Monday, December 2, 2013

Disappointing Bond Yield Curve

One of these days (or is it months, or years?), bond yields are going to really take off.  When they do, I can retire.  But in the meantime, I am really frustrated.  At times like this, the correct solution is to buy short and medium term bonds, constructing a "bond ladder," which gets you better return right now, but because the bonds are relatively short maturity (say, 2-5 years), when bond yields really do take off, you don't have the capital value of those bonds drop like stones.  Worst comes to worst, you just wait for those bonds to mature, and reinvest the capital in long-term, and by then, high-yielding bonds.

But what can you do when the Treasury bond yield curve looks like this?

Both the nominal and real yield are so miserable until you get out to ten years that you might as well stay in cash.

UPDATE: Many years ago, there was a very amusing article in Car & Driver about how the lowest cost car to own was actually a Ferrari, because instead of depreciating, they appreciated.  I don't know if that was actually then, or if it true today.  It might be an amusing alternative investment strategy, assuming the car insurance costs didn't destroy the appreciation.

UPDATE 2: To hear this website tell the story, there is something that has appreciated 115% from purchase: "Ferrari Enzo - Gained 115% or $750,000"


  1. This is obviously not the time to be in the bond market. I think the idea is to be in something besides bonds now and get in when the rates are high and declining. Since rates are sure to rise in the future, you might consider something that increases in value while rates are rising like the ETF, TBT.

  2. One of these days (or is it months, or years?), bond yields are going to really take off. When they do, I can retire. ...

    The problem is that inflation is likely to be taking off at the same time as interest rates meaning your real rate of return (especially after taxes) won't go up that much if at all.

    But what can you do when the Treasury bond yield curve looks like this?

    You might consider things like VPU , an utilities ETF from Vanguard currently paying 3.66%. Of course if interest rates spike up you can expect capital losses.

    In general there seems to be too much money around and not enough attractive investments so almost everything is pricey and/or risky.

  3. I feel your pain. In the last year I sold my house and retired. Now I'm sitting on cash. Putting it into bonds is hardly worth it - $100,000 yields $300/year at 3 year bonds. In other words, you get .3% for a huge principle value risk. Buy longer bonds, and the risk/yield is still awful.

    BTW.. if you're going to do a bond ladder, you might look at ETF's sold for that purpose. A lot of ETF's have very low expense ratios, and offer diversity that's hard to get by buying individual bonds unless you've got a whole pile of money?

    The federal reserve is robbing us. Those younger folks who complain about generational wealth transfer should be made to understand that their lifestyle comes from the destruction of our retirement funds.

  4. Yes, but a Ferrari you actually try to drive all the time rapidly becomes very expensive...

  5. Waaaaay back in college, my economics professor pointed out that Porsches, which were touted at the time as not depreciating, were actually depreciating at the same rate as the inflation.

  6. Unfortunately, about the only way to keep up with inflation and grow your nest egg is by owning equities. (stocks) The hard part is to figure out WHICH stocks to own. Right now, Ruger is pretty good, but Radio Shack isn't. You need to have a good adviser and keep your own eyes on your portfolio. Personally, we have our portfolio with an Edward Jones office, and I know a number of others who are also patrons of E.J. Their corporate philosophy is centered around people like us who need growth, but cannot stand to be very risky.

    Obviously, there is risk in equities, but the trick is diversification, so you never have the whole thing going into the toilet at once.

    If you'd rather, there are financial advisers who are fee-based, and many folks prefer that concept.

  7. @Jim, Clayton

    Unfortunately, I think the equities market has been bid way up by people seeking return that they can't get in the bond market. Thus, even if you diversify within equities, you still face substantial principle risk. You can get varying opinions on that, but it's clear that there's a huge amount of money sloshing around the world looking for returns, and that has to cause a significant increase in the risk/reward ratio - whether in equities or real estate or any other return-producing asset.

    I recommend the "A Random Walk Down Wall Street" book (it's old, but relevant) as a good perspective on stock picking and why it's usually a bad idea. The guy does a good job at explaining efficient market theory and why it's something you need to understand. One thing he claims (and backs it up pretty well) is that financial advisers are lousy at picking stocks, as are mutual fund managers.

    His recommendation (portfolio diversification primarily between equities and bonds) is not very satisfying in today's crazy zero interest world, but then today may be a very unusual time.

    Anyway, I came to the conclusion that I can't pick stocks. I have one exception - I bought Oracle when it was very young - but in that case my industry knowledge was way out on the leading edge because of my work. I didn't buy very much of it, or I wouldn't be worrying about retirement income at all. ;-)