Question Cash-equivalent investment

[celizo]

"I have all my money in AAA 30year Euro government bonds from Netherlands and Germany that I bought well over a decade ago yielding me around 4%."

So you have bought your bonds before 2011-2013.

"yielding me around 4%"

Not sure if I have well understood, but today the yield is no more 4% on your capital (your capital hase increased with the fall of interest rates this last years) !?
The "coupon" is the same, not the yield.

 

[Martin Everson]

So you have bought your bonds before 2011-2013.

Yes

Not sure if I have well understood, but today the yield is no more 4% on your capital (your capital hase increased with the fall of interest rates this last years) !?

Yes today if you bought the bonds you would be looking at less than 0.5% yield on both 30yr bonds.

The "coupon" is the same, not the yield.

I guess your thinking out loud.

 

[celizo]

"Yes today if you bought the bonds you would be looking at less than 0.5% yield on both 30yr bonds."

but in terms of current yields you are in the "same boat" even if you have bought it 10-12 years ago.
Why don't you take your capital gain profits on these bonds?

 

[Martin Everson]

but in terms of current yields you are in the "same boat" even if you have bought it 10-12 years ago.
Why don't you take your capital gain profits on these bonds?

If you bought a bond at par value paying a coupon of 5% your yield is 5%. It does not change when bond increases in value or decreases if you hold to maturity. Your coupon (same as yield in this case) remains constant....lol.

 

[celizo]

If you bought a bond at par value paying a coupon of 5% your yield is 5%. It does not change when bond increases in value or decreases if you hold to maturity. Your coupon (same as yield in this case) remains constant....lol.

no :

https://www.oblis.be/fr/school/le-rendement-de-l’obligation-523487"Attention toutefois, car il ne faut pas confondre le coupon et le rendement de l’obligation. Si le coupon est fixé une fois pour toute lors de l'émission (y compris dans le cas des coupons variables puisque l'on connaît à l'avance les critères de variation), le rendement va évoluer en fonction du cours de l'obligation."
english:
"Be careful, however, because you should not confuse the coupon and the bond yield. If the coupon is fixed once and for all at the time of issue (including in the case of variable coupons since the criteria for variation are known in advance), the yield will change according to the price of the bond"


Example with one specific germand bond:

If I've bought the 30-year German Federal Bond (2046) in 2014 for instance with a capital of 100€ (thus par value 100%).

2.50% Federal bond 2014 (2046)
https://www.deutsche-finanzagentur.de/en/fact-sheet/sheet-detail/productdata/sheet/DE0001102341/The coupon is 2.5%
I will receive 2.5€ each year until 2046.

In march 2020, for instance the price of this bond was 175. (check the link above)
It means that I have a capital gain of +75€ to this date and I can sell at 175.
2.5€ / 175€ of current capital = 1.43% (yield in comparison with the current capital valuation)

Why do not take 75€ of profit directly in 2020?
75€ = 30 years of coupon (30 years x 2.5€)
From this date (march 2020), if you hold the bond you have to wait until 2046 to win 75€ of coupons accumulated + 100€ of your initial investment...
versus winning 175€ directly in 2020.

 

[Martin Everson]

The purpose of me holding AAA gov bonds is to protect capital and get a risk free rate of return above inflation. So having €16m in bonds and getting a yield of €640k every year minus fees you are suggesting I sell into cash and lose my cash protection - as if I need any extra return in bond appreciation. Why would I sell an appreciating risk free asset that provides a return above the rate of inflation and move into cash at risk as a bank deposit..lol? You need to understand a bit more about why ppl hold treasuries and its not to make money although my strategy as always is working and will do for next decade.

 

[celizo]

Which bond (ISIN) do you have bought exactly between 2005-2010?
Which price (100%) and amount of purchase (16M? 8M?)?

 

[celizo]

Just to keep it simple, if you have bought this 4.00% German Federal bond 2005 (2037) for 16M (par value 100%).
https://www.deutsche-finanzagentur.de/en/fact-sheet/sheet-detail/productdata/sheet/DE0001135275/640k€ per year

Current price 165 (it was 185 in march 2020)
Therefore your capital valuation is 26.4M€
640/26400 = 2.4% yield

640k€ * 16 remaing years = 10.2M of coupons
You will be repaid "uniquely" 16M in 2037 (16 + 10.2 = 26.2), meanwhile you have already 26.4M to this day.

Anyway this demonstration is for OP, and I think he will understand that AAA UE GOV bonds are not the best bet probably...
Obviously 640k€ of coupon is enough for living (LOL) even if your current yield on your current capital valuation is uniquely (2% or less) and if you don't know where to invest your capital gain.

 

[Martin Everson]

Did you even read what I wrote...lol i.e

The purpose of me holding AAA gov bonds is to protect capital and get a risk free rate of return above inflation.

What part did you not bother to comprehend.....lol

Obviously 640k€ of coupon is enough for living (LOL)

Well done Sherlock

even if your current yield on your current capital valuation is uniquely (2% or less) and if you don't know where to invest your capital gain.

Whatever way of calculating returns makes you happy...each to their own. I am not a greedy person or in need of more money....lol.

 

[troubled soul]

@celizo It shows your Inexperience dear , Do not get it wrong.


You only see return by comparing chart, As every market in the world is overvalued. You see only upside. You assumption is that market always goes up side.
Now learn some history lesson.

https://www.pattonfunds.com/remembering-a-lost-decade.htmlhttps://en.wikipedia.org/wiki/Lost_Decade_(Japan)

Here you can get lower return than the government bond.
People forget the Government bond are capital Risk free. Any other class you can lose your capital.
This "inflation" thing is Bank propaganda to sell their "BS" product.
Sometime bank charges are more than the Inflation. Do read all document carefully.
You can lose more money in bank charges rather than Inflation.

If you compare long period with index and government bond , Yes Index win but do not forget "Lost Decade".
Some people does not learn from past and history itself repeating every decade after decade.

I know , Since 2014 people talking about market Over-valuation Still market going up like crazy. Some one can argue that You missed the train.
The world is chaotic and with endless supply of Idiots.

Nobody predict the future but it is better to play safe side.

After all It depend on person to person , I believe in 50% index and 50% bond.


Hope this help

 

[Martin Everson]

@celizo It shows your Inexperience dear , Do not get it wrong.

Unfortunately comprehension is not his strong point. He is interested in capital gains and total returns sadly. He read a few articles and now thinks he is a bond wizard...lol .

 

[celizo]

Thanks for me and my comprehension

For OP, make your decision with all this and your goal: if you want "protection" or "investment", a mix of this 2...etc

"Unfortunately comprehension is not his strong point."

Honestly as "moderator" you are perfect man, do not change anything...

 

[Martin Everson]

Honestly as "moderator" you are perfect man, do not change anything...

Your welcome. Healthy debate is always welcome even when you fail to comprehend the basics of treasury bond investing

 

[celizo]

sure, and the very first basic in bond investing is to not confuse coupon and yield

 

[celizo]

@celizo It shows your Inexperience dear , Do not get it wrong.


You only see return by comparing chart, As every market in the world is overvalued. You see only upside. You assumption is that market always goes up side.
Now learn some history lesson.

https://www.pattonfunds.com/remembering-a-lost-decade.htmlhttps://en.wikipedia.org/wiki/Lost_Decade_(Japan)
View attachment 2696


View attachment 2697

Here you can get lower return than the government bond.
People forget the Government bond are capital Risk free. Any other class you can lose your capital.
This "inflation" thing is Bank propaganda to sell their "BS" product.
Sometime bank charges are more than the Inflation. Do read all document carefully.
You can lose more money in bank charges rather than Inflation.

If you compare long period with index and government bond , Yes Index win but do not forget "Lost Decade".
Some people does not learn from past and history itself repeating every decade after decade.

I know , Since 2014 people talking about market Over-valuation Still market going up like crazy. Some one can argue that You missed the train.
The world is chaotic and with endless supply of Idiots.

Nobody predict the future but it is better to play safe side.

After all It depend on person to person , I believe in 50% index and 50% bond.


Hope this help

Why do you speak about stocks? because I have never recommended to manilobino to invest in stock instead of bonds for his question: "keep safe, by investing it somehow as an alternative to a current account".
Just check my message post 6, I recommend a short term bond ETF (i.e. NEAR or ERNA), not interest rates sensible such as a long term bond like 30Y.
https://www.offshorecorptalk.com/threads/cash-equivalent-investment.34241/#post-180006
"People forget the Government bond are capital Risk free"
But does manilobino plan to keep the capital untill the maturity? If not, it's not risk free.

After all It depend on person to person , I believe in 50% index and 50% bond.
I'm for diversification... but no 100% stocks nor 100% bonds. I think it's not to be "greedy" to have other assets than AAA Gov bonds.
Depends on person (risk aversion), depends on conjuncture too.

 

[jjrapy]

no :

https://www.oblis.be/fr/school/le-rendement-de-l’obligation-523487"Attention toutefois, car il ne faut pas confondre le coupon et le rendement de l’obligation. Si le coupon est fixé une fois pour toute lors de l'émission (y compris dans le cas des coupons variables puisque l'on connaît à l'avance les critères de variation), le rendement va évoluer en fonction du cours de l'obligation."
english:
"Be careful, however, because you should not confuse the coupon and the bond yield. If the coupon is fixed once and for all at the time of issue (including in the case of variable coupons since the criteria for variation are known in advance), the yield will change according to the price of the bond"


Example with one specific germand bond:

If I've bought the 30-year German Federal Bond (2046) in 2014 for instance with a capital of 100€ (thus par value 100%).

2.50% Federal bond 2014 (2046)
https://www.deutsche-finanzagentur.de/en/fact-sheet/sheet-detail/productdata/sheet/DE0001102341/The coupon is 2.5%
I will receive 2.5€ each year until 2046.

In march 2020, for instance the price of this bond was 175. (check the link above)
It means that I have a capital gain of +75€ to this date and I can sell at 175.
2.5€ / 175€ of current capital = 1.43% (yield in comparison with the current capital valuation)

Why do not take 75€ of profit directly in 2020?
75€ = 30 years of coupon (30 years x 2.5€)
From this date (march 2020), if you hold the bond you have to wait until 2046 to win 75€ of coupons accumulated + 100€ of your initial investment...
versus winning 175€ directly in 2020.

1.43% yield on a capital you don’t really have nor was the investment amount. If you buy the bond at that time yes you’ll have a 1,43% yield.
if you bought the bond at par value your yield is 2.5% if you hold it up to maturity, no matter if interest rate goes up or down.
Of course you will lose the opportunity you to earn a better yield if interest rates go up but as long as your interest rate is above inflation your capital is safe.

 

[troubled soul]

Why do you speak about stocks? because I have never recommended to manilobino to invest in stock instead of bonds for his question: "keep safe, by investing it somehow as an alternative to a current account".
Just check my message post 6, I recommend a short term bond ETF (i.e. NEAR or ERNA), not interest rates sensible such as a long term bond like 30Y.
https://www.offshorecorptalk.com/threads/cash-equivalent-investment.34241/#post-180006
"People forget the Government bond are capital Risk free"
But does manilobino plan to keep the capital untill the maturity? If not, it's not risk free.

After all It depend on person to person , I believe in 50% index and 50% bond.
I'm for diversification... but no 100% stocks nor 100% bonds. I think it's not to be "greedy" to have other assets than AAA Gov bonds.
Depends on person (risk aversion), depends on conjuncture too.

Yes You are right . I am wrong
Thanks for correcting me

 

[celizo]

if you hold it up to maturity,

Holding a 30Y bond until the maturity in practical is probably not as easy to say it... depending lots of factors (your age, situation, wealth, family, aim in life...).
You can be forced to sell it at any time for lots of reasons.

 

[Martin Everson]

1.43% yield on a capital you don’t really have nor was the investment amount. If you buy the bond at that time yes you’ll have a 1,43% yield.
if you bought the bond at par value your yield is 2.5% if you hold it up to maturity, no matter if interest rate goes up or down.
Of course you will lose the opportunity you to earn a better yield if interest rates go up but as long as your interest rate is above inflation your capital is safe.

You get it. Holding to maturity all day

 

[Golden Fleece]

Of course you will lose the opportunity you to earn a better yield if interest rates go up but as long as your interest rate is above inflation your capital is safe.

I just read this fact today, which made me think of this thread:

In fact the low inflation we experienced in the past 12-13 years, averaging 1.7% since the 2008 financial crisis, is a major anomaly.
* * *
Remember, even though the Fed insists that they’ll maintain 2% inflation, their actual track record between 1965 and 2008 is an average 4.6% annual inflation rate.

So if your own long-term financial planning is based on the Fed keeping its promised 2% inflation rate, you may be in for a rude awakening.

https://www.sovereignman.com/trends/lbj-called-he-wants-his-inflation-back-32731/