Yes, but that's what happens when you have an implicitly colluding banking cartel... I was just trying to demonstrate the logic. Using a 3m t-bill vs a 2y bond works just as well.If my understanding of overnight deposits is correct, well it still seems to be very low (in the 0.05% range from a few banks I looked at). Assuming a parallel rise in yields, a 3 month t-bill should return 0.9%, more than most deposits to my knowledge.
Pluralsight, you are asking legitimate questions and you are being condescended to and fed a mountain of baloney.
Your question of when and whether to extend maturities is a question that most every investor faces all the time. The small investor normally just punts and stays in short maturities if the outlook for short rates is up, and attempts to extend maturities when the outlook for short term rates is down.
An institutional investor doesn't take this simplistic approach at all. It's their job to analyze this very thing. They're constantly adjusting the duration of their portfolio as a response to the risk/reward they perceive in yields and the yield curve. If short rates are heading up and they think the curve may flatten or even invert, they'll extend the duration of their portfolio. It just depends on the amount of yield advantage to going long and the probability of cap gain (or loss) on the longer bond. If they think the curve may steepen as short rates go up, they'll stay short just as the small investor would.
The analysis as to whether to extend can be as simple or as complex as you want to make it. Trying to determine what you think may happen to the yield curve and assigning a probability to it could fill as much time as you could possibly have available. And that's why most small investors simply punt.
The logic is varied and never straightforward and that's what makes the mkt...Why would a small investor attempt to buy longer term bonds if the outlook for the shorter term is down? How does that work (I'm guessing simply because their short term bonds will lose in value)? And why would institutional investors do somehow the opposite, so if short rates are heading up redistribute some of their portfolio to longer term maturities? Basically just trying to understand the logic of this.
The logic is varied and never straightforward and that's what makes the mkt...
But I can offer you a few possibilities... Simplest one is that an investor might feel that the Fed is making a mistake hiking rates into a coming economic sh1tstorm. In such a scenario, it's nearly certain that longer-dated bonds will actually perform very well, regardless of the hikes. This is the sort of thing that occurred in Europe in 2008 and 2010-11 both.
Another, somewhat related, possibility is simpler yet. If you're a very large captive UST investor (like, say, various reserve managers, e.g. SAFE, etc), you're normally invested in short-dated USTs (sub 5Y). However, in a situation where you know hikes are coming, your holdings will be hit hard, since shorter-dated bonds are very sensitive to the path of monetary policy. So, in order to avoid the hit and, in fact, the whole uncertainty around 'will they/won't they', you may decide to 'extend duration' and buy longer-dated bonds, which are less sensitive to monetary policy.
Many possible scenarios...Thanks, these do make sense. Any other scenario, which can be more complicated?
Many possible scenarios...
Most broadly, if you happen to have a view that, fundamentally, the world is destined for a period of low growth (the fashionable term of late is 'secular stagnation'), you may feel that long-dated bonds offer sufficient reward for the risk, especially relative to other assets. As an extreme example, consider this: if you invested in longer-dated Japanese govt bonds in the early 90s, you would have enjoyed pretty striking returns over the next couple of decades, regardless of BoJ's monetary policy, especially vs other alternatives. And if you were able to do it with a bit of leverage, well, ooh-la-la!
Yes, although it could, in fact, be indirectly caused by easy monetary policy, if such policy is perceived by the mkt to be too easy. In such a case, an investor could argue that the excessively generous central bank is sowing the seeds of bigly yuge inflation in the future. You can observe hints of this sort of pricing in USTs in late 2010/11.In which scenario do long term bonds fall? As in when do investors perceive their long term assets will decline? It can't necessarily be an easing monetary policy because if you 're holding 10-30 year bonds it is unlikely that such a policy (which might be for up to 5-6 years maybe) will affect them.