> Pension funds, mutual funds, and other impersonal investment vehicles have rules and formulae they're supposed to be following. To the extent that those rules call for the holding of safe bonds, some bond-buying can simply happen on autopilot.
I have firsthand knowledge of this market. Unfortunately, it's very difficult to buy bonds like this for yourself if you are not an institutional investor.
Your post says that they’re not buying bonds because ETFs are a better option. That’s exactly true and ETF purchases are not the main goal of the facility. There is way more capital allocated towards primary and secondary bond purchases than there is for ETFs and they’ve stated that ETFs are last in their purchase waterfall.
Operationally, it’s much more difficult to get the bond purchases rolling because they have to get individual issuer certifications before making any purchases. This is a restriction created by Congress and had it not been in place, they would be buying bonds right now. They are likely going to make some modifications to the facility in order to streamline this process because it’s preventing them from achieving the main goal of it: buying bonds.
When you put money into the market, but take bonds (which are a guaranteed future cash flow) out you are injecting liquidity temporarily, effectively trading current cash for more future cash.
It's not the same thing as printing money and spending it and suggesting otherwise is either disingenuous or ignorant.
When you put money into the market, but take bonds (which are a guaranteed future cash flow) out you are injecting liquidity temporarily, effectively trading current cash for more future cash.
It's not the same thing as printing money and spending it and suggesting otherwise is either disingenuous or ignorant.
Well, that's where the institutional smart money is, buying up and depressing yields on high quality corporate debt.
Bond market pricing also benefits large investors. A small guy buying 20-30 bonds will pay higher markup, higher commission and be quoted higher price than a large player with an 8-digit buy order.
In a stock market (outside the dark pools) two players will get quoted roughly the same market price. The larger guy is likely to be at a disadvantage, as exposing a large buy order might lead to supply tightening.
> Individual bonds and bond funds are two quite different types of investment and should not be considered equivalent.[0]
Bond funds move based off of the sum of bonds that are inside of them.
Much like we programmers study assembly code to understand the machine, even though we write code in C++ or Javascript, any bond fund owner should study bonds to understand the underlying mechanics and risks of the overall fund.
Good point. Reminders me of negative yielding bonds. Institutions buy them knowing they will lose money unless there is a greater fool willing to buy them at a premium.
Bonds are a commited fixed return, which means the value of bond goes up if the going rate for new bonds goes down.
Thus bonds can be much more profitable than stocks when the marketing is going down. The central bank will drop rates, and thus any holder of existing bonds gets to sell their old bonds for more, maybe much more.
Of course this is not the big driver for bond demand. Rather bonds are demanded by money managers who are not allowed to take any risk. Think banks, and especially central banks.
Said money managers want to never-ever lose so much as a dollar of principle. They are not paid to maximize total return, but rather to manage this pile of money in such a way to never let it shrink.
You'll see this set of incentives all over the world if you know where to look: money which is not expected to be invested.
Think of mega-corp's payroll. Every month they need to pay X large number of dollars by the end of the month. Missing payroll by 1% would be such an incredible disaster it would lead to lawsuits. So big-corp does the sensible thing, and keeps the money in a money-market fund. Said money-market fund in-turn holds various short-term bonds (1 year or less).
Who borrows money for only 1 year or less? People who have a little bit of their own money with which to take risk and want to turn around and borrow longer term.
Bit by bit money which needs to be 100% safe, gets lent its way up the value chain until you reach end users.
My favorite example of this is how the large Japanese REITs finance themselves. These REITs will have a relationship with a single major bank. One might expect that since they have a special relationship said bank will provide all financing: but they do not. Instead the REIT borrows floating-rate loans from 10+ banks, including their special bank. Then the REIT turns around and offers these loans to the special relationship bank. Said special bank takes the 10+ float rate loans and provides the REIT a single (let same size) 30year fixed rate loan.
In this way everyone gets what they want. The REIT gets to tell investors their loans are not due for refinance until 2050. All the banks get to lend out money at 0.5% interest, and the special bank gets to take the other bank's money and earn an extra 0.5% interest on top of it all in exchange for taking the interest rate risk.
So if you are wondering why bonds are weird: it is because you are not the customer.
If they are buying bonds on the open market then it's not helping the companies that issued them, its helping investors. If they are buying newly issued bonds then you can argue its helping the companies.
This is not correct. What you're referring to is holding a bond to maturity versus holding a bond fund. If rates were to rise, both would be (relatively) equally affected. The difference would be that the price of the bond would revert to the face value of the bond as it got closer to maturity.
Obviously the downside of this is that you are basically keeping your principal value at the end of the day, but you're forced to hold a bond that's giving you a below market return until it matures. For most people, this makes absolutely no sense.
On top of that, you can buy and sell a mutual fund based on the asset value of the fund at any time, while the bond market is opaque and you often get pricing that is very far off the average unless you are a large institutional buyer/seller. There are massive economies of scale in bonds that you don't see in the stock market.
If you are trying to invest millions of dollars, buying individual bonds might make more sense, but at that point you're going to want someone to help you determine the difference between individual bonds and the covenants that one bond has over another, but even then you still run the risk of getting bad pricing on buying those bonds.
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