I have been much criticised in recent times by supposed investment specialists for suggesting that there might be any merit in investing in government bonds. In that context I note this morning that the FT reports that:
The global bond market rally accelerated on Wednesday, as New Zealand's central bank became the latest to sound a gloomy note on economic growth and traders ratcheted up bets that the Federal Reserve will start cutting interest rates this year. The 10-year Treasury yield slipped another 6 basis points to 2.37 per cent, the lowest since 2017, as the US bond market heads towards its second-best monthly performance in more than a decade. The yield fell further in Asia trading on Thursday, slipping to a near 16-month low of 2.34 per cent.
As they add:
Traders are now betting that there is almost an 80 per cent probability of the Fed trimming rates at least once this year – and a meaningful chance of several cuts.
And why are people buying bonds? Because they want safety. And they do not believe equity markets can provide that.
Why can't equity markets do that? First, because of a shortage of demand. Some of that is down to low pay. Second, it's also partly because people do not want to buy what is on offer (think new phones, diesel cars and planes that don't work). Third, because markets have stopped working out what people want because i) most of the people that markets serve have all they reasonably need and ii) advertising appears not to be working any more. Fourth, because what people want (jobs, a pay rise, security, action on climate change, affordable health care) can only be supplied by the state. And fifth, because those things are not being delivered by market ideologues in legislatures.
So bonds make sense, to the extent that there are ¢10 trillion of negative yielding government bonds in issue right now, and people willingly own them.
So here's an answer. It's a Green New Deal. I hate to point out the obvious. But it's also the only answer I know of. Or that anyone else knows of at present. And if there's one thing the Green New Deal will do it is that it will meet the demand for bonds.
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Why should they?
Bond traders I mean, those in the city who press buttons to make trades worth multi millions. Or those who are so rich they cant risk depositing their money in a commercial bank that’s only insured to £85k.
These people have grown rich on the backs of capitalism- their minimum wage workers cant afford green energies / transport / insulation… but it doesn’t matter, so long as they generate the profits that feed the rich.
Why should they, Richard, be compensated for this accumulation of money they have, by being given the chance to make yet more by purchasing green bonds? The same people who’ve fucked the environment, can now get even richer off the backs of the rest of us trying to fix it.
I really do not agree – it’s a moral thing – They’ve had their time, and They’ve blown it.
I think any Green bonds sold should be restricted to be bought by Green Quantitive Easing, or maybe only those companies who have demonstrated they are actively reducing their own carbon footprint, or selling products that allow others to do so. The rest of greedy, polluting “we don’t give a shit about the environment so long as we get our profits” organisations , can…..well, to be less than polite, can go to hell.
I did mention negative rates, didn’t I?
And you do realise you are talking about anyone with a pension, don’t you?
I totally agree.
It must be hard for the market extremists/dreamers to deal with this.
Investors have different risk profiles. If you want an explicit guarantee of return of your notional capital then own treasuries or gilts. Clearly in a falling interest rate environment (since 2010) the longer the duration the better the return and coupled with low inflation this has been a great environment
for bonds. Unlike an equity however there is a finite return available and the closer you move to that point the greater the risk you face. Owning a bond 20/30 yrs out when no one has a crystal ball then any change in interest or inflationary expectations will cause a significant fall in price. If investors are aware and happy to take this risk then fine.
You ask why can’t equities don’t provide the same safety..well actually they are completely different instruments. Bonds offer capped upside, equities offer unlimited upside and are clearly more risky in some ways and less in others – equities effectively offer inflation protection for example.
Anyway there can be no criticism of anyone owning solely bonds or solely equities as long as they fully understand the risks they face. So anyone advocating buying long dated bonds now must do so on the understanding of the duration risk i.e the sensitivity to interest rates and that inflation will erode real returns. In fact they should have the calculation showing that if long dated rates shift 50bp,100bp etc then this will be the move in the price i can sell at today.
The danger with markets is investors get “sucked in” on historical performance and buy close to the top and this is the case with bonds at present. It might be with equities too and it is worth remembering that even after the bull market of all bull markets in bonds you would have made more holding a decent equity portfolio. Personally if you want complete security then investors should put there money on a 1yr deposit – you can earn the same as a long dated gilt without the risk. If someone is young and can invest over the longer term and is then it makes sense to own equities.
You really do miss the point, don’t you?
And what is bizarre is that you would still do so even if I pointed it out
So Tim is sane and understands risk and is not making the bond v equity discussion personal or political. He is indeed entirely factual as I believe I was also..
But you showed your true agenda in the comment I deleted
I guessed it right
@fiona
You know you’re playing in a casino.
If you place your chips well you’ll win.
Probably.
If you are playing with somebody else’s money and they are relying on it for their security I hope you are good at what you do. 🙂
Hi Andy, I am going to disagree with you on this one as I think Fiona has actually put forward a pretty factual position. Bonds are not risk free and the longer dated the bond the bigger the risk. That risk is a combination of what might happen with inflation and what may happen with interest rates. Yes at the end of the term you get back the face value of the bond, but that is almost certainly not what you paid for it. Bonds are issued at auction not at face value. Certainly at the moment even if bought direct from the Government on issue day you are likely to pay more than face value. When bought on the market then at the moment you could on many UK gilts be paying 150% of the face value. When it is long dated and you decide you need your money back now rather than years into the future then you will only get the market price. That may be more or less than face value and more or less than you paid. So Fiona is right – if you want zero risk and a small return then do the 1 year or 2 year fixed deposit and not a long or medium dated gilt. If you want a higher return I would still go for blue chip shares. For example I have set my mum (who is 88) up with a portfolio of things like National Grid, Vodafone, Rio Tinto, Santander, BP. Mostly pretty international so they won’t be affected too much by Brexit and the UK going down the tubes. Anyway, the Dividends paid are nearly 5% pa. What she needs is the income and she is highly unlikely to be selling the shares in the rest of the time she has. So as long as the dividends stay roughly the same it doesn’t matter much what happens to the share prices. In fact they have stayed in aggregate almost unchanged in sterling terms over the last 7 years or so as some things have gone up and others down (e.g. Tesco). If she put the portfolio into gilts she would immediately reduce her income by 60% (to 2%) and would have to make up the shortfall by using the capital. That of course is then a downward spiral as less capital cuts the income.
Back to bonds for a moment – the USA is one of the very few countries where interest rates have gone up a bit (bond prices fall), so if the Fed now says they will rise no more and indeed may fall then of course there will be a rush into US bonds. That is simply because those bonds will now tend to increase in price and that generates a capital gain for the holders. They will sell to lock in the gain in due course. Those people are after the capital gain and any interest is fairly irrelevant.
So Government bonds of medium / long terms are just as speculative as shares but simply in a different way. It is perfectly possible to make a huge loss of the real capital value on a portfolio of gilts. I believe if I remember right that Keynes became a millionaire then lost it again and I think finally made another entirely out of speculating in UK gilts in the 1920s / 30s.
The money from the sale of GND bonds would, I assume, be spent on things such as renewable energy systems and the energy renovation of the built environment. Companies, for the most part would provide the labour and goods for the build out of renewables and renovation of buildings. Some (many?) of these companies will be quoted on stock markets (this certainly applies to the larger players). Thus wilst there might be a flight from equities to (gov) bonds this might be uneven, i.e. not all equity sectors will be equally effected since some will be meeting the growing demand generated by green gov spending.
Mike Parr says:
“…. not all equity sectors will be equally [affected]….”
They never are. Except by the initial herd-shock of a crash. Those that invested well and longterm (and can afford to hold on) will come out okay.
If GND is to work it WILL be a mixed economy solution.
Private sector players will come round to this realisation eventually. Currently they are just frozen in the headlight glare of change.
The Fed is always behind the curve.
Currently by about 48 years. Because they haven’t noticed that when Nixon decoupled the Dollar from gold it changed the game.
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