Bernstein - Implementing Liability Matching and Risk Portfolios - in 2020

itwasntme001

Deleted_User said:

itwasntme001 said:

Deleted_User said:

They might have an issue as the interest payments go up and a much higher proportion of the budget has to be dedicated to debt repayment 

This may not be an issue if CBs successfully enact yield curve control.

I don’t know what it means but once inflation takes off, central banks will be forced to act and raise the interest rates. Sooner or later. 

YCC is the act of CBs to control the long end of the yield curve by purposefully keeping rates at or within a range through the act of buying enough bonds at that maturity.  It happened in the 1940s to help fund the war.

Once inflation takes off, it is not at all clear whether CBs will be forced to raise rates, at least not initially.  The FED has stated it will let inflation run a little hotter than the 2% "target".

Given the debt loads I am not at all convinced CBs will  even act if it stays stubbornly at 3-4-5%.  But if/when they do act, it'll likely be because they are concerned of a permanent shift that could damage the economy.  All bets will be off as to what happens to asset prices.

If you have inflation at 7%, short term interest rates could top out at 4%, because the economy and debt makes raising rates very problematic.  That is why linkers are a decent bet.

Difficult to say what will happen to stocks.  Clearly the risk premium will have to rise given the massive uncertainty with the regime shift.  Growth stocks could continue to do well providing cash flows keep up with inflation.  There is an argument to be made that growth stocks tend to have a lot more pricing power than old economy value stocks.  But much will depend on the type of inflation we will get.

In stagflation I think growth stocks can do a lot better than value.

itwasntme001

What I am not really understanding properly is that Petter Spiller keeps going on about MMT and how inflationary that will be, but surely the output of MMT is just flowing back to profits for companies and therefore very bullish for stocks, an asset class CGT is underweight in.  I think MMT does not redistribute wealth, it only makes the wealth inequality even wider.

Thrugelmir

itwasntme001 said:

What I am not really understanding properly is that Petter Spiller keeps going on about MMT and how inflationary that will be, but surely the output of MMT is just flowing back to profits for companies and therefore very bullish for stocks, an asset class CGT is underweight in.  I think MMT does not redistribute wealth, it only makes the wealth inequality even wider.

With too much money in the system chasing a limited supply of resources. Then the price of the resource will rise as competition ensues for it. Monopolies will thrive. There'll have no need of capital markets i.e. stock exchanges.   Companies will go private.

[Deleted User]

itwasntme001 said:

Deleted_User said:

itwasntme001 said:

Deleted_User said:

They might have an issue as the interest payments go up and a much higher proportion of the budget has to be dedicated to debt repayment 

This may not be an issue if CBs successfully enact yield curve control.

I don’t know what it means but once inflation takes off, central banks will be forced to act and raise the interest rates. Sooner or later. 

Once inflation takes off, it is not at all clear whether CBs will be forced to raise rates, at least not initially.  The FED has stated it will let inflation run a little hotter than the 2% "target".

I know they stated this but am a little skeptical they have the power to do more than delay the rise by a few months. Fighting market forces is hard.  As Nigel Lawson once discovered. Centralized actions work well when they follow market trends. Much easier to keep the rates down when the economy is in a recession. If the confidence returns, so will the yield. 

[Deleted User]

Linton said:

Deleted_User said:

gm0 said:

Thanks Linton and Mordko.  Both useful suggestions which I will follow up on. 

The concept of short duration bond ladder as cash alternative is big enough on each step (5) to buy actual bonds rather than an ETF.  I'll have to bone up on reading bond data (again - have done this but forgotten) and then look at some numbers/cashflows.  

Classically of course this would be linkers not just gilts (TIPS in US parlance) but actual protection from a possible inflation spike may turn out like a lot of insurance to have all the cost and none of the result (when the argument/manipulation of CPI occurs at the point it is needed later). Will ponder some more.

Buying government bonds is easy. The only hard part about bonds is weighing risk of default and pricing it.  Gilts and treasuries are risk free money, so the price is always right.  Treasuries can be bought directly from the US government, most cost efficient way to do it.  There is currency risk but I am ok with USD risk for a portion of my fixed income.  I have a mixture of inflation protected fixed income and standard bonds which protect against deflation.

For most private investors, UK Gilts can only be bought on the secondary market.  Not that it makes much difference since new gilts are auctioned by the government rather than being sold at face value, so there is no chance of a good deal.

However gilt yields are so low, negative in £ terms in some cases especially for index linkers if inflation stays at current values, I dont believe a gilt ladder is worth the effort taking into acount the risk of unplanned capital loss should you need to sell early.

I think you are being paranoid if you believe CPI is manipulated.

I am considering a small exposure to Chinese government bonds within my FI portfolio. After US coupons have gone to zero, China seems to be the only country left with both the financial muscle and the capacity to drop rates further  if/when the next round of trouble hits the fan. 

NottinghamKnight

Deleted_User said:

Linton said:

Deleted_User said:

gm0 said:

Thanks Linton and Mordko.  Both useful suggestions which I will follow up on. 

The concept of short duration bond ladder as cash alternative is big enough on each step (5) to buy actual bonds rather than an ETF.  I'll have to bone up on reading bond data (again - have done this but forgotten) and then look at some numbers/cashflows.  

Classically of course this would be linkers not just gilts (TIPS in US parlance) but actual protection from a possible inflation spike may turn out like a lot of insurance to have all the cost and none of the result (when the argument/manipulation of CPI occurs at the point it is needed later). Will ponder some more.

Buying government bonds is easy. The only hard part about bonds is weighing risk of default and pricing it.  Gilts and treasuries are risk free money, so the price is always right.  Treasuries can be bought directly from the US government, most cost efficient way to do it.  There is currency risk but I am ok with USD risk for a portion of my fixed income.  I have a mixture of inflation protected fixed income and standard bonds which protect against deflation.

For most private investors, UK Gilts can only be bought on the secondary market.  Not that it makes much difference since new gilts are auctioned by the government rather than being sold at face value, so there is no chance of a good deal.

However gilt yields are so low, negative in £ terms in some cases especially for index linkers if inflation stays at current values, I dont believe a gilt ladder is worth the effort taking into acount the risk of unplanned capital loss should you need to sell early.

I think you are being paranoid if you believe CPI is manipulated.

I am considering a small exposure to Chinese government bonds within my FI portfolio. After US coupons have gone to zero, China seems to be the only country left with both the financial muscle and the capacity to drop rates further  if/when the next round of trouble hits the fan. 

Potentially lower financial risk but at very much increased political risk. 

[Deleted User]

NottinghamKnight said:

Deleted_User said:

Linton said:

Deleted_User said:

gm0 said:

Thanks Linton and Mordko.  Both useful suggestions which I will follow up on. 

The concept of short duration bond ladder as cash alternative is big enough on each step (5) to buy actual bonds rather than an ETF.  I'll have to bone up on reading bond data (again - have done this but forgotten) and then look at some numbers/cashflows.  

Classically of course this would be linkers not just gilts (TIPS in US parlance) but actual protection from a possible inflation spike may turn out like a lot of insurance to have all the cost and none of the result (when the argument/manipulation of CPI occurs at the point it is needed later). Will ponder some more.

Buying government bonds is easy. The only hard part about bonds is weighing risk of default and pricing it.  Gilts and treasuries are risk free money, so the price is always right.  Treasuries can be bought directly from the US government, most cost efficient way to do it.  There is currency risk but I am ok with USD risk for a portion of my fixed income.  I have a mixture of inflation protected fixed income and standard bonds which protect against deflation.

For most private investors, UK Gilts can only be bought on the secondary market.  Not that it makes much difference since new gilts are auctioned by the government rather than being sold at face value, so there is no chance of a good deal.

However gilt yields are so low, negative in £ terms in some cases especially for index linkers if inflation stays at current values, I dont believe a gilt ladder is worth the effort taking into acount the risk of unplanned capital loss should you need to sell early.

I think you are being paranoid if you believe CPI is manipulated.

I am considering a small exposure to Chinese government bonds within my FI portfolio. After US coupons have gone to zero, China seems to be the only country left with both the financial muscle and the capacity to drop rates further  if/when the next round of trouble hits the fan. 

Potentially lower financial risk but at very much increased political risk. 

Not sure its true.  I don’t like the Chinese government but lately they seem to be behaving far more consistently and less “MMT” than the former stalwarts of stability. People running state finance in Beijing are all Harvard graduates. Trump’s trade wars seems to have made them stronger - and increased their exports.  Like them or not, won’t be too long before China becomes the largest economy in the world.  Certainly wouldn’t put all FI into Renminbi bonds but some allocation appears reasonable. 

NottinghamKnight

Deleted_User said:

NottinghamKnight said:

Deleted_User said:

Linton said:

Deleted_User said:

gm0 said:

Thanks Linton and Mordko.  Both useful suggestions which I will follow up on. 

The concept of short duration bond ladder as cash alternative is big enough on each step (5) to buy actual bonds rather than an ETF.  I'll have to bone up on reading bond data (again - have done this but forgotten) and then look at some numbers/cashflows.  

Classically of course this would be linkers not just gilts (TIPS in US parlance) but actual protection from a possible inflation spike may turn out like a lot of insurance to have all the cost and none of the result (when the argument/manipulation of CPI occurs at the point it is needed later). Will ponder some more.

Buying government bonds is easy. The only hard part about bonds is weighing risk of default and pricing it.  Gilts and treasuries are risk free money, so the price is always right.  Treasuries can be bought directly from the US government, most cost efficient way to do it.  There is currency risk but I am ok with USD risk for a portion of my fixed income.  I have a mixture of inflation protected fixed income and standard bonds which protect against deflation.

For most private investors, UK Gilts can only be bought on the secondary market.  Not that it makes much difference since new gilts are auctioned by the government rather than being sold at face value, so there is no chance of a good deal.

However gilt yields are so low, negative in £ terms in some cases especially for index linkers if inflation stays at current values, I dont believe a gilt ladder is worth the effort taking into acount the risk of unplanned capital loss should you need to sell early.

I think you are being paranoid if you believe CPI is manipulated.

I am considering a small exposure to Chinese government bonds within my FI portfolio. After US coupons have gone to zero, China seems to be the only country left with both the financial muscle and the capacity to drop rates further  if/when the next round of trouble hits the fan. 

Potentially lower financial risk but at very much increased political risk. 

Not sure its true.  I don’t like the Chinese government but lately they seem to be behaving far more consistently and less “MMT” than the former stalwarts of stability. People running state finance in Beijing are all Harvard graduates. Trump’s trade wars seems to have made them stronger - and increased their exports.  Like them or not, won’t be too long before China becomes the largest economy in the world.  Certainly wouldn’t put all FI into Renminbi bonds but some allocation appears reasonable. 

Maybe, racism isn't a big concern in China, wiping out foreign investors if necessary could even be played quite well but obviously has consequences, and it's not in China's interest to promote foreign wealth to any great degree, they are accumulating enough foreign currency and government bonds as it is.

Thrugelmir

NottinghamKnight said:

Deleted_User said:

NottinghamKnight said:

Deleted_User said:

Linton said:

Deleted_User said:

gm0 said:

Thanks Linton and Mordko.  Both useful suggestions which I will follow up on. 

The concept of short duration bond ladder as cash alternative is big enough on each step (5) to buy actual bonds rather than an ETF.  I'll have to bone up on reading bond data (again - have done this but forgotten) and then look at some numbers/cashflows.  

Classically of course this would be linkers not just gilts (TIPS in US parlance) but actual protection from a possible inflation spike may turn out like a lot of insurance to have all the cost and none of the result (when the argument/manipulation of CPI occurs at the point it is needed later). Will ponder some more.

Buying government bonds is easy. The only hard part about bonds is weighing risk of default and pricing it.  Gilts and treasuries are risk free money, so the price is always right.  Treasuries can be bought directly from the US government, most cost efficient way to do it.  There is currency risk but I am ok with USD risk for a portion of my fixed income.  I have a mixture of inflation protected fixed income and standard bonds which protect against deflation.

For most private investors, UK Gilts can only be bought on the secondary market.  Not that it makes much difference since new gilts are auctioned by the government rather than being sold at face value, so there is no chance of a good deal.

However gilt yields are so low, negative in £ terms in some cases especially for index linkers if inflation stays at current values, I dont believe a gilt ladder is worth the effort taking into acount the risk of unplanned capital loss should you need to sell early.

I think you are being paranoid if you believe CPI is manipulated.

I am considering a small exposure to Chinese government bonds within my FI portfolio. After US coupons have gone to zero, China seems to be the only country left with both the financial muscle and the capacity to drop rates further  if/when the next round of trouble hits the fan. 

Potentially lower financial risk but at very much increased political risk. 

Not sure its true.  I don’t like the Chinese government but lately they seem to be behaving far more consistently and less “MMT” than the former stalwarts of stability. People running state finance in Beijing are all Harvard graduates. Trump’s trade wars seems to have made them stronger - and increased their exports.  Like them or not, won’t be too long before China becomes the largest economy in the world.  Certainly wouldn’t put all FI into Renminbi bonds but some allocation appears reasonable. 

Maybe, racism isn't a big concern in China, wiping out foreign investors if necessary could even be played quite well but obviously has consequences, and it's not in China's interest to promote foreign wealth to any great degree, they are accumulating enough foreign currency and government bonds as it is.

The Chinese will happily play hard ball now when it suits them. As recent events have shown.  From Hongkong, to the regulation of Chinese companies, to trade with Australia, the OBOR initiative. The CPP puts the interests of their broader population first. The long game rolls mercilessly on.  Decades after it first started. 

[Deleted User]

NottinghamKnight said:

Deleted_User said:

NottinghamKnight said:

Deleted_User said:

Linton said:

Deleted_User said:

gm0 said:

Thanks Linton and Mordko.  Both useful suggestions which I will follow up on. 

The concept of short duration bond ladder as cash alternative is big enough on each step (5) to buy actual bonds rather than an ETF.  I'll have to bone up on reading bond data (again - have done this but forgotten) and then look at some numbers/cashflows.  

Classically of course this would be linkers not just gilts (TIPS in US parlance) but actual protection from a possible inflation spike may turn out like a lot of insurance to have all the cost and none of the result (when the argument/manipulation of CPI occurs at the point it is needed later). Will ponder some more.

Buying government bonds is easy. The only hard part about bonds is weighing risk of default and pricing it.  Gilts and treasuries are risk free money, so the price is always right.  Treasuries can be bought directly from the US government, most cost efficient way to do it.  There is currency risk but I am ok with USD risk for a portion of my fixed income.  I have a mixture of inflation protected fixed income and standard bonds which protect against deflation.

For most private investors, UK Gilts can only be bought on the secondary market.  Not that it makes much difference since new gilts are auctioned by the government rather than being sold at face value, so there is no chance of a good deal.

However gilt yields are so low, negative in £ terms in some cases especially for index linkers if inflation stays at current values, I dont believe a gilt ladder is worth the effort taking into acount the risk of unplanned capital loss should you need to sell early.

I think you are being paranoid if you believe CPI is manipulated.

I am considering a small exposure to Chinese government bonds within my FI portfolio. After US coupons have gone to zero, China seems to be the only country left with both the financial muscle and the capacity to drop rates further  if/when the next round of trouble hits the fan. 

Potentially lower financial risk but at very much increased political risk. 

Not sure its true.  I don’t like the Chinese government but lately they seem to be behaving far more consistently and less “MMT” than the former stalwarts of stability. People running state finance in Beijing are all Harvard graduates. Trump’s trade wars seems to have made them stronger - and increased their exports.  Like them or not, won’t be too long before China becomes the largest economy in the world.  Certainly wouldn’t put all FI into Renminbi bonds but some allocation appears reasonable. 

Maybe, racism isn't a big concern in China, wiping out foreign investors if necessary could even be played quite well but obviously has consequences, and it's not in China's interest to promote foreign wealth to any great degree, they are accumulating enough foreign currency and government bonds as it is.

Most of these bonds are still held by the Chinese banks although western institutional investors have been moving in. Its a diversifer, would reduce the overall FI portfolio risk.