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Implications of negative long term real rates - Treasuries

30 year TIPs are currently yielding -0.32%.   They traded briefly negative on March 6, 2020, before returning temporarily positive in June 2020.  Since then, they have traded significantly and consistently negative.   In early August, they reached an extreme value of -0.45% and have since then been trading within a band and effectively establishing a lower range between -0.26 to -0.45%.

Never before have 30 year TIPs traded at negative yields, although the series has only been published by the FRED beginning in February 2010.

30 Year TIPs from February 2010 to September 14 2020.jpg 

5 year TIPS data is available for a longer time period:

5 Year TIPS from January 2003 to Sept 14 2020.jpg 

5 Year TIPS are also currently negative and have traded in negative territory for an extended period before.  That would be initially briefly negative in October 2010 and then for an extended time period between April 2011 thru September 2013.  5 year TIPS remained close to zero until September 2017 at which time they slowly rose to a high just over 1% in December 2018.

Longer term investors may recall that 2013 was a great time to own equity, where as the fall of 2018 was not.  So, I will surmise that if 5 year TIPs were to return to near 0, that would not necessarily be bad for owners of equity.  It's only when 5 year TIPs began to reach levels significantly positive that the market began to react negatively.   However, these fluctuations were of a shorter term and longer term investors were best served by ignoring the changes.

However, can the same be said now???

One thing that stands out is that while 5 year TIPs were negative in 2012, the same is not the case for 30 year TIPs.  Back in 2012, 30 year TIPs remained slightly positive.

Notice that before COVID 19, the FED was already concerned with the economy and had taken steps that were driving 5 year TIPs lower.  While 5 year TIPs were below 0 in February, they were not significantly lower than where the had traded from August 2013 thru September 2017.

The primary implication of negative long term real yields, is that for the first time, safe fixed income investments can only reduce a portfolios overall return.  "Savers" of all types and sizes including institution such as pension funds are going to begin feeling a drag...  it's only been about 3 months now, but this is a new era!

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Re: Implications of negative long term real rates - Treasuries

Super sluggish portfolio returns over the next 10 years.

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Re: Implications of negative long term real rates - Treasuries

       I’ll just playIng devil’s advocate but there’s a ton of money on the sideline worldwide. Probably a great deal of demand for goods and services also. After a vaccine and everything is opened up plus unemployment falls we may have an economic boom along with greater inflation leading to Fed rate increases.
   
        Savers will probably go to CD ladders instead or step up to government funds regardless if they’re just losing less to inflation. My parents were thrilled with those 12% CD’s during the stagflation of the 70’s.

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Re: Implications of negative long term real rates - Treasuries


@steelpony10 wrote:

       I’ll just playIng devil’s advocate but there’s a ton of money on the sideline worldwide. Probably a great deal of demand for goods and services also. After a vaccine and everything is opened up plus unemployment falls we may have an economic boom along with greater inflation leading to Fed rate increases.
   
        Savers will probably go to CD ladders instead or step up to government funds regardless if they’re just losing less to inflation. My parents were thrilled with those 12% CD’s during the stagflation of the 70’s.


Just what level of unemployment would it take to have an economic boom that would lead to fed rate increase since fed recently announced that it would only raise rates after inflation reached a level that averaged greater than 2% for an unstated period of time? Fed was unable to get inflation to 2% for 8 years ending in feb 2020 even though it injected $3T Into the economy and unemployment was only 3.6%. Last 12 months inflation is 1%. Problem with an economic boom increasing inflation is that large Corp such as amazon and Walmart have become adept at improving productivity as sales increase to keep costs from going up which in turn keeps customers happy and allows increasing profits with lower prices on goods.

Spoiler
 
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Re: Implications of negative long term real rates - Treasuries

Update: 30 Year TIPS continue their historic run with negative yields.  

 Most recent reading was -0.32%, which is within a band of -0.26 to -0.45% that has been established beginning in July 17, 2020

Interestingly, the FED is indicating that the US has been in a recession since January 30, 2020.  That is prior to the onset of the wide spread COVID-19 pandemic.  At that time, 30 year TIPS were trading at a positive 0.26%.

30 Year TIPs from January 2 to September 17 2020.jpg

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Re: Implications of negative long term real rates - Treasuries


@3M wrote:

Update: 30 Year TIPS continue their historic run with negative yields.  

 Most recent reading was -0.32%, which is within a band of -0.26 to -0.45% that has been established beginning in July 17, 2020

Interestingly, the FED is indicating that the US has been in a recession since January 30, 2020.  That is prior to the onset of the wide spread COVID-19 pandemic.  At that time, 30 year TIPS were trading at a positive 0.26%.

30 Year TIPs from January 2 to September 17 2020.jpg


How can the recession have begun in January when the first Qtr GDP was positive?  My understanding was that a recession required Two consecutive quarters of a decline in GDP. Did the Fed change the rules or is this new fed speak?

The National Bureau of economic research says the recession began in February which is when the economy peaked.

Does anyone really care about the economic mopes determining when the recession began?

 

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Re: Implications of negative long term real rates - Treasuries

       Mr. Intruder:

https://www.moneycrashers.com/what-is-inflation-definition-causes-inflation-rate/

             No one can tell the future so “ probably” and “may” don’t really mean much. I can’t answer a question about the future. Currently it looks like the U.S. is set on pause as actual facts about the current situation take hold but that’s an opinion only. 
             
              Remember Goldilocks got a virus. The important move was to recognize irrational exuberance when you saw it and cash in some capital gains again in my opinion. I bought a car and they gave me an addition 6k off to get it off the lot after I swept away the cobwebs. Lol.

 

 

       

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Re: Implications of negative long term real rates - Treasuries

EE Savings Bonds are still guaranteed to double in 20 years which equals a 3.5% rate. TVA exchange traded bonds with an implicit federal government guarantee and about 8 year duration yields a little over 2%..

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Re: Implications of negative long term real rates - Treasuries


@steelpony10 wrote:

       Mr. Intruder:

https://www.moneycrashers.com/what-is-inflation-definition-causes-inflation-rate/

             No one can tell the future so “ probably” and “may” don’t really mean much. I can’t answer a question about the future. Currently it looks like the U.S. is set on pause as actual facts about the current situation take hold but that’s an opinion only. 
             
              Remember Goldilocks got a virus. The important move was to recognize irrational exuberance when you saw it and cash in some capital gains again in my opinion. I bought a car and they gave me an addition 6k off to get it off the lot after I swept away the cobwebs. Lol.

 

 

       


I could buy a new car with some of my gains since March but I have no place to drive it. My bet is that the markets will resume their upward trend no later than after Election Day because Congress is not going to let the economy go into a fatal stall like Maverick and Goose after they flew through Iceman's jet wash.

 

 

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Re: Implications of negative long term real rates - Treasuries

         Intruder: my guess is after a vaccine but slowly. i don’t think anyone trusts authority anymore. Certainly there is no respect. So a slow process. It’s heart warming you still have faith in the Federal government though. 

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Re: Implications of negative long term real rates - Treasuries

 

Triple M...thanks for OP post.

If GVT Treasury bond yields approach zero, then one expects TIPs yields to be at zero or negative.  Reason is TIPs provide an inflation bonus...so they are more valuable than a stand-alone gvt treasury, at the same yield.  So TIPs are justified by some, at negative yields.

I agree with intruder...inflation outlook and rates for next couple years is for quite low numbers.

During the past decade+ there have been numerous discussions by bond folks re TIPs.  Half, including Capecod and me, concluded that "TIPs were not worth it; better to own treasuries at higher yields, and buy TIPs , at best, when inflation finally shows up."

So far, that strategy and outlook has prevailed as the best.

Disclosure...I have never owned TIPs...and I exited many of my standard issue, vanilla bond funds, in past 9 months, concluding the risk is not worth the measly interest rate reward.  I patiently wait.  I could be wrong...but not by much, missing at worst a little yield each year.  And potentially avoiding the worst: the relaxation/removal of government under-girding the bond market using billions and billions, and rates rising, and the accompanying large NAV price declines.

Good luck all.

R48

 

 

 

 

 

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Re: Implications of negative long term real rates - Treasuries

I bought VTIP, Vanguard's short-term inflation-protected blah-blah-blah, just to see, just to see. 

It's still rising due to rates lowering, not become the TIPS was a wise move due to inflation.  Still, I'm up 3.3%, not factoring in distributions, so it has been better than a poke in the eye with a sharp stick.    

But, because the duration of VTIP is only 2.7 years or so, the move will go in the other direction at some point, barring a rise in inflation.  So, I'll watch the trend and sell it when it goes flat.    

Sure, it would be good to invest in these things BEFORE inflation rears its ugly head, but I may be dead before that point arrives.  YMMV.

ctyankee  

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Re: Implications of negative long term real rates - Treasuries

A number of people are responding to this thread as individual investors.  

That is perfectly understandable since probably everyone on this forum is either an individual or a small time advisor.

However, the largest purchasers of long term Gov't Bonds are pension funds.

Some of these funds have hundreds of billion under management.

I believe the total for all public pension plans is well over 3 trillion.

Anyhow, please consider how the managers of those funds are looking at this situation...

For decades long term bonds returned several % points more than inflation and they were to primary investment of choice.

But, TIP returns have not been over 1.5% for over 10 years now.  1% was actually the norm up last year.

Still, because they had such large stock piles from the good ole days, their older long term bonds were inflating.  So, overall they were looking good.  Future returns were meager, but total was still appreciating.

Fall of last year, long term bonds were appreciating and returns had lowered to about 0.5%.  Not good, but "okay".

Now, it's different.  Future returns are actually negative (after inflation).

If long term rates were to rise much at all, then the hoard of older bonds would shrink.

So, it's basically a crazy world for pension plan mangers.  The only "safe" investment is basically a ship with a large leak.  It's floating all right, but there is really no way to possibly bail it out.  With time, it's only going to sink deeper and deeper.   

Higher taxes? you bet.

Lower benefits? of course.

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Re: Implications of negative long term real rates - Treasuries


@3M wrote:

A number of people are responding to this thread as individual investors.  

That is perfectly understandable since probably everyone on this forum is either an individual or a small time advisor.

However, the largest purchasers of long term Gov't Bonds are pension funds.

Some of these funds have hundreds of billion under management.

I believe the total for all public pension plans is well over 3 trillion.

Anyhow, please consider how the managers of those funds are looking at this situation...

For decades long term bonds returned several % points more than inflation and they were to primary investment of choice.

But, TIP returns have not been over 1.5% for over 10 years now.  1% was actually the norm up last year.

Still, because they had such large stock piles from the good ole days, their older long term bonds were inflating.  So, overall they were looking good.  Future returns were meager, but total was still appreciating.

Fall of last year, long term bonds were appreciating and returns had lowered to about 0.5%.  Not good, but "okay".

Now, it's different.  Future returns are actually negative (after inflation).

If long term rates were to rise much at all, then the hoard of older bonds would shrink.

So, it's basically a crazy world for pension plan mangers.  The only "safe" investment is basically a ship with a large leak.  It's floating all right, but there is really no way to possibly bail it out.  With time, it's only going to sink deeper and deeper.   

Higher taxes? you bet.

Lower benefits? of course.


There will be Higher taxes for Top 1% but not for the rest of us because it’s not smart to raise taxes in a recession on the bottom 99% because their votes count. NJ just raised income tax rate on anyone with $1M in income to 10.9% From 9% which will just encourage millionaires to follow Trump and David Tepper to FL or Some other state with low taxes Which will negate any increase in revenue.

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Re: Implications of negative long term real rates - Treasuries


              3M - I found this in the Harvard Business Review from 1988! Seems they saw cash as the high risk investment as a pension ages. So pensions should take on “less” risk (to purchasing power) by eliminating the worst asset in a low interest rate situation, cash.

               Makes you wonder about holding excess cash long term individually. We use a muni fund (20% of assets) for most cash primarily funded by excess investments in high risk CEF’s since the bank crisis. I saw this problem, being too conservative early on, managing our parents retirement portfolios. Now we can afford to cut back on risk gradually. Maybe too much cash too long contributed to some pensions problems. Pensions may be competing with cities for bonds as mentioned.

https://hbr.org/1988/01/the-right-way-to-manage-your-pension-fund

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Re: Implications of negative long term real rates - Treasuries

I invest mainly in bonds for years and never cared about any implications or LT scenarios.  I continue to find great opportunities.  YTD TIP made 8.6% regardless.

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