Bonds With Negative Yields

There are over 17 trillion dollars of bonds with negative yields. Does this mean you are paying someone for the privilege of loaning them money? And why are people buying them?

Monday Morning Money—Bonds With Negative Yields

Each episode of Monday Morning Money is also broadcast on Local Radio, WMOA (1490 AM and 101.3 FM).  You can hear it at 11:07 every Monday. 

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Do you have a question about what’s happening in the world of finance or investing?  Is there a topic that has you curious?  We’d love to hear from  you.

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$17 Trillion of Bonds With Negative Yields

There has been a lot of attention lately about the more than $17 trillion of debt with negative yields. Much of that is issued by foreign governments. But there is about a trillion dollars in corporate debt with negative yields
 
So does this mean you are paying these countries for the privilege to loan them money?

The Basics of Yield

Yield is the return you will earn if you buy and hold a bond until it matures. It factors in the interest rate, the return of your principal, how long until it matures, and the price you pay.
 
So keep in mind, yields and interest rates are NOT the same thing. In some cases, these bonds could pay the investor interest. German bonds currently do not. But you can have a bond with a negative yield which does pay interest.
 
The thing which causes their yields to be negative is the price investors have to pay. Paying a high price and holding the bond to maturity assures you of a negative return—even though you might collect interest along the way.
 
Let’s look at a simple example. You have a bond which matures 10 years from now. It has a coupon or interest payment of 1.6% per year. You collect that for the life of the bond. When the bond matures, the issuer typically redeems them at a price of $100. If you buy this bond for a price of $116 or more, your yield will be negative. Why? Because the return from your interest won’t be enough to compensate for the high price you have to pay.

Why Buy Bonds With Negative Yields?

This is where it helps to understand the relationship between yield and bond prices. Yields and prices are inversely related. That means if one goes up, the other goes down. Think about a teeter totter. On one end you have prices, the other side yields.
So why would someone buy bonds with negative yields? If you know you are going to lose money holding these notes, why wouldn’t you just put the money under your mattress?
 
One theory is speculation.  Those who are buying these notes are speculating that yields will go even lower. That’s the only way buying a bond with a negative yield results in a profit.
  
Those who are buying these notes are speculating that yields will go even lower. That’s the only way buying a bond with a negative yield results in a profit.

Buy Low, Sell High

There is a saying in the investment world. Buy low, sell high. With bond yields at extremely low—and in some cases negative—levels, it means prices are already high. Buying bonds with negative yields, or longer term bonds with very low yields, seems like a recipe for the opposite.
 

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Financial Planning

Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors  He typically works with people who are planning for retirement.  Fleming Watson is a Registered Investment Advisory firm located in Marietta Ohio.  Our firm primarily serves Marietta, Parkersburg, Williamstown, St. Marys, Belpre, Vienna and the surrounding communities in Washington and Noble Counties in Ohio and Wood and Pleasants county in West Virginia.

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Some Changes Are Coming

Some Changes Are Coming
Some changes are coming to the content we create.  And we wanted to take a moment to describe  what is happening.
 
Over the past several months we have made a commitment to creating more content for our website. There are two reasons for this.
 
First, we wanted to help you stay informed about the events going on in the world. We wanted to add perspective and and insight you won’t find in a 30 second sound bite.
 
The second was to help people who are planning for retirement. We created a video series to give them some ideas to help them to plan for a better outcome.
 
We intend to continue both, but there will be a few changes.
 

Monday Morning Money Has a New Format

 Originally we designed this series to help people planning for their retirement. Going forward, this will be the name of our show that addresses current events and how they impact you. 
We are also happy annouce Monday Morning Money will also appear each Monday at 11:07 on local radio WMOA (1490 AM, 101.3 FM). Of course every episode will be here on our website, our Facebook page, and our YouTube channel. The first episode will air on September 2nd.
Some Changes Are coming
 
We are also happy to answer questions. And an easy way is to submit those questions using the form at the bottom of the page.
 

Videos Designed to Help People Plan for a Better Retirement

As you could guess, this series will no longer be called Monday Morning Money. We don’t have a name for it yet. But, they will continue to appear as we have the opportunity to create them.
As always, we want to address the topics which matter most to you. So if you have a question or a suggestion, we are happy to tackle it in a future episode.
 

YouTube and Facebook

 Speaking of YouTube and Facebook, we could use your help. Please take a moment to subscribe to our YouTube Channel. And if you are on Facebook, please like our page. These actions help our analytics for various search engines. This allows us to be able to reach more people who may need help managing their money and planning for the future.

What's On Your Mind?

Do you have a question about what’s happening in the world of finance or investing?  Is there a topic that has you curious?  We’d love to hear from  you.

 We’ll do our best to answer it in a future episode.  To submit your question, fill out the form.  If you prefer, you can send us an email directly.  That email address is neal@flemingwatson.com

Enter Your Question Here

Going to the Little League World Series

This week we take a break from talking about the stock market. We won’t discuss bonds and interest rates. We also won’t talk about the economy and recessions. This week we talk about The Little League World Series.
 
Dad and I traveled to Williamsport, PA to attend the first weekend of The Little League World Series. For baseball fans, this is an incredible event. 

Podcast: Going To The Little League World Series

The Little League World Series Complex

This tournament takes place in South Williamsport, Pennsylvania. It involves 16 teams: 8 from the US and 8 from other countries. The complex consists of two beautiful stadiums.

Volunteer Stadium

This is where the international teams play the early rounds.

Lamade Stadium

(click the images to enlarge)

This is the main stadium.  It is a venue Sports Illustrated called one of the 20 places they would go to to watch a game.  Bleacher Report called it one of the 25 most iconic places to watch a game.  It lived up to the hype.w

These Kids Can Play

Sometimes when you are watching, it is hard to remember these kids are only 11 and 12 years old. They play the game at a high level. We saw diving stops, amazing catches, and this unusual 1-5-4 double play.

There are all kinds of highlights on the Little League website.  And here are some of the plays from prior years. 

A Family Friendly Bucket List Trip for Baseball Fans

If you are a baseball fan or have a child or a grandchild who is involved in the game, this is a trip to make. They don’t sell tickets. Parking is free—with shuttles from the lots to the stadium. And concessions are reasonable. They have plenty of activities for kids as well.
 
From Marietta, it’s about a 5½ to 6 hour drive (depending on how many times you stop).
 
Most of all it is a chance to make some memories.  A trip with your kids, or in my case, a trip with my dad, is something you will remember and cherish for a long time.

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On Wednesday, August 14, the Dow dropped 800 points. It is a big number for certain. In percentage terms, this translates to a 3% decline.  Let’s try to add some perspective to the stock market’s wild day.
 
Moves this big are not frequent.  It was the 94th time the Dow dropped at least 3% in a day since 1950. That is 94 out of more than 17,600 trading days.

Some Perspective on The Stock Market's Wild Day

Days like this are unpleasant.  Unfortunately they are part of the journey.  Thankfully they are a small part.

The Dow Jones Industrial Average is still up over 9% for 2019.

 

The Hidden Risk In Bonds

Recent volatility in the stock market has many investors looking for “safety”. Many turn to government bonds. But is now the right time to invest in these notes? Today we’ll talk about the hidden risk in bonds.

Podcast: The Hidden Risk In Bonds

What's On Your Mind?

Do you have a question about what’s happening in the world of finance or investing?  Is there a topic that has you curious?  We’d love to hear from  you.

 We’ll do our best to answer it in a future episode.  To submit your question, fill out the form.  If you prefer, you can send us an email directly.  That email address is neal@flemingwatson.com

Enter Your Question Here

To understand the hidden risk in bonds, there are two important concepts.

Key Concept 1: Yield

When talking about bonds, the first key concept is yield. Yield is the return you will earn when you buy a bond. It factors in the current price, the interest rate, the date it matures, and the return of principal.
 
If you buy a bond with a 2% yield and hold it until maturity, that is the return you will realize.

Key Concept 2: The Relationship Between Yield and Price.

The second concept is the relationship between yield and price. Bond yields and bond prices are inversely related. This means when bond prices go up, yields go down. And when yields go up, prices go down.

Where is the Hidden Risk In Bonds?

Bond yields are near historic lows. And it is hard to imagine them going lower. When they increase, it could create a very difficult situation.
 
Those who buy these longer term notes will face two choices. The first is to accept a low rate of return over the next several years. The other option is to see the value of their investment decline as yields move higher.
 
Let’s show you an example.
This is an actual bond quote from Monday, August 12.  (Click image to enlarge).  This note matures in May 2029.  The yield was 1.595%.  If you purchased this bond your price was 107.  

Hold it until it matures

If you hold this note until maturity, you will earn 1.595% over the life of this bond.  You’ll collect the interest payments, and most likely the principal.   (US Government bonds are backed by the full faith and credit of the United States).  

What if Yields Go Up?

Though complex, you can calculate the price of a bond if yields change.  What happens to the price of this bond if yields increase to 2% in 60 days?
 
The price will drop, remember the inverse relationship. In this instance, the price drops 3.5% to 103.26
Hidden Risk In bonds

The moves can be more extreme if yields increase even more.  In this example, we show what happens to the price if yields increase to 2.5% in 6 months.  

The price of this bond drops to 98.68, a decrease of 7.5%

Hidden Risks Bonds

If yields move high enough, the price decrease can be more like a stock investment.

Here we show what happens to the price of this note if bond prices move to 3% in one year.  

A price decrease of 11% is not what anyone bargains for when they buy a so called “safe” investment.

Bond risk

Lower Return, Higher Risk

Right now, longer term bonds present a low return, higher risk environment. Investors buy these because they think they are safe. And if you hold this note until it matures, you’ll collect the interest and get your money back.
 
But you lock in a low return—1.6% over 10 years is not attractive. In the meantime you’ll see the value of this bond decrease when yields increase. And if you sell it before 2029, you’ll likely incur a loss.
 
This is why we have been using short term bond investments—with maturities of 1 year or less. There is less price fluctuation, and fewer opportunities for big price decreases as yields move higher.
Financial Planning

Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors  He typically works with people who are planning for retirement.  Fleming Watson is a Registered Investment Advisory firm located in Marietta Ohio.  Our firm primarily serves Marietta, Parkersburg, Williamstown, St. Marys, Belpre, Vienna and the surrounding communities in Washington and Noble Counties in Ohio and Wood and Pleasants county in West Virginia.

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Do you have a question about what’s happening in the world of finance or investing?  Is there a topic that has you curious?  We’d love to hear from  you.

 We’ll do our best to answer it in a future episode.  To submit your question, fill out the form.  If you prefer, you can send us an email directly.  That email address is neal@flemingwatson.com

Enter Your Question Here

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Audio Only Version

We know a lot of you visiting here may be using a cell phone.  And video uses more data.  If you would like to listen to the audio only version of this, click on the green play icon.

We also posted the graphs below for reference.

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Do you have a question about what’s happening in the world of finance or investing?  Is there a topic that has you curious?  We’d love to hear from  you.

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Our Expectation: Stocks Will Act Like Stocks

We expect stocks to act like stocks. This means we believe—over the long term—they will perform well. They will generate the returns we need to improve our purchasing power and grow our assets.
 
It also means the growth won’t happen in a straight line. There will be periods of stress and pain along the way.
 
The market is at all time highs. And we haven’t seen a true bear market in over a decade. The current economic expansion is the longest on record. We felt it is time for a more conservative approach.  
 
Here is how we are doing it.

Step 1: Rebalancing

Rebalancing your account means we reset your asset allocation. Here is an example. A couple of years ago, John’s account had 60% of its value in stocks. The other 40% was in bonds. Because the stock market has done extremely well, the stock allocation grew to 65%.
 
Rebalancing his account sells some of the stock holdings and buys bonds. When complete, his allocation is reset back to 60% equity and 40% bonds.
 
In September, we will have an episode of Monday Morning Money about rebalancing.

Step 2: New Core Holdings

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One tool we use to help measure the investment risk of our portfolios is a service called Riskalyze.  We measure the risk characteristics of the funds and ETF’s we use.  
 
Riskalzye also helps us to better understand how you feel about the risk and reward.  You can complete a brief survey to find your Risk Number.  There is a link below.  It costs nothing, and it takes 5 minutes or less to answer the questions.
2020 bear marketover

How Much is Too Much?

How much risk can you tolerate?  Would you be uncomfortable if your portfolio was down 10% in the next six months?  What about 20% or more?  Our 5-minute risk assessment questionnaire (powered by Riskalyze) will help you identify your appetite for risk and reward.  We can then take a look at your accounts to see if your investments align with the results. 

Taxes Matter

Most of these changes will occur in IRA’s or other types of accounts which don’t create a tax bill for you. If there are changes which need to be made in a taxable account, we will call you to discuss the tax implications.

Stay Informed.

What’s Happening Now is a podcast talking about current events which  impact your bottom line.  

If you would like to be notified when a new episode is released, sign up for our mailing list.  Just complete the form.

Join Our List Today!

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Financial Planning

Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors  He typically works with people who are planning for retirement.  Fleming Watson is a Registered Investment Advisory firm located in Marietta Ohio.  Our firm primarily serves Marietta, Parkersburg, Williamstown, St. Marys, Belpre, Vienna and the surrounding communities in Washington and Noble Counties in Ohio and Wood and Pleasants county in West Virginia.

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