The value of government bonds - as relating to their yields

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Newmoney24

After treasury / government bonds go below 0.10% yields, are they still profitable to hold on to?

Im not interested in buying government bonds, just trying to understand why other people are still holding on to them-
take the US for example, it's short term bond rates are near 0. doesn't that mean that value of them can't go any higher? (or is it that, when they are .02% and go to .01% does their price double?? (if this is the case they still have plenty of room to go up right?))
 
...(or is it that, when they are .02% and go to .01% does their price double??...

Price and Yield ........ Apples and Pears

Yield divided by 2 = half the yield, not twice whatever the price was.


After treasury / government bonds go below 0.10% yields, ...it's short term bond rates are near 0.

No, its YIELD is near 0 (0.10 is 10 basis points, moving toward 0). The RATE for the bond does not change.


...when they are .02% and go to .01% ...(if this is the case they still have plenty of room to go up right?)...

They can go up in Yield to the extent the market can go down in price for them. When the price reaches zero, the yield to the buyer at that price is infinite. (I wonder if that is what happened to government bonds of Zimbabwe at one time.)


After treasury / government bonds go below 0.10% yields, are they still profitable to hold on to?

Yes, in a scenario where inflation remains less than the yield at the time you bought them, you not only get the cash the bond pays, but you also realize capital gain should market yields go below the yield you bought them at.


...just trying to understand why other people are still holding on to them...

Sort of a version of bending over, putting your head between your leg, and kissing your butt goodbye; you realize loss when inflation is higher than your yield. Only a version, though, because you haven't lost your butt; it is eroding away by inflation.


I readily stand by to be corrected.
 
Quote from Newmoney24:

After treasury / government bonds go below 0.10% yields, are they still profitable to hold on to?

Im not interested in buying government bonds, just trying to understand why other people are still holding on to them-
take the US for example, it's short term bond rates are near 0. doesn't that mean that value of them can't go any higher? (or is it that, when they are .02% and go to .01% does their price double?? (if this is the case they still have plenty of room to go up right?))
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Yeah, if a perpetual bond is yielding 0.02% and you buy it and subsequently the yield then goes to 0.01%, you just doubled ya money!!!
 
Quote from Visaria:

Yeah, if a perpetual bond is yielding 0.02% and you buy it and subsequently the yield then goes to 0.01%, you just doubled ya money!!!
More...

No. No you do not double your money. There's a concept called Duration (no, not passage of time, but as in DV01) in bonds. Please go look it up.
 
Quote from Newmoney24:
----treasury / government bonds....
----still profitable to hold on to?
----trying to understand why other people are still holding on to them....
----short-term bond rates are near 0.
----value of them can't go any higher?
More...
1) Low yields are indicative of recession/depression and fear. :)
2) With shorter-dated coupons, government securities behave more like treasury bills instead of bonds or notes, i.e. a 1 basis-point drop in yield produces a 1 tick increase in price. :cool:
3) Instead of concern for return ON principal, investors are more concerned with return OF principal in holding these instruments when yields are very "low". :D
 
Quote from gip3:

No. No you do not double your money. There's a concept called Duration (no, not passage of time, but as in DV01) in bonds. Please go look it up.
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Hmmm, what would the price of a perpetual bond be, with a coupon of 2.5%, currently trading at at par i.e a yield of 2.5% if the yield dropped to 1.25%?
 
Quote from Visaria:

Hmmm, what would the price of a perpetual bond be, with a coupon of 2.5%, currently trading at at par i.e a yield of 2.5% if the yield dropped to 1.25%?
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You did say 'perpetual'. My goof. Yeah, you are right - durations on perps are looooong.
 
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