5% a day keeps the doctor away
The name is Bond, James Bond. Bonds are back ladies and gentlemen.
For those of you that are not already up to your ears invested in the popular Vanguard Lifestyle products in your retirement savings, the bond curves of multiple countries have steepened massively in 2025.
The long term rates have gone up quite a bit in the likes of Japan, U.S.A. and the UK.
The times when fiscally incontinent politicians could issue long term bonds near zero percent interest rates are over.
Japanese institutions have “en masse” played the carry trade and collected over $4 trillion in foreign assets.
The “safe” 40-year, 35-year and 30-year government bonds in Japan have surged 100 basis points since April.
That translates into almost 20% losses for holders.
The Bank of Japan has for a long time played the game of financial repression.
They are stepping back now and quantitative tightening is the new name of the game in the land of the rising sun.
The Bank of Japan owns over 50% of all Japanese JGB government bonds so good luck with that.
For the diligent retirement savers that keep on saving for your retirement month-in-month-out this could be an opportunity to add some long-term bonds into the diversification mix.
Five percent returns a day is clearly not possible with bonds, but 5% a year is achievable now.
Source Gemini AI
Quick example;
Say you are lucky enough to be able to put $1 million into the 30 years Treasury (US long term bond) at a 5% yield.
That means the US government will pay you $50,000 a year.
Ok fair enough Potus has talked the long term rates down a bit and the yield is now 4.88%.
But even $48800 a year should be enough in retirement to live on.
So for buy-and-holders, that don’t re-invest the interest income, 4.88% is the yield you make.
Short-term rates in the US are still attractive as well at over 4% yields.
The same can be said for UK short-term rates.
Valuations matter also in bond land.
The direction of travel is rate cuts for the official central bank short term rates.
There is a record amount of money parked in short-term money market funds.
If US rates get cut to say Canadian levels of 2.75% money markets become a lot less interesting.
The ECB just cut rates to only 2%. So I am not interested in their bonds. The ECB is playing the financial repression game playbook again.
In my humble opinion central banks should keep the official short term central bank rate at least 1% above the inflation rate.
But governments pay so much money in interest now they can’t afford reasonable short term rates anymore.
They borrow mainly short term now as with a normal steep yield curve long term rates will be higher and there are only a few countries left that can afford to pay longer term and higher interest payments year-in-year-out.
Also the more long term debt they would try to issue the more the lack of demand would become a problem and the more long term interest rates would be pushed up.
Quantitative easing (QE) allowed central banks to manipulate long term interest rates lower. That game is up after the inflation wave QE unleashed last time around...
So yep the name is Bond, James Bond and of boy is he back in the picture or what?
One thing to keep in mind is that Trump has hidden a penalizing tax on passive income in his big and beautiful tax bill for “investors from unfriendly counties”.
So for UK investors it is possible that at some stage someone gets say emotional about say a digital tax on US tech firms and rather than 4.85% interest the US government only puts 3.88% on your bank account.
Currency risk is also real. The mighty $ has collapsed more than 8% versus the £ for example this year.
Just like with equities diversifying across multiple currencies is wise in bonds as well.
Annuities are opaque and have high fees.
If long term rates are high enough though some guaranteed income from annuities can be nice in order to sleep well at night in retirement.
Another feature is that when you die the money in annuities belongs to the counterparty.
The plus side is that in return you should get a higher yield.
So all in all long-term bonds have now become more competitive versus an asset allocation in equities.
Still not all is lost for equities.
Dividend aristocrats can provide stable and growing dividends year-in-year-out.
PepsiCo (PEP) for example has a dividend yield of 4.34% now.
PEP has increased its dividend for 50 years in a row now. The company achieved Dividend King status in 2022 according to the sure dividend website.
On a market level the forward P/E for the S&P 500 is now 21 or 22.
The back-of-an-envelope calculation gives return expectation of one divided by 22 of 4.55%.
So that 4.55% return expectation for the S&P 500 is pretty close to bond return expectation in the US.
If however you were to buy-and-hold the S&P 500 index now for 30 year I suspect the realized return would be closer to the 9% or 10% return from the past 30 years.
The old saying at Exxon was;
“Governments come and go”.
Long-term investing requires long-term thinking.
This is me thinking on buying some exposure to long-term bonds and throwing that into the investment mix.
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