary was caught on tape trash talking Bernie Millennials.

That just about nails her political coffin shut.

#45 Fluorine on 10.01.16 at 8:39 pm

No issues here!

I love charts & I love bonds. Keep it up, Doug.

Cheers,

~Flu

#46 WUL on 10.01.16 at 8:39 pm

SELF DIRECTED:

I have changed my mind. My response will be ready by Thursday.

However, speaking of Tony Lama Boots (now a Berkshire Hathaway company by the way), from Wikipedia:

“Born to Italian immigrant parents in 1887, Tony Lama first learned the leather and boot trade at the age of 11 when he apprenticed as a shoemaker in Syracuse, New York.”

Warren Buffet is one clever dude. Nothing like a cowboy boot company in Texas. Alberta should diversify its economy.

#47 Rock Beats Paper on 10.01.16 at 8:44 pm

Forgot to mention that Bonds are not at multi year highs, not even multi decade highs. THEY ARE AT MULTI CENTURY HIGHS.

Almost 1/3rd of developed market bonds are yielding zero or even negative, not because there are more codgers living too long, but because central bank balance sheets are bloated with Trillions in bonds.

That is not a free market, but it is stable and not so volatile. Madoff was able to show low volatility for years as well.

Since Clinton is loaded, lets sell them to her at multi-century highs.

#48 The doubter on 10.01.16 at 9:07 pm

How about bonds vs sexes? Do women love bonds more than men?

#49 WUL on 10.01.16 at 9:23 pm

#40 Mark on 10.01.16 at 7:58 pm

Agreed.

#50 John in Mtl on 10.01.16 at 9:45 pm

I have the same question as BobC (Post #5):
“For the risk you take with bonds aren’t you better off with cash?”

Thanks Mr Rowat & blog-Dawgs

#51 Toronto1 on 10.01.16 at 9:50 pm

Bonds used to be a great hedge but with todays govt mentality of pay later i would pass on govt bonds. Almost every emerging market is issuing bonds that will never be repaid at miniscule interest. Everyone is looking for alpha so they pule in.

Stick to corporate bonds fortune 5 and blue chips will pay as they have too govts not so much.

#52 Bobby13 on 10.01.16 at 9:51 pm

Triple bubble bond, stock market, housing. Nothing too exciting will happen until elections over. Bonds should be illegal.

#53 Doug Rowat on 10.01.16 at 10:20 pm

#38 Sheane Wallace on 10.01.16 at 7:44 pm

Here is some information for starters:

https://www.fidelity.com/learning-center/investment-products/fixed-income-bonds/bond-prices-rates-yields

Capishe?

A link to the Fidelity fixed income ‘Learning Center’. Sounds like a blast. And commenters accuse me of being boring.

The point of the post was that you need bonds in your portfolio for their lack of volatility. If you’re a brave soul who can do without them, so be it. The rest of us poor schmucks need them.

–Doug

#54 Doug Rowat on 10.01.16 at 10:40 pm

#50 John in Mtl on 10.01.16 at 9:45 pm

I have the same question as BobC (Post #5):
“For the risk you take with bonds aren’t you better off with cash?”

Thanks Mr Rowat & blog-Dawgs

Great question. Bonds ain’t what they used to be, but they still give you something. For most medium- and long-term investment horizons, bonds will beat the returns on cash every time.

If you’re too risk averse for bonds, it may be your equity weighting you should reconsider.

–Doug

#55 young & foolish on 10.01.16 at 10:45 pm

Hey blog dogs … there is no escape from low returns these days. We nervously buy over-inflated equity etfs knowing full well that it’s a fed induced bull market and has nothing to do with “fundamentals” aka. profits. We sooth ourselves by believing diversification will at least keep us safe, but in today’s interconnected markets, contagion is a certainty. Rowat is right about demographics. Demand is down all around, and spending has been on expanding credit. No wonder companies have been hoarding “dead money”.

#56 Not a big deal on 10.01.16 at 11:06 pm

Soon cash will be king again.

#57 Fortune500 on 10.01.16 at 11:21 pm

Thank you Doug. Concise and interesting. I appreciate these educational deviations. I also appreciate getting it for free!

#58 not 1st on 10.01.16 at 11:34 pm

Ryan, a scared jittery person who swoons at every market mis-step doesn’t hold bonds, or equities. Thats what real estate is for. And if risk is declining with aging population, thats where the trade will be.

We are just one Deutch Bank away from a mass exodus from the equity markets. Less that 20% of the population holds any equities at all outside their forced pension plans. If it wasnt for pensions or 401Ks this would be a thinly owned asset.

#59 not 1st on 10.01.16 at 11:35 pm

Sorry, I meant Doug, not Ryan.

#60 Tony on 10.01.16 at 11:39 pm

Re: #22 Self Directed on 10.01.16 at 6:06 pm

They won’t rebuild a thing in Fort McMurray. The town is destined to become a ghost town like dust bowl Oklahoma.

#61 Crack shot crank on 10.02.16 at 12:17 am

I too am a zero bond guy. The concept of balanced portfolio investing or MPT has been dead half as long as the Dodo Bird. It’s an antiquarian concept that has been replaced with fundamental analysis and those who apply thrashing around in a tar pit waiting to die off.

Bonds are a vehicle liberal governments use to steal money from the citizens. They print ‘bonds’ and buy them all back at zero. It used to private money working a supply demand solution to the economic foundations of an economy, no more. That’s why rates for mortgages are no longer set by the ‘bond market’ because there isn’t one. It’s all a scam by politicians manipulating what is no longer an indepedant central bank.

Minister Moron let slip a few weeks ago that he would be giving the BOC guidance for a five year plan before November. Does that sound independent to you. The government(s) are broke and spending like drunken sailors, they don’t plant rate hikes. Let’s not blame the seniors for a collapse in yields. Overlay the chart with governments gluttonous out of control spending over the same time and there’s where the answer lies.

#62 Smoking Man on 10.02.16 at 12:52 am

Ha, and they don’t even know about Nictonites yet.

Paul Hertz, Director of the Astrophysics Division of the NASA, shared at IMGUR this amazing statement about aliens. “Be carefull what you wish for. if you guys knew even a fraction of the shit we do, you will never sleep again. I promise you that” Paul Hertz Director of the astrophysics divison at nasa.
IMGUR link: ​https://imgur.com/nRg3DYB

https://www.google.ca/amp/m.disclose.tv/amp/news/if_you_knew_what_we_do_you_will_never_sleep_again__nasa_director/135704?client=ms-android-samsung

#63 Pat on 10.02.16 at 12:52 am

http://www.forbes.com/sites/jareddillian/2016/09/28/canada-to-china-your-money-is-not-welcome-here/?ref=yfp#24956b485263

Canada agrees to extradite chinese nationals that smuggle money into Canada. This is got the whole Richmond Chinese community up in arms. According to my contacts this news is 10x worse than the 15% tax

#64 April. on 10.02.16 at 12:52 am

Thank you for the link.

#65 Gogo on 10.02.16 at 1:09 am

This is the first post that is not only amusing to me. Thanks for sharing!

#66 MF on 10.02.16 at 1:13 am

Thank you for the article Doug,

Couple things don’t make sense to me though.

1) So if aging demographics are responsible for the decrease in productivity and older people are more risk averse than younger people, it would make sense that a large portion of older folks are buying these bonds for safety. Fine.

Why then are government debt levels so high? Don’t governments issue bonds to raise funds? If there is such an insatiable demand for these bonds then wouldn’t that be reflected by better government debt levels? Why is it not? (I know there are other types of bonds besides government ones but still).

Another question. I read that when bonds go up, stocks go down and vice versa. Money is supposed to flow back and forth. How is it possible that today we have the US stock market at near all time highs, but the bond market as all time lows in rates (highs in price). How can both be happening at the same time? Garth made a post a few Fridays ago where the market was completely down (stocks and bonds). During the next crisis isn’t there a fear that bonds will be dumped too?

MF

#67 Not boring, I thought it was good on 10.02.16 at 1:20 am

I liked the standard deviation chart. Nice to see someone actually taking the time to verify the orthodoxy of the risk free rate and a stock index that supposedly has a Beta of 1. You show that for the most part this is a correct assumption other than times of extreme economic turmoil like the Great Recession.

Doug (note I got your name correct this time, sorry again), you can correlate until the cows come in, but the T-Bill 10 Year rate besides being a well known indicator of where US prime rates are headed is also equally well known to be the RISK FREE RATE.

It is not, never has been and never will be a predictor of consumption and productivity, there are other measures.

Productivity has always been one of the hardest things to measure and outputs divided by inputs is as good as any to date which has nothing to do with the risk free rate or where the prime rate is headed, if anything, it is the other way around.

Recall in the early 80s high inflation years, Corp. Canada abandoned productivity and innovation in favor of short term investing with high prevailing yields.

So if anything, the correlation ought to be that high yields are a drag on productivity. On consumption, you are on your own.

bsant54

#68 Willdaman on 10.02.16 at 1:24 am

Doug, hoping to get your take on something I had asked Garth back in August… hoping for a better answer than Garth’s pithy response, pls see below:

————————
The government bond weighting is low – about 7% – and nobody buys them for yield. They are, instead, a cheap stabilizer for balanced portfolios, keeping volatility down and also mitigating equity losses during unexpected events like Brexit. Yes, rookies think the purpose of every asset class is to rise. — Garth

————————-
In the current environment, if govt bonds are primarily for the purpose of reducing volatility and mitigating losses, would it not make sense to replace these with gics rather than buying govt bonds that are guaranteed to lose money once interest rates start their inevitable climb?

No. — Garth

#69 Martin Lazi on 10.02.16 at 1:31 am

Best and most interesting post I have read in a long time. Looking forward for next saturday. Just great. Thx

#70 Self Directed on 10.02.16 at 2:21 am

#40 Mark on 10.01.16 at 7:58 pm

Interesting about the commuting problem there. Good post, Mark. Let’s hope the rebuild that has started will actually contribute to Q3 numbers. The country’s GDP needs to stay net positive. The real boost needed is consumer confidence.

#71 Self Directed on 10.02.16 at 2:35 am

#41 WUL on 10.01.16 at 8:07 pm

Thanks, WUL. True, Insurance claims a plenty up in Fort Mac. Those must be dealt with.

2nd largest… google says Conception Bay South? A visit or work trip? Been thinking of moving to Lobster land, perhaps Halifax for the cheap housing. Vibe looks relaxed and I hear people don’t talk about housing. But I can’t get past the sales and income tax rates.

#72 macroman on 10.02.16 at 3:30 am

doubter;

How about bonds vs sexes? Do women love bonds more than men?

Well of course, women love the many James bonds.

Especially the one that runs Goldfinger over with a Kia

#73 Sitting in a Bangkok highrise not giving a shit on 10.02.16 at 4:13 am

I’ve been 100 percent equities for 40 ++ years. It’s true, you have to resist the urge to be stupid when crap is happening. But the fact is you’ll outperform balanced investing by wide margins, Be passive and you’ll never know what a ten bagger is like when the stocks you’ve picked are going stratospheric. You’ll never make a million saving with zero return bonds.

#74 LowRent of Arabia on 10.02.16 at 4:43 am

Negative returns or low returns on bonds with even slight inflation. Plus add in portfolio fees or commissions.

Solution: Basket of currencies including some precious medal ones.

I know the immediate response will be to call this a doomer portfolio but it is simply this…

The risks of holding equities and bonds in the current government manipulated markets and the zombie banks floating around are not offset by single digit returns on investment…hence no reason to invest.

Think of it as a roulette table where the red and black include as least thirty more green 0/00 slots. Or where a bet on black pays out as only 7%. No thanks. I keep my cash, go to the bar and find Smoking Man. Wait for a better casino.

#75 Sheane Wallace on 10.02.16 at 5:06 am

The statements that we ‘need bonds in our portfolio for their lack of volatility’ is based on prevailing market sentiments and attempts to influence investment behaviour in mainstream media (behaviour economics) in an attempt to prolong the charade with ZIRP until the ultimate end with central banks becoming the only purchaser of bonds.

The earlier this changes the better.

The points that I made is that bond yields depend on inflation and risk, not on growth.

We are witnessing attempts to replace money with expiration coupons and bond market with some travesty of central banks ‘purchasing’ bonds which is not money printing but pure theft.

We will see how long it till last.

I made specific argument about government debt – you can not have bond yielding lower returns lower than inflation mid to long term. Period.

The argument of volatility does not fly when there are alternatives with higher yielding GICs or corporate bond ETFs.

Unfortunately now central banks are starting to ‘purchase’ corporate yield (at negative rates!) and stocks!

Show me in your graph when central banks in the whole history of banking ever purchased government bonds, corporate bonds or stocks.
Never.

We are witnessing meddling of idiots with the basics of money, bonds, markets.

Do we think that purchasing productive assets with money from nowhere is sound policy?

The earlier these guys get the finger the better,

#76 Basil Fawlty on 10.02.16 at 7:55 am

Central Bank asset purchase programs have purchased trillions in government bonds, since 2008. This has resulted in the lowest interest rates in history, based on the biggest bond bubble in history.
Look out below.

#77 PrairieDoginYUL on 10.02.16 at 8:16 am

What about 200% in equities? Everyone loves a little leverage ;)

#78 Robert on 10.02.16 at 8:46 am

Once the money starts getting to a reasonable size, should I start diversifying my cap exposure in, say, the US market?

For example, I plan to maintain about a 20% exposure to the US market. Currently, it all tracks the S&P 500. As my money grows, should I consider moving some of this 20% (on the order of 4-5%?) into etf’s that track US small/medium cap companies?

#79 DoomandGloomer on 10.02.16 at 9:25 am

Rowat says:

” …what then explains the declining economic growth?
You guessed it: demographics.”
——————————————————————-
Rowat is right.

While the life expectancy of retirees is increasing, birth rates have fallen by nearly 50% since the 1950s. A key factor to economic prosperity in the developed word from the end of World War II through the 1980s was an ever-increasing working-age population. The U.S. and European working-age population peaked in the past decade, and it is set to drop by nearly a full percent through the year 2040.

If a large proportion of a nation’s population consists of the elderly, the effects can be similar to those of a very young population. A large share of resources is needed by a relatively less productive segment of the population, which likewise can inhibit economic growth.

Canada has more people over the age of 65 than under 15. The age group that now encompasses the boomer generation – 50 to 69 – makes up 27 per cent of the population, compared with 18 per cent in that age group two decades ago. The number of people over 65, the traditional retirement age in this country, make up 16 per cent of the population – double their proportion in 1971. (ref. http://www.theglobeandmail.com/globe-investor/retirement/the-boomer-shift-how-canadas-economy-is-headed-for-majorchange/article27159892/)

Check out this interesting WSJ analysis on demographics:

http://www.wsj.com/articles/how-demographics-rule-the-global-economy-1448203724

Once upon a time, demographer Thomas Malthus looked down the path of world population growth in the late-18th century and predicted a global famine that never happened. The Industrial Revolution did instead.

Optimists believe that productivity trumps Malthusian demographics. I say, don’t bet on it. The worst is yet to come.

#80 I Haven't Paid Taxes in 18 Years on 10.02.16 at 9:54 am

Bonds are for losers, taxes on gains are too high and you can’t scam the taxpayers enough with the write-offs.

Crooked Hillary will love ’em, though.

#81 WallOfWorry on 10.02.16 at 9:55 am

#75…Sheane Wallace,
“We are witnessing meddling of idiots with the basics of money, bonds, markets.”
********************************************

Well said. Invest in hard assets.

#82 Timmy on 10.02.16 at 10:01 am

Blog post was adapted from the recent issue of the Economist.

Prove it. — Garth

#83 Doug Rowat on 10.02.16 at 10:14 am

#66 MF on 10.02.16 at 1:13 am

Thank you for the article Doug,

Garth made a post a few Fridays ago where the market was completely down (stocks and bonds). During the next crisis isn’t there a fear that bonds will be dumped too

The correlation between stocks and bonds is low to modestly negative, but there’s not a completely inverse relationship, especially if you own corporate or high-yield bonds.

For most investors, a modestly negative relationship smoothes the volatility sufficiently.

Corporate and high-yield bonds could get dumped during the next crisis, but that’s why you should have some government bonds too.

–Doug

#84 crowdedelevatorfartz on 10.02.16 at 10:32 am

The only thing more annoying than some of the snarky comments on here about how stupid , boring and ridiculous the topic d’jour is….are the morons that keep insisting Trump is a viable alternative for anything other than a Maury Povitch Shock Jock Radio DJ.
Ya dont like Hillary and the status quo….we all get it…..
Unfortunately the “choice” of Trump as President has the same appeal as the current president of the Phillipines. A semi literate loon with delusions of grandeur who really doesnt mind speaking before thinking because he’s always right and everything he says is “awesome’.
Deep down Trump doesnt want to be President because he’d have to take a cut in pay, cowtow to Congress and ass kiss other politicians for 4 years to get anything done…….nah, he’ll do everything in his power to ruin his chances of being elected in the next 3 weeks………..insulting beauty queens and Bill Clintons liasons are merely the start…….but he sure has the electorate fooled.

#85 conan on 10.02.16 at 10:35 am

When the bear comes over for breakfast, always have a cup in your hand.

Best not to joke with bears. A bad or misfired joke can be taken the wrong way.

#86 Frank Blood on 10.02.16 at 10:47 am

Re:#46 WUL-“Warren Buffet is one clever dude. Nothing like a cowboy boot company in Texas. Alberta should diversify its economy”.
Shameless plug: Alberta DOES have a local boot company, Alberta boot company in Calgary. GREAT boots, great aftersale service. I recommend if anyone is in the market for boots and in Calgary that you check them out.

#87 Basil Fawlty on 10.02.16 at 11:10 am

One can argue that after inflation and taxes real bond yields are negative. This is aside from the $13T in bonds that have a negative yield, before deducting inflation, since taxes could not apply to a negative yield.
So, the point of this posting is that we should invest in these bonds, because they lack volatility? Are negative yields not a definition of volatilty?

#88 Pepito on 10.02.16 at 11:48 am

I think you are just guessing at the reason(s) for low bond yields, doug. As another poster noted, the chart shows correlation not causation.

But as long as we are guessing, here is mine. Total credit market debt has grown to close to 300% since the early 80s. The only other time it has come close to that figure was prior to the great depression. Real wages have been stagnant or actually decreased since the 70s. Credit expansion and the financialization of advanced economies have increasingly been the substitute for real economic growth which has for decades now been driven by cheap central bank money to both consumers and business. Central banks have been dropping yields lower and printing cheap money to keep the party going like it’s still he 80s.

All this IMHO has much more to do with the offshoring effect of globalization and the resultant huge gap in wealth distribution between labour and business over the past 3 decades. Simply, to run an economy on credit, credit must be cheap.

#89 blueb on 10.02.16 at 11:53 am

#61 Crack shot crank

Everything you say is absolutely correct. Central Banks setting rates is wrong on so many levels… where do I begin!

The “Market” should be setting the rates… BOC (and their ilk) trying to control things is how we got into this mess.

What’s needed here are a couple of Murray Rothbard quotes…

“There is no need for government to intervene in money and prices because of changing population or for any other reason. The ‘problem’ of the proper supply of money is not a problem at all.”

“We have gotten to the point where everything the government does is counterproductive; the conclusion, of course, is that the government should do nothing at all, that is, should retire quickly from the monetary and economic scene and allow freedom and free markets to work.”

#90 Wrk.dover on 10.02.16 at 12:09 pm

Imagine having a couple of underwater double wides set up as illegal duplexes that go up in smoke in Ft Mc money-hungry, and trying to sort that out with insurers.

That situation reminds me sooo much of the banks that print to buy stocks in companies with a next-quarter-only long term planning strategy. If the banks hadn’t bought all of these equities in the past 8 years the s&p would be valued where? That should still be the true value, unless Ponzi principals actually are valid and viable long term.

I like my cash more than enough to not want to abuse it by participating in these kind of schemes that don’t end well. Or that is the new normal and I am missing out?

#91 Bram on 10.02.16 at 12:33 pm

#77 PrairieDoginYUL on 10.02.16 at 8:16 am
What about 200% in equities? Everyone loves a little leverage ;)

That made me chuckle. Heh heh.

#92 BS on 10.02.16 at 12:47 pm

Bonds are a must in any portfolio. In addition to reduced volatility there are more way to make money in bonds than the coupon. The next move for interest rates in Canada is down. Good for Canadian bonds. The next move for US interest rates is up which will give the bond funds a slight hair cut but the USD vs the CAD will go up and more than offset that for Canadian investors, especially when Canada cuts. Eventually the US will cut again with a recession due in the next year or two and again that will be good for bonds.

#93 jess on 10.02.16 at 12:55 pm

according to this: 230,000 empty ireland houses /2yr supply with a country where GDP had grown by 26% in 2015?
“There are 6,000 people officially homeless including 2,000 children. There are up to 130,000 households on local authority housing waiting lists. In Dublin there are 7,995 vacant houses and 16,321 vacant apartments. Yet rough sleeping is on the rise.

A REPORT FROM the country’s Housing Agency says there are almost a quarter of a million empty houses across the country

http://www.thejournal.ie/houses-empty-around-the-country-2783895-May2016/

#94 Not a big deal on 10.02.16 at 12:56 pm

How are bonds like Hillary? I’m not being bribed for my own gains to the tune of tens of millions of dollars like her and Billy. But I guess bribing the American people with their own money is not a big deal (nor is it reported by the media).

#95 Doug Rowat on 10.02.16 at 1:01 pm

#87 Basil Fawlty on 10.02.16 at 11:10 am

One can argue that after inflation and taxes real bond yields are negative. This is aside from the $13T in bonds that have a negative yield, before deducting inflation, since taxes could not apply to a negative yield.
So, the point of this posting is that we should invest in these bonds, because they lack volatility? Are negative yields not a definition of volatilty?

I didn’t say I was in love with bonds, just that they’re necessary to control emotion.

And no, negative yields do not equal volatility. Volatility is an unpredictable and whipsawing market. Assuming you hold to maturity, there’s nothing unpredictable about the bonds you mention–your return will be negative.

However, if you diversify your bond holdings sufficiently, you should still be able to top inflation.

–Doug

#96 Mark M. on 10.02.16 at 1:37 pm

#66 MF – “How is it possible that today we have the US stock market at near all time highs, but the bond market as all time lows in rates (highs in price). How can both be happening at the same time.”

It’s called a bubble MF. Unfortunately Garth, Ryan and Doug can’t spot one without a RE/MAX sign in front of it.

#97 GL on 10.02.16 at 1:44 pm

Great post Doug
How about the theory that with the imploding and
unrepayable debt, there is the possibility that bonds follow equities in the next crash.

#98 Paul on 10.02.16 at 2:13 pm

#82 Timmy on 10.02.16 at 10:01 am

Blog post was adapted from the recent issue of the Economist.

Prove it. — Garth
————————————————————-
Timmy didn’t your Mom tell you not to poke the bear. lol

#99 Sheane Wallace on 10.02.16 at 2:21 pm

#88 Pepito on 10.02.16 at 11:48 am

All this IMHO has much more to do with the offshoring effect of globalization and the resultant huge gap in wealth distribution between labour and business over the past 3 decades. Simply, to run an economy on credit, credit must be cheap.

—————————
It is self-enforcing contraction of real economy, the more they financialize to keep the ‘status Quo’ the worse the situation becomes, the less competitive the economy, worse jobs etc.

But nominally they report ‘some growth’.

If this goes the way it is going we are going to replicate the third world countries models – 0.01 % ultra reach, 4-5 % doing OK, some ‘middle’ class of 20 % and the rest living paycheck to paycheck.

The two most notable and frequently seen ads that I saw this weekend in Toronto where for quick cash loans and for Prevent suicide help lines. Never have seen any of these in Europe.

Speaks volumes about the state of the affairs and the economy here.

#100 Sheane Wallace on 10.02.16 at 2:26 pm

#92 BS on 10.02.16 at 12:47 pm
Bonds are a must in any portfolio. In addition to reduced volatility there are more way to make money in bonds than the coupon. The next move for interest rates in Canada is down. Good for Canadian bonds. The next move for US interest rates is up which will give the bond funds a slight hair cut but the USD vs the CAD will go up and more than offset that for Canadian investors, especially when Canada cuts. Eventually the US will cut again with a recession due in the next year or two and again that will be good for bonds.

—————————
‘Good news’ because you are measuring in a nominal terms in flawed declining currency.

Keep these gains, I am sure they will help you in your retirement.

You will be far better getting highly risky junior minors vs, bonds in the case of further rate cuts.

#101 Rational blance on 10.02.16 at 2:53 pm

You can convince me to hold bonds in my portfolio by showing me data, but you could never convince me to support an uninspiring candidate like Hillary Clinton by comparing her to bonds. You have to show me some data why she is the better choice. Trump has a strong case for winning, what does she bring, the status quo of spending and disorder? Something has to give, either its now with a candidate like Trump, or later the landing will be much harder.

Clinton has a good chance of winning, but its like voting for mediocrity that leads to a terrible future just to be safe for now. Its a good thing not all Americans think like portfolio managers (in 5-20 year time horizon).

#102 Bottoms_Up on 10.02.16 at 3:00 pm

Doesn’t this blog post then nicely illustrate why rates won’t be going up?

#103 Vivek on 10.02.16 at 3:05 pm

“….long been taught that as bond yields fall, bond prices rise.”

Hmmm… isn’t it the other way around?

Bond prices rise (due to demand, among other things) leading to falling yields, no?

#104 NASA on 10.02.16 at 3:34 pm

#62 Smoking Man on 10.02.16 at 12:52 am

Ha, and they don’t even know about Nictonites yet.

Paul Hertz, Director of the Astrophysics Division of the NASA, shared at IMGUR this amazing statement about aliens. “Be carefull what you wish for. if you guys knew even a fraction of the shit we do, you will never sleep again. I promise you that” Paul Hertz Director of the astrophysics divison at nasa.
IMGUR link: ​https://imgur.com/nRg3DYB

https://www.google.ca/amp/m.disclose.tv/amp/news/if_you_knew_what_we_do_you_will_never_sleep_again__nasa_director/135704?client=ms-android-samsung

====

Anybody can peak behind the curtain – if they care and if they really want to know.

You will be able to sleep – but you will never be able to “un-know” it.

#105 Mark on 10.02.16 at 3:35 pm

“One can argue that after inflation and taxes real bond yields are negative. This is aside from the $13T in bonds that have a negative yield, before deducting inflation, since taxes could not apply to a negative yield.”

Negative real after-tax yields are nothing new. Run the ‘math’ on yields in the 1970s and 1980s with the tax and inflation rates of the time. Today’s situation, with low rates, is actually far superior for the saver, even though the rates are “low”.

I say this a lot, but seniors pining for high interest rates should really be careful of what they wish for. Sure, high rates will give them a nice rich cashflow stream, but high rates typically are associated with much higher inflation, and higher tax levels.

#106 Rock Beats Paper on 10.02.16 at 3:44 pm

It is good to see that Garth and Doug do not agree on some things. Doug is postulating that demographics has driven rates to close to zero, and the demographics suggest a long grind down here. Garth seems to think that rates will rise, albeit on a slow measured path.

Doug is forecasting one Fed rate hike in December, at least two in 2017, and further tightening after that. Go ahead. Ask him. — Garth

#107 WalMark of Sadkatoon on 10.02.16 at 3:44 pm

Bonds are fine in the portfolio. Just don’t add gold. Canadian investors with gold in their portfolio are all poorer for it!

#108 James on 10.02.16 at 3:46 pm

Re:The chart below, which shows the increase in average US worker age versus the declining yield on US 10-year Treasuries, illustrates this relationship perfectly…

Sorry, correlation does not imply causation.

#109 Mark on 10.02.16 at 4:01 pm

“How is it possible that today we have the US stock market at near all time highs”

Plot the long-term bond market (ie: the TLT ETF) versus the S&P500 since 2007.

The S&P500 is up 54% over the past 10 years and has delivered a modest dividend ontop of that. 2% at best most of the time.

The long-term bonds are up 154% and have delivered a 3-5% yield for most of the interval.

Yes, I can appreciate that there is an argument to be made that the S&P500 is richly valued, if not slightly overvalued. But the bond market, in comparison, is straight into looney-toon land in terms of its returns over the past decade relative to the long-term historical situation.

14 year return of ~130% on the S&P500. 14-year return of ~375% on long-term US Treasuries + coupons.

#110 Sheane Wallace on 10.02.16 at 4:02 pm

This is how the things will work out in the next 3-4 years:

1. Interest rates will go down, not up in short term. In 6 months there will be cut in Canada, in 1 year- in US.

2. Fed will start buying stocks to support markets. This will start in 1-1.5 years and last maybe 2-3 years.

There will be inflation that will be under-reported all the way.

3. At the very end (of the bond market cycle) there will be outright monetisation that will officially bring the inflation to warring levels so they have to raise rates to ‘save’ the currencies will absolutely obliterate the shills/savers counting on government bonds.

Inflation will make debt levels serviceable again. Savers and bond holders as well as people on fixed income will get wiped out.

Yes, rates will increase, but not incomes, so borrowers, get ready to pay much higher rates down the road with no increase in income.

In the process there will be a lot of disinformation (just watch out when rates go down again how the bond will ‘spike’ again attacking gullible ‘investors’)

Can we make short term profit on bonds? Sure.
Will I personally sit on that powder keg with match already lighted hoping for it to be big enough for my trades?
No.

Better:
1. Retain all real estate that is paid off.
2. Putt all your money in stocks
3. Buy preferreds short to mid term
4. Get 5-10 % in miners.

and just wait it out.

#111 BS on 10.02.16 at 5:12 pm

#101 Sheane Wallace on 10.02.16 at 2:26 pm

You will be far better getting highly risky junior minors vs, bonds in the case of further rate cuts.

Rates have been cut and it didn’t help the junior minors yet. The junior gold minor etf GDXJ was trading at $172 in 2011. It is now at $44.20 and no yield (it was as low as $16 a year ago or a 90% loss off the high).

On the other hand IEF the 10 year US treasury bond etf was at $90 in 2011 and made a steady climb to $111 now plus it paid about 2% to 3% yield each year. Then you also got the appreciation in the USD vs CAD or about 25% more on top of that. So bonds have doubled your capital since 2011 where juniors have eroded 70%. A person who invested $100K in the bond etf would have $200K CAD today and the person who invested $100K in the juniors would have $30K. You need the juniors to go up almost 7 fold while the bonds stay flat just to catch up. When do you expect those who have held the juniors since 2011 will catch up to to the bonds or even make their money back? Wow some investment advice.

#112 Ima Fakeologist on 10.02.16 at 9:18 pm

Garth,
Take a look at my buddy Mike in Vancouver:
https://youtu.be/nldryaGgwPE

#113 Karl hungus on 10.02.16 at 11:31 pm

Here’s the thing, bonds are supposed to control emotion. On what? Your entire portfolio? Who looks at their entire portfolio as one unit ? I’ll tell you who doesn’t, the people who can’t control their emotions. It wont matter that they have bonds. They’ll look at the portion of their portfolio that isn’t bonds and freak out anyway.

#114 Trumpet Sound on 10.03.16 at 12:38 am

“Basically, they’re your portfolio’s Hillary Clinton.”

Gasp. Where is the inhaler? Crooked Hillary bonds, they may as well be Madoff bonds.

#115 spaceman on 10.03.16 at 1:50 pm

Penny Henny on 10.01.16 at 3:16 pm
My plan is to go 100% equities in index fund ETFs. Well I guess 100% is inaccurate because I plan to have 3 years of spending money in GICs

not a good plan, GICS pay nothing, therefore you would be better to buy a stable divdend stock like J&J and reinvest dividends.

Bonds and Equitys Balance each other, so when you need the money, you get it from whichever is the highest… there is no need to put money in GICS, savings accounts, or T-bills.

My Canadian RBC Bond fund averaged a 2-5% return over the course of the last 5 years, as a result of the lowest interest rate in history, is there something wrong with that? No.

The return on short term bond fund was about 1.5%, which beats any GIC. They hold their value, and are used to balance against your Equities, which should always remain about 50%.

#116 mark on 10.03.16 at 7:27 pm

What’s the rolling span on the chart?