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US bonds carry negative yield


John Ranalletta

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John Ranalletta

It's called paying someone to sit and watch your money.

 

If you invested $1 million in three-month bills at today’s negative discount rate of 0.01 percent, for a price of 100.002556, at maturity you would receive the par value for a loss of $25.56.

 

Yikes.

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Dave McReynolds

Why would someone do that rather than get a CD? Is it that most of the $1 million wouldn't be covered by FDIC, and the added risk just isn't worth the 3% or so return you would get?

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Lets_Play_Two
Why would someone do that rather than get a CD? Is it that most of the $1 million wouldn't be covered by FDIC, and the added risk just isn't worth the 3% or so return you would get?

 

Its all a matter of perception. People don't want risk so the demand for the safest security (short-term treasury paper) goes so high the treasury gets the use of the money for free. t-bills continue to be considered risk-free and currently the risk-free return is zero! CDs are not risk-free securities..

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John Ranalletta

Ginnie Maes in the Vanguard GNMA Fund carry a federal guarantee equal to treasuries are currently yielding 4.5 - 5%.

 

Fundamentally, lots of investors are stashing cash because they are preparing for further, severe deflation. Judging from the empty malls here in Indy last weekend, I'd say, they're right.

 

 

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Lets_Play_Two
Ginnie Maes in the Vanguard GNMA Fund carry a federal guarantee equal to treasuries are currently yielding 4.5 - 5%.

 

Fundamentally, lots of investors are stashing cash because they are preparing for further, severe deflation. Judging from the empty malls here in Indy last weekend, I'd say, they're right.

 

 

But there is no guarantee that if you invest $1000 today, they will return that $1000 to you in 90 days. That is why the yield is higher. There is no free lunch!

 

The malls here in south Florida are packed.. Maybe its the weather! Investors have no idea what is coming that is why they are afraid and are willing to take zero return for return of principal.

 

An interesting footnote to the guarantee of GNMA securities:

 

"The value of "guaranteed" securities fluctuates due to changing interest rates or other market conditions. Investors may experience a gain or loss due to prepayment of obligations and may receive back part of their investment before redemption."

 

So GNMA unlike t-bills sold on a discount basis carry interest rate risk as well as prepayment risk. Risk requires return.

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John Ranalletta

You're correct, of course, but an Monte Carlo analysis (1/1/2000 - Present) of a portfolio made up of three equal portion of Vanguard, American Century and Fidelity GNMA funds reveals not much volatility. Historically, not much downside risk, me thinks, since historical yield exceeds std. dev.

 

GMNA.JPG

 

 

 

 

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I think it's jsut a matter of perspective. Right now most people wish ALL of their 401k was earning 0%. Instead my portfolio averaged about -25% over the last 12 months.... and it was only moderately aggressive.

 

0% yield might also be better than leaving the money in cash. But overall, yes, a CD would be much better.

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Lets_Play_Two

I am not arguing with your yield numbers, mine was simply a discussion of risk...of course you do know that past performance is no guarantee of future results!! :)

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