Wednesday, December 4, 2013

Encouraging Guesses From Schwab

They seem to think that bond yields are going to rise substantially next year:
We would not be surprised to see 10-year Treasury yields return to the 3.0% to 3.5% range in the year ahead.
Which means better than 4% on 30 year Treasury bonds.  My guess is that we might well see 5.5% or even (dare I hope) 6% yields on municipal bonds.  And then the wild dancing frenzy starts at my house!


  1. Clayton,

    Why would this make you happy? You know, of course, that bond prices and interest rates are inversely related. So if yields rise, bond prices fall. While stock and bond prices do not march to the exact same drummer, they will follow each other at times, so downturn in the bond market might well go along with a crash (or "correction") in the stock market. Bottom line, you seem to be betting on, or wanting, capital markets to decline and capital costs to rise. Only if you are sitting on cash that you want to invest in fixed rate securities does your wish make any sense. And only if the rise stops where you want it to. Because if you buy in when rates are 4%, and rates rise to 6%, you take a capital loss, unless of course you hold to maturity. I don't much like what the fed is doing to the economy, holding interest rates so low, but I'm also not keen on what rising rates would signify. To me, it would most likely signify a return to inflation, in which case the real rates will remain low. Catch-22.


  2. Yes, I have a lot of cash, and a lot of equities that I will cash out as soon as bond rates start to rise. Yes, I know it means inflation is coming back. But I hate my day job so much, that I just want to be able to quit, and devote more time to teaching and writing. Even if interest rates go up from where I buy bonds, I will hold to maturity and live off the interest.

    The inflation is inevitable. We have created a mountain of debt that needs to be paid off, and inflation is probably the only way that can happen.

  3. ... I will hold to maturity and live off the interest.

    But if inflation takes off that interest will buy less and less every year. You may be ok the first year but what about year 10 or year 20.

    That said hating your job isn't good either.

  4. There will be wild frenzy in the stock market, but of a different sort. Just the mere suspicion of this has created ripples of barely-suppressed panic on Wall Street.

    But it has to happen at some point. We can't continue the artificially low rates for much longer. Many Democrats, I surely suspect, are hoping to continue this until after the next presidential election, whereupon they can claim the coming cataclysm on the likely Republican winner.

  5. I know exactly how you feel about the day job. Both my wife and I are barely hanging on at jobs we hate, but which pay decently and allow us to keep socking money away for that wonderful day when we can go Johnny Paycheck on 'em.

  6. James B. Shearer: Yes, 20 years of runaway inflation would make that money worth almost nothing. But five years of runaway inflation would cause a dramatic change in the government, I think.

  7. I should mention that in another eight or so years, I will be eligible for my full Social Security benefits, which will be substantial enough to fill in some inflationary impairment of bond interest. I have some confidence that Congress, as crazy as they might get, won't eliminate Social Security. Imagine tens of millions of heavily armed senior citizens with nothing left to lose.

  8. You don't really need runaway inflation to cause problems if you are on a fixed income. The US averaged 7% inflation between 1970 and 1985 and that will almost halve the value of a dollar in 10 years.

    It does help if you can start collecting social security in a few years.

    If you are comfortable with a fixed income you might also look into life annuities.