The Dirty Dozen: 12 Genuinely Awful Investments


But why not go with TLT. It had the highest volatility (standard deviation) of the three but was almost as poorly correlated with the S&P 500 and clearly provided the best average annual return.

It makes sense that TLT was the winner. In a declining-interest-rate environment, long-term bonds are supposed to appreciate better than intermediate-term bonds and intermediate appreciates more than short-term. That’s basic bond math. I didn’t test ZROZ because its history doesn’t extend far enough back to allow a full test. But as a zero coupon bond, we can assume it would have appreciated even more vigorously than TLT. (By the way and for the record, this is really about a bond concept called “duration,” that combines coupon and maturity, rather than maturity per se. But for purposes of today, we need not deal with that beyond saying zero-coupon binds have longer durations and, hence more volatility.)

Figure 4 makes it clear for anyone who’s been distracted for the last 35-or-so years that interest rates have, indeed, moved steadily and aggressively downward.

Figure 4


So everything we see thus far makes perfect sense. TLT and ZROZ were heroes, as were all other long-term fixed-income bonds and ETFs that are, of course, impacted by the same dynamics.

Turn! Turn! Turn!

I used to think of Pete Seeger as a folk singer and songwriter, but perhaps I should start seeing him as having been an especially forward-thinking fixed-income analyst when, inspired by Chapter 3 of Ecclesiastes, he penned the song lyrics “Turn! Turn! Turn!” What else can one say about where interest rates are now; pretty much at zero.

I really didn’t think this was such a complicated notion, but then, neither the author of Ecclesiastes nor Pete Seeger nor I envisioned the nonsense floating around about negative interest rates.

Strictly speaking, yes, they are actually here – but not really. There are cases where banks now pay a fee to make deposits of overnight funds, as opposed to receiving interest. That may spread or even deepen a bit. But that’s not the sort of economy-wide phenomenon we’d need in order to give TLT, ZROZ or any other funds in Table 1 the kind of return characteristics needed to justify continuing to hold.

To understand what it would take to make investments like this work, imagine its 2020 and the yield on the 10-Year Treasury is minus 4%. Since corporates carry credit risk, their yield you be even lower, say minus 7%.

Traders work on the floor of the New York Stock Exchange (NYSE) on March 7, 2016 in New York City. (Photo by Spencer Platt/Getty Images)

What would this world look like? Would bidders at Treasury auctions say how much of a holding fee they are willing to pay for the privilege of getting their hands on Treasuries, which pay nothing until they are redeemed at face vale in the future? What happens to older secondary market securities? Would holding fees high enough to offset pre-existing contractual interest obligations be paid to sellers? What happens when the issue is sold again; which seller gets the holding fee? Or does it all go to the Treasury Will the equity market look like if business can be paid by bondholders to take capital from them? Would they worry about repayment of principal? If rates stay negative, they’d just borrow anew to repay maturing obligations. Why share the equity-holder’s wealth with the public?

What about rates paid by consumers? We can’t expect them to pay 25% on credit card debt any more, or if we do, then for negative rates to get them to spend more, Congress may have to enact a penalty on savings and excess income (good luck defining that) of, say 30%. How else can we motivate them to take on more credit card debt? What about folks building savings for college, retirement, etc.? Are we to impose tax penalties on those who don’t empty these accounts to spend now, whether they want things or not? (That will make battles over rules requiring people to buy health insurance look like a marshmallow roast) Who do you think would sponsor such a Bill in the Senate? Ted Cruz? Bernie Sanders?

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