Should we still be investing in high grade gov bonds considering the amount of public debt?

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Jaxx
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Should we still be investing in high grade gov bonds considering the amount of public debt?

Post by Jaxx » Tue Oct 31, 2017 12:53 am

Hi guys, Just a thought re bonds. I am seeing quite a few articles now in the media suggesting that governments, including those from the G7 who offer bonds of the highest grade are increasing their public debt instead of reducing them. Articles discussing possible government bankruptcy are also appearing. Just wondering what your thoughts were considering that many SatuMedia advocate the use of government bonds as part of a portfolio?

I currently have gov bonds in my portfolio and this is of concern.

Cheers.

Jaxx

stlutz
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Re: Should we still be investing in high grade gov bonds considering the amount of public debt?

Post by stlutz » Tue Oct 31, 2017 1:06 am

The key question is whether the government is issuing bonds in a currency it controls or in someone else's currency.

A state government or a Eurozone country (e.g. Greece) is a risk of default. A developed country with a large economy that has a large public debt, not so much. Japan's debt to GDP is super "high" at 245%. There is not nor has there every been any hint that they will go bankrupt.

For sovereign governments that issue their own currency, defaults almost always happen due to revolution or invasion.

Longtermgrowth
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Re: Should we still be investing in high grade gov bonds considering the amount of public debt?

Post by Longtermgrowth » Tue Oct 31, 2017 1:18 am

This thought has crossed my mind. Around what, 20 trillion for the U.S? I have fixed income invested mostly in direct CD's, but who backs the FDIC? :?
Current concerns ad missed, as far as bonds go, it seems U.S Government bonds are among the safest out of fixed income options...
Last edited by Longtermgrowth on Tue Oct 31, 2017 1:24 am, edited 3 times in total.

PFInterest
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Re: Should we still be investing in high grade gov bonds considering the amount of public debt?

Post by PFInterest » Tue Oct 31, 2017 1:20 am

Lol if the govt goes bankrupt the bonds you have will be the least of your worries.

Jaxx
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Re: Should we still be investing in high grade gov bonds considering the amount of public debt?

Post by Jaxx » Tue Oct 31, 2017 1:26 am

PFInterest wrote:
Tue Oct 31, 2017 1:20 am
Lol if the govt goes bankrupt the bonds you have will be the least of your worries.
Good point! I guess one can think of it as the very last line of defence! Once that is gone, guns and tin cans is what we will be looking for :)

Jaxx
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Re: Should we still be investing in high grade gov bonds considering the amount of public debt?

Post by Jaxx » Tue Oct 31, 2017 1:29 am

stlutz wrote:
Tue Oct 31, 2017 1:06 am
The key question is whether the government is issuing bonds in a currency it controls or in someone else's currency.

A state government or a Eurozone country (e.g. Greece) is a risk of default. A developed country with a large economy that has a large public debt, not so much. Japan's debt to GDP is super "high" at 245%. There is not nor has there every been any hint that they will go bankrupt.

For sovereign governments that issue their own currency, defaults almost always happen due to revolution or invasion.
This is the one I have invested in. In which case, I guess with the exception of Germany who control the Euro, the only real risk as from the other eurozone countries which form approx maybe 15- 20% of the total holdings.

https://ishares.com/uk/individual/e ... individual

AlohaJoe
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Re: Should we still be investing in high grade gov bonds considering the amount of public debt?

Post by AlohaJoe » Tue Oct 31, 2017 1:31 am

Jaxx wrote:
Tue Oct 31, 2017 12:53 am
Hi guys, Just a thought re bonds. I am seeing quite a few articles now in the media suggesting that governments, including those from the G7 who offer bonds of the highest grade are increasing their public debt instead of reducing them. Articles discussing possible government bankruptcy are also appearing. Just wondering what your thoughts were considering that many SatuMedia advocate the use of government bonds as part of a portfolio?
I think you are reading terrible articles by doom mongers that have been consistently wrong and need to find something better to do with your time than read their drivel.

Valuethinker
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Re: Should we still be investing in high grade gov bonds considering the amount of public debt?

Post by Valuethinker » Tue Oct 31, 2017 4:05 am

Jaxx wrote:
Tue Oct 31, 2017 12:53 am
Hi guys, Just a thought re bonds. I am seeing quite a few articles now in the media suggesting that governments, including those from the G7 who offer bonds of the highest grade are increasing their public debt instead of reducing them. Articles discussing possible government bankruptcy are also appearing. Just wondering what your thoughts were considering that many SatuMedia advocate the use of government bonds as part of a portfolio?

I currently have gov bonds in my portfolio and this is of concern.

Cheers.

Jaxx
As per other replies if a country controls its own currency and borrows in that currency it cannot default per se. The Central Bank prints money to settle the debts.

You can have hyperinflation.

So yes in principle Eurozone countries like Italy or Spain could get into trouble. But that is such a nightmare scenario that some kind of solution would be found-- just as the European Central Bank is now buying up bonds (Quantitative Easing) to drive down interest rates-- it could simply roll over those bond holdings to new govt debt.

Greece is an outlier. A tiny fraction of the Eurozone economy, and lessons have been learned which will be applied to other Eurozone countries-- they won't be allowed to get into such trouble.

People worry about Japan with its demographics and huge debt load. But, again, they borrow in Yen. They can print more yen thus driving the currency down.

These are all such nightmare scenarios I wouldn't get too worried. These countries will not renege on their debts. And even though Japan is trying quite hard to create 2% inflation, it is not happening. We seem to be in the grips of a global deflation (or near deflation). The "secular stagnation" hypothesis in other words has legs-- not even massive expansion of private credit is driving economies back to full employment or inflationary conditions.

Worry about private debt to GDP (China, Australia, Canada, UK, Sweden) not public debt to GDP. It's the former that was the underlying factor in the last crisis- both cause & severity. US btw is pretty OK on that criterion compared to where it was in 2006, say.

magneto
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Re: Should we still be investing in high grade gov bonds considering the amount of public debt?

Post by magneto » Tue Oct 31, 2017 6:23 am

Valuethinker wrote:
Tue Oct 31, 2017 4:05 am
As per other replies if a country controls its own currency and borrows in that currency it cannot default per se. The Central Bank prints money to settle the debts.
Hang on to that key fact.
"The Central Bank prints money to settle the debts" VT

That pretty much takes care of Credit Risk.
And yet the thread seemingly must continue? :?:

Only problem then left is Duration Risk, as yet unmentioned?
This latter risk is arguably the main concern today; and this risk the investor may address in whatever way they see fit.
Last edited by magneto on Tue Oct 31, 2017 11:09 am, edited 2 times in total.
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Re: Should we still be investing in high grade gov bonds considering the amount of public debt?

Post by nisiprius » Tue Oct 31, 2017 8:25 am

The whole global economy is, currently, tightly linked to U.S. treasury securities and the idea that they're safe. They may not be, but there isn't really any easy practical way for an ordinary person to opt out from the assumption that they are.

A rational approach is to look at what the bond ratings agencies say. They don't have magic crystal balls and they probably have a touch of political opinion in their ratings of sovereign bonds, but they have talked to officials and done math on tax revenues and so forth and their judgement is probably better than my gut feelings based on politicians ranting.

In 2011 Standard & Poor's made headlines by AAA (outstanding) to AA+ (excellent), while A. M. Best, Fitch, and Moody's kept it at AAA.

Nothing has yet changed since then, and the change didn't create the shock waves some suggested it would.

Nobody is forcing you personally to invest directly in government bonds if you have reservations about them. They form around 2/3rds of what is traded on the bond market so they constitute about 2/3rds of Total Bond, and John C. Bogle has expressed reservations about it--not because he thinks they are shaky, but because he thinks it is appropriate for the average investor to take on a little more risk to get a little more reward.

But, what are you going to do? You can certain invest in an investment-grade corporate bond fund. It's easy. Based on past performance, it's not a big change, but it's not as if corporate bonds didn't have problems of their own. (Liquidity, for one). (It's also pretty noticeable that corporate bonds took maybe a 10% hit during 2008-2009, not bad compared with stocks... but government bonds actually went up... not enough to offset stocks unless you were something like 85% Treasuries, 15% stocks...)
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Nate79
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Re: Should we still be investing in high grade gov bonds considering the amount of public debt?

Post by Nate79 » Tue Oct 31, 2017 9:53 am

If you don't invest in gov't bonds for fear of gov't default what are your options? Depending on which gov't you are talking about I guess but if talking about the US maybe diversify outside the US but that probably won't help much.

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