Hedging against inflation?

[divs4ever]

REMEMBER even Sovereign ( government ) bonds can default ( cost you money ) you can have a 'soft default ' , the nicer end is they miss an interest payment or two up to say giving you back 30 cents in the dollar ( or less ) like during the Greek crisis , or a 'hard default ' where you get almost nothing back even if you sue successfully ( and might have to wait years extra for anything you get back )

THERE IS ALWAYS some risk involved ( sometimes tiny , sometimes acceptable and sometimes HIGH risk )

 

[Value Collector]

Why you no like anymore?

Sounds like guaranteed gain in value.

No, government bonds are terrible investments in general, interest rates are lower than inflation.

Eg on a $100 bond you might earn $3 interest, and then you have to pay tax on that interest leaving you with about $2, so you have $102 but then over that year inflation reduces the value of your cash, so now it cost $105 to buy what used to only cost $100, and your $100 has only increased to $102 so you are worse off.

 

[Value Collector]

Here is a short video explaining bonds

 

[Value Collector]

YEP , we agree on that

my understanding was the negative part with the bond eroding capital over the duration ( as opposed to your explanation )

sort of like the shrinkage of some gold ETFs

cheers

but i suppose anyway it is structured is still a bad deal for the lender , considering the risk taken and the returns received

Both things happen

Eg yes inflation will definitely erode the value of your capital, but negative interest rates are a separate issue as I described, where the total value you receive back via interest and capital at maturity is less than what you paid for the bond.

 

[divs4ever]

Why you no like anymore?

Sounds like guaranteed gain in value.

NOT guaranteed , likely depending on where you invest ,
and ALSO you have to try to guess future inflation say you grabbed some Aussie Treasuries at , say , 3% per year return for ten years now for 2020/2021 that was OK when official interest rates were low as was official inflation ,but THIS year things MIGHT get nasty , say official rates climb over 3% ( so suddenly you probably aren't breaking even , there ) and real inflation MIGHT be over 8%

now SOME bonds are floating rate ( they add a bank swap rate component ) so they will adjust up BEHIND official rate increases ( unless the banks have a MAJOR crisis moment ) so most of the time you will lose less during heavy inflation than the fixed rate ( you are already holding )

as VC pointed out you can buy these 'on-market' ( after they have been officially issued ) so depending on the timing you can buy that $100 ( face value ) bond at more or less than the face value ( but you still get that $100 plus the last interest payment back )

the other tiny detail , say your bond is paying 10% per year ( say you bought a 20 year bond 15 years back ) BUT current official rates are below 2% , the borrower ( often ) has the right to redeem ( payout the face value in full ) early , sometimes issuing bonds at say 3% to raise the cash to pay you out ,

( that happened to me several times in the corporate world ) and sometimes your bonds just mature , and there is nothing comparable currently available , which is why i have no direct bond exposure currently they just don't pay me enough to take the risks i calculate are in the near future

( would you lend to a heavily addicted junkie ... anything could happen next week , and there goes your cash )

now i WOULD have considered the FMG offering they they weren't offered to Australian investors , so for better or worse i was left out there ... FMG has a bold plan but a track record of delivering on previous plans

to get a better idea of what can go wrong go back to the Greece and Cyprus debt crisis where the ECB ( NOT the Greece or Cyprus government ) restructured the debt problems sure there are other examples but Greece and Cyprus should present multiple viewpoints in 'civilized nations ' ( where many expected to have relatively safe outcomes , compared to say Venezuela or Argentina )

now all that being said ... depending how the current economic scenario plays out , i MIGHT be back in when it is HIGH risk/HIGH reward but NOT at current returns

in the US and Japan the BIG danger is the Central Bank is the buyer of last resort so there is no 'free-market ' what happens if the Central Bank stops buying , and there are no other buyers ( and therefore those governments can no longer borrow money to pay the interest and repay the bonds on maturity )

 

[3 hound]

NOT guaranteed , likely depending on where you invest ,
and ALSO you have to try to guess future inflation say you grabbed some Aussie Treasuries at , say , 3% per year return for ten years now for 2020/2021 that was OK when official interest rates were low as was official inflation ,but THIS year things MIGHT get nasty , say official rates climb over 3% ( so suddenly you probably aren't breaking even , there ) and real inflation MIGHT be over 8%

now SOME bonds are floating rate ( they add a bank swap rate component ) so they will adjust up BEHIND official rate increases ( unless the banks have a MAJOR crisis moment ) so most of the time you will lose less during heavy inflation than the fixed rate ( you are already holding )

as VC pointed out you can buy these 'on-market' ( after they have been officially issued ) so depending on the timing you can buy that $100 ( face value ) bond at more or less than the face value ( but you still get that $100 plus the last interest payment back )

the other tiny detail , say your bond is paying 10% per year ( say you bought a 20 year bond 15 years back ) BUT current official rates are below 2% , the borrower ( often ) has the right to redeem ( payout the face value in full ) early , sometimes issuing bonds at say 3% to raise the cash to pay you out ,

( that happened to me several times in the corporate world ) and sometimes your bonds just mature , and there is nothing comparable currently available , which is why i have no direct bond exposure currently they just don't pay me enough to take the risks i calculate are in the near future

( would you lend to a heavily addicted junkie ... anything could happen next week , and there goes your cash )

now i WOULD have considered the FMG offering they they weren't offered to Australian investors , so for better or worse i was left out there ... FMG has a bold plan but a track record of delivering on previous plans

to get a better idea of what can go wrong go back to the Greece and Cyprus debt crisis where the ECB ( NOT the Greece or Cyprus government ) restructured the debt problems sure there are other examples but Greece and Cyprus should present multiple viewpoints in 'civilized nations ' ( where many expected to have relatively safe outcomes , compared to say Venezuela or Argentina )

now all that being said ... depending how the current economic scenario plays out , i MIGHT be back in when it is HIGH risk/HIGH reward but NOT at current returns

in the US and Japan the BIG danger is the Central Bank is the buyer of last resort so there is no 'free-market ' what happens if the Central Bank stops buying , and there are no other buyers ( and therefore those governments can no longer borrow money to pay the interest and repay the bonds on maturity )

Australia gov with all its problems is very stable hence I can not even consider a default risk.

 

[divs4ever]

No, government bonds are terrible investments in general, interest rates are lower than inflation.

Eg on a $100 bond you might earn $3 interest, and then you have to pay tax on that interest leaving you with about $2, so you have $102 but then over that year inflation reduces the value of your cash, so now it cost $105 to buy what used to only cost $100, and your $100 has only increased to $102 so you are worse off.

YEP as the video says it is complex when dealing with real world economics ( but possibly rewarding )

however in a 'free-market ' there are opportunities ( but not every week or year )

in 2011 to 2015 , there was a lot of uncertainty , but also some predictability ( if you ignored the mainstream narrative ) so interest rates were tempting and market rates ( for the bonds ) were volatile you could buy SOME bank hybrids for as low as 63 cents in the dollar ( AND they never missed up payment up to the early redemption date )

just as well they didn't notice i had a bad heart and should reduce excitement until late 2016 ,hey ( wink ) ( otherwise the doctors might have had the heart attack )

 

[Value Collector]

Australia gov with all its problems is very stable hence I can not even consider a default risk.

The lower the perceived risk, the lower the interest rate will be, hence when a market panic happens and people are bailing out of other assets USA government bond interest rates can go near 0% or sometimes negative.

The is almost zero chance the USA government would ever default because they can print the cash to pay, so you are not going to become rich off US or Australian bonds.

(Unless of course you make some really well timed purchase like buying 30year 10% bonds in the 1980’s and holding them as interest rates collapsed, which caused their prices to rise a lot.

 

[divs4ever]

Australia gov with all its problems is very stable hence I can not even consider a default risk.

i am not so confident in them , and they LOVE to mess with the financial and tax rules

ALSO there is a small chance the major parties can be dumped and an assortment of minor players run the show ( now that could either be bad or AWESOME , depending on who is in charge )

a group unpopular with the banks might be terrific for the citizens ( and an opportunity for an intending bank shareholder )

there is a global trend towards populist leaders ( and a consequential coup , when the populist wins )

PS i always factor in a default risk , since most governments can't budget sensibly ( they are only looking at the next election )

 

[DrBourse]

Remember that Inflation is NOT Transitory.......

This article is from www.GoldBroker.com .......