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Sharing of Inflation Rates, Rates of Return

Last Post by Pizza Man 3 years ago

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Pizza Man

(@pizzaman)

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Topic starter November 20, 2023 4:42 pm

Good article about long dated low coupon Treasuries and a good explanation on how bonds fair-value rates are determined:

U.S. Treasury rates in the long-end of the curve are 100 basis points too high relative to a fair-value model. The risk-adjusted opportunity in long-dated, low-coupon Treasuries is attractive.

In fact, I take his point one step further and argue that given everything going on in the world, going long Treasury securities – and especially long-dated ones with low coupons – offers a very attractive hedge against bad macroeconomic and geopolitical outcomes, and one that pays you a 5% yield to boot.

There are two pillars to this argument. A global fair-value model for interest rates suggests that 10-year U.S. rates are 100 basis points above fair value. Models could be wrong, obviously, and it is possible that despite this historically high “mispricing,” interest rates could go higher still. But if rates do go higher, they are unlikely to go much higher from current levels, which makes the upside-downside of going long Treasuries attractive, especially so for long-dated, low-coupon ones, for the reasons I discuss below.

Fair value for 10-year rates

The QuantStreet fair-value rates model is estimated using the last several decades of data from eight major economies: Australia, Canada, Germany, Japan, Norway, Switzerland, the U.K., and the U.S. The model relates the level of nominal 10-year rates in each country to their last-12-month (LTM) GDP growth, LTM inflation, the LTM inflation from 12 months ago, the most recent unemployment rate, the most recent current account level as percent of GDP, and the most recent government debt-to-GDP ratio. Based on the historical relationship between these variables and 10-year nominal interest rates in these countries, the model determines a fair value for the 10-year rate. Comparing the prevailing 10-year rate against this fair value estimate gives a sense of market mispricing.

https://www.advisorperspectives.com/articles/2023/11/14/long-dated-low-coupon-treasury-bonds?hsid=28216572

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Pizza Man

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Topic starter December 10, 2023 10:09 am

Morningstar evaluation: These are the 3 top guaranteed retirement incomes

John Rekenthaler, director of research at Morningstar, recently evaluated three other ways to generate guaranteed retirement income – Treasury bonds, TIPS ladders and annuities – to see which is best. The answer? It all depends on inflation and life expectancy.

https://finance.yahoo.com/news/treasury-bonds-vs-tips-ladders-131720815.html

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Pizza Man

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Topic starter December 16, 2023 12:26 pm

Bonds over Stocks for the next 10 years:

https://www.advisorperspectives.com/articles/2023/12/13/bonds-not-stocks-next-10-years-michael-lebowitz?hsid=28216572&_hsmi=286677980

The average 2024 Wall Street S&P 500 forecast is for a gain of 6.50% next year. In the past, a 6.50% expectation, while slightly lower than historical averages, was a no-brainer when choosing between stocks and sub-2.5% bonds. Today, that calculus has changed dramatically, with interest rates offering respectable yields.

Suppose you think yields will rise or fall based on your inflation and economic growth forecast, or you want to create a table of various return scenarios. In that case, one can approximate returns closely by multiplying the duration of a bond with the expected change in yield. Add to that price return the expected coupon payments over an assumed period, and you have a robust estimate of potential return.

... stock returns over the next 10 years may likely be lower than bond returns. Stock prices and valuations will change, and with it, the 10-year outlook will respond. The prospective returns for stocks and bonds may differ vastly in three months or three years. But for now, not only are bonds much easier to understand and forecast, but they also offer a comparable, if not better, return prospect.

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Richard Eaton

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December 17, 2023 10:32 am

@pizzaman

The forecast of bonds better than stocks could be true, but last year Wall Street forecasters were saying that stocks would be down in 2023 and instead stocks are up quite a bit, there never seems to be accountability for bad forecasts. I would love to see a chart of these prognosticators' predictions vs. actuals. I'll bet it would be no better than throwing darts.

There is still a lot of disbelief that inflation is tamed, so while the very bottom seems to be in on bonds, I think rates will be coming down much more, so I feel like they are still a solid investment.

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Pizza Man

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Topic starter December 20, 2023 2:43 pm

Still Holding I Bonds? Jan. 1 Could Be Your Ideal Date to Cash Them In

KEY TAKEAWAYS

I bonds enjoyed a historic heyday last year between May 1 and Oct. 31, due to their initial 6-month rate surging to 9.62%. But if you bought during this time, your return has since dropped to 3.38%.
In the meantime, CD rates have soared, with dozens of the best nationwide CDs offering record rates above 5% APY. That makes now a smart time to move I bond money into a federally insured CD.
Though you can cash out an I bond anytime after one year, there's a sweet spot on the calendar for maximizing your I bond earnings before you withdraw.
Based on your I bond's issue date, we'll tell you the best month to withdraw. And then the best day to cash in is always the first of the month. For many current I bond holders, your ideal withdrawal date is coming up on Jan. 1.

https://www.investopedia.com/i-bonds-jan-1-could-be-your-ideal-date-to-cash-them-in-8418134?hid=cf7663b321b1ba4c06f591c0f273ce622b2a3d21&did=11393037-20231220

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