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Buffett: Bonds not the place to be

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TUK020
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Buffett: Bonds not the place to be

#390670

Postby TUK020 » February 27th, 2021, 4:42 pm

FT article:
Buffett warns of ‘bleak future’ for debt investors
‘Bonds are not the place to be these days’ Berkshire Hathaway chief tells shareholders in his annual letter

https://www.ft.com/content/01f308ff-0a6 ... c81d940b23

1nvest
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Re: Buffett: Bonds not the place to be

#390688

Postby 1nvest » February 27th, 2021, 6:45 pm

Repeated oft enough and one day such claims will be right - and then they can proclaim how they predicted such. But people have been saying the same since the 2010 0.5% post 2008/9 financial crisis interest rate yields. Since 2010 US 20 year Treasury returns have compared to BRK stock total returns (around 6.5% annualised gains). In the UK 30 year gilts have provided near 9% annualised rewards. All over a time when many have been saying that with yields so low bonds only had one way to go (suggesting/predicting losses).

UK longer dated Gilt total returns by year since 2010 ...
UK LTG TR
2010 4.1
2011 25.7
2012 3.5
2013 -5.4
2014 23.2
2015 3.5
2016 13.9
2017 7.2
2018 1.1
2019 20.7
2020 2.7


that compounded to a 2.5x gain factor

dealtn
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Re: Buffett: Bonds not the place to be

#390692

Postby dealtn » February 27th, 2021, 6:59 pm

1nvest wrote:Repeated oft enough and one day such claims will be right - and then they can proclaim how they predicted such. But people have been saying the same since the 2010 0.5% post 2008/9 financial crisis interest rate yields. Since 2010 US 20 year Treasury returns have compared to BRK stock total returns (around 6.5% annualised gains). In the UK 30 year gilts have provided near 9% annualised rewards. All over a time when many have been saying that with yields so low bonds only had one way to go (suggesting/predicting losses).

UK longer dated Gilt total returns by year since 2010 ...
UK LTG TR
2010 4.1
2011 25.7
2012 3.5
2013 -5.4
2014 23.2
2015 3.5
2016 13.9
2017 7.2
2018 1.1
2019 20.7
2020 2.7


that compounded to a 2.5x gain factor


Who are the "many" claiming "only had one way to go"? I can't recall many. Most that have been bearish on (government) bonds have been saying with yields historically low it isn't an appropriately compensatory likely return for the (2-way) risk of holding.

Of course you might have a different recall to me, but ex-post justification, or criticism, for ex-ante commentary is easy to do. Far in advance.

(I haven't read the article so have no direct comment to make on it as no wish to go through a paywall. Maybe somebody could summarise Buffett's argument please?)

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Re: Buffett: Bonds not the place to be

#390696

Postby SalvorHardin » February 27th, 2021, 7:04 pm

Here's what Buffett said, from page 5 of the 2020 annual report which is on Berkshire Hathaway's website (link below):

"And bonds are not the place to be these days. Can you believe that the income recently available from a 10-year U.S. Treasury bond –the yield was 0.93% at yearend –had fallen 94% from the 15.8% yield available in September 1981? In certain large and important countries, such as Germany and Japan, investors earn a negative return on trillions of dollars of sovereign debt. Fixed-income investors worldwide –whether pension funds, insurance companies or retirees –face a bleak future"

https://www.berkshirehathaway.com/reports.html
Last edited by SalvorHardin on February 27th, 2021, 7:06 pm, edited 1 time in total.

dealtn
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Re: Buffett: Bonds not the place to be

#390697

Postby dealtn » February 27th, 2021, 7:06 pm

Presumably its the Annual letter to shareholders in the Annual Report?

https://www.berkshirehathaway.com/2020ar/2020ar.pdf

Why post a link to a journalist's view on a named person's view when you can go directly to the source of that view?

GrahamPlatt
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Re: Buffett: Bonds not the place to be

#390725

Postby GrahamPlatt » February 27th, 2021, 9:19 pm

So Buffet is referring to “bonds” with either negligible or negative yields. A case of stating the obvious then. But there exist “bonds” with superior yields, and given that no-one (esp. not the monetary policy committee) know what will happen with inflation, I’m sleeping easily.

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Re: Buffett: Bonds not the place to be

#390730

Postby AleisterCrowley » February 27th, 2021, 10:19 pm

The usual advice is government bonds for the bond part of a portfolio (basically 'zero' risk)
So Gilts for the UK - 10yr is about 0.8% after ramping up recently. I think 5yr was about 0.4%?
Where are these 'superior yields' to be found?

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Re: Buffett: Bonds not the place to be

#390733

Postby Lootman » February 27th, 2021, 10:33 pm

AleisterCrowley wrote:The usual advice is government bonds for the bond part of a portfolio (basically 'zero' risk)
So Gilts for the UK - 10yr is about 0.8% after ramping up recently. I think 5yr was about 0.4%?
Where are these 'superior yields' to be found?

I assume that Graham means corporate bonds, as they will always have a yield spread over gilts. That spread might be quite low for a high quality company like Unilever. But could be much higher for so-called junk bonds.

As an example distressed Carnival Cruiseline has raised money in the last 12 months through both bond issues and private debt financing. The interest rates they had to offer were between 8% and 12%, from what I saw. Clearly these will give you a high running income and the potential for capital gains if cruising returns as a thing. But there is also a much higher risk of a default and a significant loss.

So yes, you can get superior yields, but only by going down in terms of quality and safety. If risk-free gilts go up in yield (i.e. go down in price), then usually corporate bonds suffer as well, maintaining or even increasing their spread over risk-free yields. So in a rising rate and inflation environment, all bonds will tend to do badly, bar some special situations.

To be a long-term perma bond bull, you really need have a pessimistic outlook on the economy. You hope for recessions and declining rates. Bond bulls love misery just like equity bulls love growth.

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Re: Buffett: Bonds not the place to be

#390734

Postby GrahamPlatt » February 27th, 2021, 10:34 pm

I’m using the dictionary definition of bond. Which by my interpretation includes pretty much all “fixed interest” corporate obligations. So I include BOI, SKIP, BUR2 (or BUR4) etc; each circa 6% currently.

Ref my post here viewtopic.php?f=8&t=27955&start=20#p390426

TBH I’ve been mulling a purchase of BUR ords for the past six months.,.

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Re: Buffett: Bonds not the place to be

#390737

Postby AleisterCrowley » February 27th, 2021, 10:53 pm

Fair enough, but they are up at equity levels of risk
The context is normally 'boring safe bond bit of portfolio' when expressed as 70/30 etc..

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Re: Buffett: Bonds not the place to be

#390740

Postby 1nvest » February 27th, 2021, 11:11 pm

Lootman wrote:To be a long-term perma bond bull, you really need have a pessimistic outlook on the economy. You hope for recessions and declining rates. Bond bulls love misery just like equity bulls love growth.

Only for those that are 100% or near 100% into such. Treasury yields are low because the bond market is saying that we are heading into a future of ultra-low expected returns. Supply capacity vastly outpaces demand, inflation risk is relatively low and likely to remain relatively low. It would take years of exceptional growth in demand before aggregate supply and aggregate demand meet at a point that's going to generate sustainable inflation. The debt burden is the biggest deflationary force globally. We've all turned into Japan. 1.3% treasury bond returns during a 0% inflation or even deflationary period is a positive real gain, and is pretty much guaranteed, safe, you know exactly the total return at the offset if held to maturity in 10, 20, whatever years time.

As part of a balanced portfolio, the shorter term inverse correlation can be significant. If stocks drop -30% and longer dated bonds gain +10% then 50/50 will be -10% down, which if all were swapped-into/costed-as stocks would have you holding nearly 30% more stock shares.

Many that hold bonds do not love misery, but rather hold bonds as part of a balanced portfolio in order to reduce the risk of misery. 50/50 stock/bonds has more consistently provided modest real gains throughout all economic cycles than either all-stock or all-bonds.

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Re: Buffett: Bonds not the place to be

#390759

Postby 1nvest » February 28th, 2021, 12:58 am

SalvorHardin wrote:Here's what Buffett said, from page 5 of the 2020 annual report which is on Berkshire Hathaway's website (link below):

"And bonds are not the place to be these days. Can you believe that the income recently available from a 10-year U.S. Treasury bond –the yield was 0.93% at yearend –had fallen 94% from the 15.8% yield available in September 1981? In certain large and important countries, such as Germany and Japan, investors earn a negative return on trillions of dollars of sovereign debt. Fixed-income investors worldwide –whether pension funds, insurance companies or retirees –face a bleak future"

https://www.berkshirehathaway.com/reports.html

Longest dated UK gilts (50 year) have a duration around the same as stocks priced to a 3.3% dividend yield. i.e. duration is a measure of sensitivity to interest rate changes/risk. The same conditions that could prove to be bleak for long dated gilts might also affect stocks to the same degree. Sub 3.3% dividend yields and the sensitivity is even higher. Shiller's S&P500 dividend yield indicates a recent 1.5% dividend yield https://www.multpl.com/s-p-500-dividend-yield, so whilst stocks have the capacity to earn more than bonds, they also have greater risk/downside in the event of the interest rate (inflation) increases that hit bonds.

Feb 2018 to Jun 2020 and BRK stock investors lost -9% annualised real, compared to +1.7% annualised real gains from SHY (short term treasury bond fund). Near a 12% annualised difference. Over the last decade BRK stock has lagged the S&P500 and compared to a 50/50 stock/long dated treasury bond blend. Primarily BRK has benefited over decades from high interest rates when the insurance arm of BRK has provided a massive float of 'free money', insurance premiums paid in lieu of claims later being paid out. With many others now also having access to as good as free money (low interest rates since 2008) that competitive advantage has been lost.

Berkshire's cash mountain is around 30% of its book value, quite a considerable amount for someone who opines fixed-income to be bearing high risk. Perhaps he's hoping that others will ditch bonds, lower prices, increase yields so that he can earn a higher return on the $128 billion of fixed income he's holding.

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Re: Buffett: Bonds not the place to be

#390793

Postby dealtn » February 28th, 2021, 8:03 am

1nvest wrote:
Berkshire's cash mountain is around 30% of its book value, quite a considerable amount for someone who opines fixed-income to be bearing high risk. Perhaps he's hoping that others will ditch bonds, lower prices, increase yields so that he can earn a higher return on the $128 billion of fixed income he's holding.


Unlikely. He already has that holding so, as you said earlier, the return (to maturity) of that holding is already known (bar default) there won't be a higher return. In the scenario you paint, an existing holding will fall in value before its maturity, so that is a negative, not a positive for Berkshire.

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Re: Buffett: Bonds not the place to be

#392240

Postby 1nvest » March 4th, 2021, 1:24 pm

TUK020 wrote:FT article:
Buffett warns of ‘bleak future’ for debt investors
‘Bonds are not the place to be these days’ Berkshire Hathaway chief tells shareholders in his annual letter

What's bad for bonds can be just as bad if not more so for stocks. If Buffett had alternatively said that 'Berkshire Hathaway stock is not the place to be these days' !!!

Here's some US data for 1978 to 2019 inclusive https://tinyurl.com/4s5uj8zw

75/25 stock and LTT (20 year Treasury) near-as provided the same total return as all-stock. All stock was more volatile, zig-zagged around more. If a longer dated bond had been held the alignment would likely have been closer i.e. longer dated bonds are more volatile. That was over a period of broadly declining inflation/interest rates. As bonds are priced to lower yields so their price rises (and vice-versa). What about over a period of the opposite case, rising interest rates/inflation. Well looking at UK data for 1960 to 1977 inclusive, where inflation/interest rates rose from very low levels to very high levels, and that butts up to the above 1978 to 2019 start period, Well again 75/25 stock/20 year gilt (constantly rolled) yielded the same (near-as) total return as all-stock. But where again the all-stock was more volatile than the 75/25.

Combine those, as a indicator of overall outcome across a full cycle of low to high and then high to low interest rates/inflation transition - and the indications are that the rewards from 75/25 stock/bonds were little different to all-stock, but where 75/25 tended to do so with lower volatility when holding 20 year gilts. If 30 year had been held instead then perhaps the two might have compared in both reward and volatility. Longer dated bonds tend to be more stock like, some stocks can be more bond like. What might be bleak for bonds can also be bleak for stocks.

A long dated treasury/gilt considered as a stock has distinctly different characteristics. For one it wont fail, the state would rather print money and/or raise taxes than be seen to have defaulted/failed. Also over shorter periods long dated bonds have the tendency to move sharply in the opposite direction to stocks as/when stocks drop sharply. Perhaps as investors flight stocks and into 'safer' bonds - such as occurred in 2008 for instance. In other cases bonds may spike up when stocks stay flat ... 2011 and UK stocks -3% total return whilst long dated gilts gained +25%; 2014 when stocks gained +1% total return, gilts gained +22%.

Timing to exclude certain assets due to perceived valuations often proves to be worse than not timing. Since the transition to very low yields after the 2008/9 financial crisis some suggested that bonds only had one way to go (they assumed low yields would only see yields rise and bonds lose), since then however bonds have gains more than 100%. Low nominal yields are just a measure. In real (after inflation) terms real yields have at times be massively lower historically, -12% for instance in 1975 (25% inflation, 12% interest rates). For conventional bonds prices tend to rise as nominal yields (interest rates) decline, prices decline as nominal yields rise. For inflation bonds (TIPS in US, Index Linked Gilts in UK) prices move in reflection of real (after inflation) yields - prices rise as real yields decline, prices decline as real yields rise. Again where longer dated tends to see higher moves. So whilst some might see a 20 year Index Linked Gilt currently priced to a -1% real return as being a 'bad' bond, if inflation were to soar and the Fed/BoE maintained a yield curve control policy that kept interest rates low, then such bonds could really soar in price/value. Likely where stocks and conventional bonds might see large losses. Buyers of such bonds are in effect paying a 1% (whatever) yearly insurance premium relative to the amount of inflation bonds held as a hedge against a transition over to much wider negative real yields (high inflation, low interest rates). If say 33% of the portfolio that's a -0.33% yearly portfolio insurance cost, but where that 33% weighting might perhaps double or more in value if/when stocks drop perhaps 50% in value (67/33 stock/bond transitions to being 33/66).


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