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http://biz.yahoo.com/smart/030623/20030616trad_13.html

Just an opinion, but it's important to keep in mind interest rates aren't at some unsustainable low from which they must bounce back at any second.

Nick
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I always take "opinions" from fund managers about what to buy or which way the market is headed to mean: I got there first and I'm going to get out before I tell you.

Yes, there have been periods with lower interest rates. But no reasoning is provided for why we should be re-entering such a period and why the last 40-50 years have been an anomoly.

Bond prices are set by supply and demand. Nowadays there are credit cards, there's a world looking for loans, there are low downpayments on houses and big ticket items (even if currently you can get zero percent financing), there is a huge tax advantage to owning stocks instead of bonds, and the government is borrowing at over 4% GDP and rising (more, when you add in how much is being borrowed on social security).

If the guy can explain why rates will continue down despite these factors, I'll take him seriously. Simply to suggest rates will go down because they have been lower sometime in the past, with no reasons for why the future will look more like the distant past than the recent past, is not reasoning.
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or with the mass misinformed,

is this bubble bigger than Tech of 3 yrs ago ?
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is this bubble bigger than Tech of 3 yrs ago ?

The tech bubble had people buying into ideas which would never pay off in a million years. In today's bond market, you're buying into something which will, with 100% certainty, pay off, albeit with perhaps a low payout, given that the bonds reach maturity. No matter how low yields go, nothing in the bond markets will come close to the follies of the tech stocks of the late 90's. (Unless, of course, you're talking junk bonds, where the question of reaching maturity can be debated.)
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The tech bubble had people buying into ideas which would never pay off in a million years. In today's bond market, you're buying into something which will, with 100% certainty, pay off, albeit with perhaps a low payout, given that the bonds reach maturity. No matter how low yields go, nothing in the bond markets will come close to the follies of the tech stocks of the late 90's. (Unless, of course, you're talking junk bonds, where the question of reaching maturity can be debated.)


Agreed. There are fundamental differences between bonds and bond funds and stocks that make a bubble in bonds almost impossible if you apply the definition of “bubble” as applied to the late 90's.

Bonds will always pay back your principal.* If you hold your bonds until maturity, you will get your money back. You only real loss is an opportunity cost of holding a poorly paying investment rather then other investments paying more when rates rise. Given the losses people fear about a bubble popping, I can't include opportunity costs as a downside.

As for bond funds, you could very well see significant decrease in your NAV as rates rise. However, if you hold the fund, it will begin investing in higher yielding bonds as rates rise. If your horizon is long enough, you will see rates go up and down over the life, usually resulting in at least breaking even on your NAV (with income either realized or reinvested). You won't see a bond fund become worthless like a stock in a company that has no viable business model and no profits.

Therefore, I don't consider there to be a bubble in bonds, nor do I feel one is even possible (in the classic sense of the word). However, what I do see is investors chasing yield. I see people still pouring money into bond funds because they examine past returns without knowing the economics behind what sets the NAV's.

As with other cases like this, the mainstream investor, being insufficiently educated, is getting in too late, and after NAV's drop, will probably get out too late.

Splotto


* With the exception of junk bonds or bonds whose issuers default. I realize that is a major exception, but it's warranted because people are talking about a bubble in the entire bond market. If you choose to speculate in bonds that have higher chances to default then usual, then you are taking that risk on your own and you were only realizing the possible downside of your choice, regardless of interest rates or the existence of a bubble.

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There are fundamental differences between bonds and bond funds and stocks that make a bubble in bonds almost impossible if you apply the definition of “bubble” as applied to the late 90's.

Bonds will always pay back your principal.



Bonds will always pay back your principal in nominal terms.

If, thanks to the Fed's efforts, we'll get a good measure of inflation that may not be an immaterial difference.

All assuming the fiat system as such survives, of course...

SB
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"As for bond funds, you could very well see significant decrease in your NAV as rates rise. However, if you hold the fund, it will begin investing in higher yielding bonds as rates rise. If your horizon is long enough, you will see rates go up and down over the life, usually resulting in at least breaking even on your NAV (with income either realized or reinvested). You won't see a bond fund become worthless like a stock in a company that has no viable business model and no profits."

I agree the tech bubble analogy is overdone (including the claim that valuations didn't matter, that it was okay to buy into an IPO at prices that presumed future profits that could never be achieved). But buying bonds or into bond funds where the only way you can beat a CD is if interest rates actually decline, with no good reasons for why they should continue to decline and a budget deficit out of control, is chasing returns.

I do find the current situation with the Total Bond Index Fund, with its low durations for its yield, intriguing, because you can beat a 4 year CD even if interest rates (as they affect the fund) are up a couple of percentage points.
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SB:

Bonds will always pay back your principal in nominal terms.

If, thanks to the Fed's efforts, we'll get a good measure of inflation that may not be an immaterial difference.


I agree. I would lump the failure to keep up with inflation as an opportunity cost.

Splotto
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>>But buying bonds or into bond funds where the only way you can beat a CD is if interest rates actually decline,

If the beginning interest rate on the bond fund is greater than the current rate on CDs, or if the yield curve steepens, long term bond funds will beat CDs. And of course the bond fund, unlike the CD, is liquid.

You can hold your CD to maturity and get your principal back, but a bond fund manager can do the same thing with his bonds. If the bonds in the fund were at a premium when you purchased, you may have a capital loss, but that's only because the bond was paying an above market interest rate. There is no free lunch.

>>with no good reasons for why they should continue to decline and a budget deficit out of control, is chasing returns.

I don't think I can predict future interest rates better than the market can (within current interest rates are expectations about the future).

Nick
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a teck stk that went down 90% is a big disappointemnt.

but a bond fudn down 30%,, when it was though safe ,,

is disappointing as well..

that's all..
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