Saturday, March 28, 2020

The U.S. now joins large swaths of Europe and Japan that also have negative-yielding debt.


Popping

Bubbles
Yields on both the 1-month and 3-month Treasury bills dipped below zero Wednesday, a week and a half after the Federal Reserve cuts its benchmark rate to near zero and as investors have flocked to the safety of fixed income amid general market turmoil. 
It was the first time that happened in 4½ years, when both bills briefly flashed red and yields fell to minus-0.002% each. The readings Wednesday were well below those. The one-month traded at minus-0.053% while the three-month was at minus-0.033% around 2:35 p.m. ET.
 DYI:  Unfortunately the popping of the junk bond bubble another run to quality [relatively speaking] and safety to short term treasury bills dropping to slightly negative yields.  A typical static 60% stocks, 30% bonds, and 10% bills [cash] portfolio has been hit hard with a peak to current trough 27% decline for equities.  This typical asset allocation would have intermediate term bonds with a mixture of high grade corporate and Treasury notes that has experienced a nice bump up in price however this will decline future compounding [lowering current yield].  Vanguard’s Intermediate-Term Bond Index Fund Admiral Shares (VBILX) is now a scant 1.77% yield.  T-bills are now negative yield much to the chagrin for our typical 60 – 40 – 10 investor.

So…

I’ll do the math just sit back and let’s see would our estimated average annual return will be if we put our money into our 60 – 40 – 10 portfolio today going to sleep like Rip Van Winkle waking 10 years from now.

Stocks…3.13% x .60 = 1.878% rounding 1.9%
Bonds…1.77% x.30 = 0.531% rounding 0.5%
Cash…0% x .10 = 0% rounding 0%

Adding them all up [1.9 + 0.5 + o] = 2.4%

2.4% average annual return for the next ten years.  For a retirement account with that return you will need to buy the recipe book 15 ways to eat Alpo dog food and enjoy it!  Ouch!

Valuations for both stocks and bonds remain absurdly priced.  Our long term investor will have to continue to wait for improved valuations.

Till Next Time
  DYI

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