Jul

14

Bonds, from Nils Poertner

July 14, 2023 |

like Sidney Homer used to say- "sooner or later every generation is shocked by the behaviour of interest rates."

Hernan Avella disagrees:

I don't think many people can be shocked, given the data we have from the 80's. Most asset holders are older folks anyways, that have the memories of the Volker era deep in their heads.

Stefan Jovanovich offers:

Edward Chancellor interview

High Interest Rates To “Slay” Zombified Companies | Edward Chancellor & Joseph Wang

Kim Zussman adds:

America’s Retirees Are Investing More Like 30-Year-Olds

At Vanguard, one-fifth of taxable brokerage account investors aged 85 or older have nearly all their money in stocks

William Huggins responds:

i suspect a good part of that boils down to how one's asset portfolio is defined. most studies of brokerage accounts don't account (haha) for the real estate, pension, insurance, or physical assets of those being studied. if most of my income is derived from a secure pension, its (mathematically) a pretty good approximation to drawing the yield from a large investment grade bond portfolio (less the liquidity). owning your home (usual by 85) would similarly constitute a "housing cost equivalent" yield, as would any reliable health benefits being drawn. seen in that way, one's discretionary funds being kept in equities would be quite reasonable.

Zubin Al Genubi reminisces:

Sure would have been nice to own 17% bonds. 5% not too bad though.

Nils Poertner offers:

Big investors rush into bonds after ‘cataclysmic’ year

Capital Group predicts $1tn will flow into debt markets in next few years as investors move to lock in higher yields

Henry Gifford writes:

In the 1970s my father bought some New York City municipal bonds. At the time there were rumors that the city government was going to go broke. I heard my father say “How can the government go broke? When they want money all they have to do is send people bills.”

The city government defaulted on the bonds. It was widely reported in the news as a disaster, with various solutions to the terrible problem proposed. I was only a teenager, but didn’t see a problem with the government not being able to borrow money any more. I still think it would be great. But, most people believed it was a terrible problem, with disaster looming.

My father reacted by buying more of the bonds – “default” meant they mailed his checks one week late. The bonds were triple tax free: no federal income taxes, no NY State income taxes, and no NY City income taxes. The bonds paid 28%. It was the only time in my father’s life that he borrowed money – to buy more of those 28% bonds. I have no idea for how many years he was collecting 28%.

I started buying apartment houses in Manhattan when I was 20. It was normal to pay 12% interest. One time I bought a small building – only four families – with the goal of replacing the 12% seller-financed loan with an 8% bank loan on an owner-occupied property. I moved into the building, fixed it up, but never managed to get a city inspector to come inspect and remove all the violations without inventing some new ones, as I never bribed an inspector. But for a long time I dreamed of refinancing a little bit of my real estate at 8%.

Nils Poertner responds:

tangentially speaking . we would need to have experience from bond traders of the 1970s and 1980s, today is more leverage though and we have more complex system so not sure how much that would really help. collective mind has been in a long mental bear mkts as well. we need nerves of steel in coming yrs and imagination.


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