[quote=flu][quote=SD Realtor]What is the ideal economic situation do you make money on a buying bonds?
Conditions similar to 1980-1984.[/quote]
So from what I recall, 1970’s was a period of high inflation. And early 80ies was a period of falling interest rates…
So with that, aren’t we in a period right now with falling rates (albeit artificially created), and does that at least partly explain why bonds have been doing pretty well in their returns since the price of bonds have been increasing?
And if so, if one expect rates in the near-mid future to start to rise aggressively and continue to rise, wouldn’t that make bonds a really really really bad investment in the coming years?
I keep seeing people say that with rising interest rates, the RE market property value is gonna fall…We’ve been through periods of high inflation and high interest rates in the past…Have we seen huge corrections in RE as a result of rising interest rates (minus the liar loan/bubble periods)?
It seems like there are so many variables when it comes to property, and the value is less correlated to rising interest rates, historically speaking…
On the other hand it seems like there is much higher correlation between rising interest rates and bonds, and that bonds will get slaughtered during a period of increasing interest rates…
Thoughts?[/quote]
Correct, you want to be buying bonds when rates are high and about to fall. That makes the value of your bonds go up because the higher yield of your bonds (relative to lower yields in the future) will command a premium. You get asset appreciation (price of the bonds you hold), and it’s very, very nice to be getting say 10% yields when everyone else is getting 5% yields.
IMHO, during periods of ZIRP, you should be getting ready to short bonds, but you can also get killed if your timing isn’t right, depending on how you do it and your time-frame for holding the bonds. Personally, I would love to short bonds, but the Fed is making the timing of that very difficult.
Whoever gets the timing right will be very lucky because they can get the return on their short positions, and then buy assets when rates are high (and prices of those assets are low). There is not always a 1:1 correlation between interest rates and asset prices (like houses), but that’s because there are many other variables in play. In the 70s and 80s, you had women entering the workforce en masse, and Baby Boomers were entering their peak buying years. This pushed the prices of assets up even though interest rates were rising. We are on the opposite end of that situation now, though, which is why I am a deflationist…while also acknowledging the potential for a currency crisis of sorts.
If you can hold all other variables constant, then asset prices — especially those that are dependent on credit, like houses — would fall when rates rise. If you doubt this, ask yourself why the Fed has been hammering rates down during the entire housing/credit bubble bust.
