i wouldn't buy IEF. it doesn't have enough liquidity, plus you are paying an expense ratio. just look at the UST 10yr. now at 3.55%.
bloomberg.com
in a world where there is high unemployment, zero income growth, a huge decline in commercial lending (C&I loans down 16% YoY), and very, very low CPI, 3.55% is not bad yield at all. the real yield is much higher than is typical.
if you were to buy this now, what would the primary reason be ? yield ? capital gain ? or do you expect both ?
part of the reason to own fixed income is to have an asset class that behaves very differently from the other things in your PF. fixed income is very different from equities, tending to do poorly when equities do well and vice-versa. having a decent fixed income allocation reduces PF volatility while surprisingly not detracting from PF returns as much as you might think.
the main reason for this is, in yrs when stocks do poorly you can rebalance (sell fixed income and buy more stocks). this makes up somewhat for the fact that you won't participate in full on stock upswings, compared to somebody who is 100% stocks (or gold, or whatever). there've been tons of studies on this. check out William Bernstein's "The Intelligent Asset Allocator".
how many millions does one need with such yields to make a decent go of it without other income ?
considering stock yields are even lower, one would need less money in bonds than one would need in stocks. the low nominal yields are indeed a "problem" for investors who lack sufficient funds to support their cash flow requirements at 3-handle yields. but that doesn't mean the yields can't go lower.
just look at Japan. yields tanked to unimaginable lows there. people became afraid of risk assets and flocked to bonds, where at least principal is secure and there is some sort of appreciation.
maybe that is part of the reason why the place is full of goldbugs, hoping for capital gains and outsmarting the other goldbugs in trading acumen !
it is true that bonds are unexciting. they can only pay off at par, plus interest. therefore, all the underfunded pension funds can calculate in advance that they can't "afford" to own bonds. instead, they must "bet it all on black", i.e., own 100% risk assets and pray that they go up. ironically, this overexposure to risk assets ends up hurting their returns like last yr. this magical thinking strategy is the underpinning of today's overownership of stocks across all investor classes. everybody is trading against everybody else, trying to make their nut in capital gains since income and dividends are too low and PEs too high.
imo this is just like going to Las Vegas. it is a zero sum game and only the lucky win. i don't trust things without a yield, which is why i hedge my gold with Treasurys. otoh, i don't necessarily trust that faith in fiat currencies (not just USD, though it gets all the bad press) will survive that long, so i also hedge my Treasurys with gold.
as for the overownership in stocks society: i think it will fall apart. as boomers age, pensions and individuals will naturally go into net liquidation mode. this will lower PEs and stock prices. people who are banking on 11% annual returns from stocks may have a tough time. |
