
30-year U.S. bond yields less than S&P dividend rate - potiuper
https://www.bloomberg.com/news/articles/2020-03-06/bond-markets-shred-history-books-in-grip-of-furious-fear-trade
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brenden2
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 bond prices are high and yields are
low, it suggests the market thinks equities will have a lower return.

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.

Anyway, I'm not giving investment advice, but I think the current market panic
is short term and non-systemic, so it's not a terrible idea to consider
rebalancing from bonds into stocks while the prices are good. If you think the
market might keep dropping, then perhaps wait a little longer.

The truth is that trying to time the market is like throwing a dart at a board
blindfolded, so you might as well take advantage of the current state instead
of speculating about the future.

~~~
Der_Einzige
Lmao the current market panic is not short term and is absolutely systemic.

Supply chains have ground to a halt . Actually, it's easy to "time the
market"... Just buy puts when everyone is panicking.

~~~
jotakami
My retirement account is up 20% in two weeks from SPY puts and GLD calls

~~~
kenneth
SPY puts (and some others) have been good to me. I'm up about 1000% in my
public positions over the past couple weeks.

I'm letting it ride until my thesis on how bad this gets pays through. It's my
hedge against my world getting significantly affected by the virus.

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Danieru
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.

~~~
ikeboy
This doesn't explain why rates change. The delta can only ever be explained by
people choosing to buy bonds instead of what they previously owned, or vice
versa. Those people are definitely not trying never to lose any money at any
cost, or they'd have bonds all the time and rates would never change.

~~~
TheOtherHobbes
Rates and prices reflect confidence in the future - essentially faith in the
system.

~~~
ikeboy
Not quite - rates are going down not because people think they won't be paid
back, but because they think their alternatives will return less due to lower
growth and are shifting investments from there to bonds.

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thebrain
I recently cashed out a Canada Savings Bond I had from when I was a kid and I
after taking into account inflation I made about $8 while the government had
my money for 20+ years.

~~~
unlinked_dll
Bond rates are supposed to track the inflation rate so it's nice to see it
functioning as intended

~~~
cheez
Depends which "inflation" measure is being used.

~~~
3fe9a03ccd14ca5
Depends on which asset classes are used.

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tryptophan
The dividend yield doesn't matter (alone). The more common way to return cash
to shareholder's is via buybacks.

The actual 'yield' of the market should thus be calculated as div yield +
buyback yield, giving the investor yield, which is what intellectually honest
people should compare to treasury yields.

~~~
MuffinFlavored
> The more common way to return cash to shareholder's is via buybacks.

Is this more common throughout history or only common in today's modern market
of cheap interest rates?

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outside1234
I'm not sure why this headline is news.

Bond yields should be less than S&P dividend rates because with a bond, there
is a much higher likelihood of getting your principal back (debt is senior to
capital) that isn't there with underlying stocks of the S&P.

Also, the underlying stocks of the S&P can cut their dividends to 0 tomorrow
without warning, so you need to price this risk in.

~~~
hylaride
> Bond yields should be less than S&P dividend rates

No. Stocks don’t necessarily pay out any dividends at all, like google or
amazon. Stocks can also give substantial capital gains. Bonds have
historically had higher yields than the dividend yield of the S&P to entice
people to purchase them to compete with this fact.

While they have a higher chance of getting your principal back they also have
to compete with other assets for the money. This is why bond yields typically
go up during “good” times as people feel the stock market is a better place,
but the yields then go down (for “safer” bonds at least, like the federal
government or high rated corporations) as people flock to safety and the
demand means they can pay out less.

This is news because it’s another indication that people are flocking to
“safety” causing both the bond yields to go down due to demand, and the stock
yields to go up as their prices fall.

~~~
perl4ever
"Stocks can also give substantial capital gains"

They did, but if dividends are higher than bond yields, that _could_ be
nature's way of telling you that future capital gains will be roughly zero or
less.

If you look back like 40 years, the long term bonds ended up returning about
the same as the stock market. So maybe the current long term yields are
telling you what stocks will return over the same period of time.

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mkagenius
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?

~~~
mabbo
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 market).

What this all means is that in a few months, at my renewal date, the mortgage
interests rates may be incredibly low (they're already at 2.7% today), my
home's value is much higher than what I owe, and the stock market looks like
it's going to be hitting the bottom around that time too.

So the question is... do I gamble on this? I could easily access hundreds of
thousands of dollars in a low interest mortgage and drop it all on index
funds. If it worked, 10 years later I could retire early. If it doesn't, I'm
another god-knows-how-many years away from paying off the mortgage.

Mind you, my (sane, rational, smart-than-me) wife would never agree to any of
this so it's only nice to think about.

~~~
smabie
Why would you ever want to pay off your mortgage? Mortgages are the best and
cheapest way to get debt. Considering the rate environment, the rate risk
isn’t a big deal, IMO. Hell, I would even go a step further: dump that 200k
into a levered S&P 500 (2x should be good). Unless the world falls apart,
you’ll definitely be a millionaire in 10 years. And if you do 3x, maybe even 5
years (that’s some more risk though).

I can’t really imagine a world in which the annualized yield of SPY over 10
years is less than 2.7%. And like I said before, rates are only going down and
that’s not going to change anytime soon. Of course a financial advisor
wouldn’t tell you to do it but they don’t really care about you in the first
place.

~~~
Ididntdothis
"I can’t really imagine a world in which the annualized yield of SPY over 10
years is less than 2.7%."

Seems your imagination is lacking. From 2000 to 2010 it was negative. I wonder
if the current market is the only market you ever have seen. Housing prices
also have collapsed not too long ago in the past.

~~~
smabie
You’re time period is very convenient, including two crashes and none of the
recovery. That said, point taken.

~~~
Ididntdothis
Downturns in the market will kill you if you are leveraged. Once the money
it's gone, it's gone and it will be hard to make it back. that is, unless you
have a rich dad who gives you more money. That's why I think it's very
important not to be naive with investment advice.

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mrep
Hm, I'm seeing the title "Bond Markets Shred History Books During Furious Fear
Trade".

Also, kinda silly to focus on just dividends considering buybacks are now
greater than dividends [0].

[0] (pdf):
[https://www.yardeni.com/pub/buybackdiv.pdf](https://www.yardeni.com/pub/buybackdiv.pdf)

------
exogan
I'd rather have bonds with a small yield than the S&P (which fluctuated 3%
almost every day this week) with a higher yield.

~~~
dcftoapv
You've just discovered the Sharpe ratio. The part you're missing is that bond
prices are just as volatile as equity prices in risk-on environments.

------
clubdorothe
I'm about to start investing with lump sum next week since stocks looks
cheaper. I was thinking to go with 80% SWDA (global stocks [1]) and 20% AGGU
(global bonds[2]). I'm a non US resident.

\- Should I consider to take less bonds?

\- Is lump sum a good idea, or should I DCA?

[1]
[https://www.ishares.com/uk/individual/en/products/251882/ish...](https://www.ishares.com/uk/individual/en/products/251882/ishares-
msci-world-ucits-etf-acc-fund)

[2]
[https://www.ishares.com/uk/individual/en/products/291772/ish...](https://www.ishares.com/uk/individual/en/products/291772/ishares-
core-global-aggregate-bond-ucits-etf-fund)

~~~
hamstercat
I would not recommend taking investment advice from HackerNews.
/r/PersonalFinance is a better place, or you can start reading forums like
Boggleheads and blogs.

If you’re canadian I can recommend a couple of blogs I follow, otherwise I’m
sure there are others from your country with specific advice.

If all else fails, paying a for-fee advisor that doesn’t sell funds can help
you setup a plan for yourself.

------
dcftoapv
This is a fun and directionally interesting comparison, but it's ultimately
meaningless.

Cash flows with different durations can't be used in carry trades so this
cannot be exploited even if you have a hypothesis about the relative risk of
each asset.

Convexity increases the price of high duration cash flows which drives down
yields of instruments such as the 30 year treasury.

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papito
I backed the truck up in 2018 for Fidelity Treasury Bond Index Fund. Most of
of my 401K is in it. It's up 31% in the last year. With almost no management
fee. That's all.

~~~
dcftoapv
Congrats, but you should sell out of that before prices come crashing back
down to earth, which they inevitably will after the covid-19 scare passes. It
might be a couple of months, but history says that you're going to lose all of
that money again over the next two years.

~~~
papito
I am well aware of the risk of rising interest rates, but those will be in the
toilet due to the lasting effect on the disrupted supply chain.

~~~
dcftoapv
You're betting against all of documented history. Also, your concern shouldn't
be interest rate risk. Your concern should be a reversal in perceived credit
risk. You benefited from a flight to quality. While these can persist much
longer than one would expect (see LTCM), you will eventually lose.

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Zelphyr
Is there a ELI5 about this somewhere?

~~~
smabie
Sure, what’s the question?

