11Lun
I would like to discuss the hope of price gains. The link shows the current yield curve in the eurozone: https://www.ecb.europa.eu/stats/financial_markets_and_interest_rates/euro_area_yield_curves/html/index.en.html 20-year AAA-rated government bonds yield approx. 2.5% (all bonds 3.3%). I interpret this as follows: 1. sooner or later the yield curve must invert again, i.e. long-dated bonds will yield more than short-dated bonds. The market has priced this in. 2. Currently, the deposit rate for 20y Euro AAA bonds would have to fall below 2.5% for the current yield curve to allow further large price gains, and only if we assume that interest rates will continue to fall. Hence my question for discussion: What are the arguments for the hoped-for rally?
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11Lun
@RT270 Let me take the two US bonds I have already bought (https://www.finanzen.net/anleihen/a3lqvl-us-staatsanleihen-anleihe , https://www.finanzen.net/anleihen/a3lhra-us-staatsanleihen-anleihe). Both are broadly comparable. The maturity of one of them is half a year shorter, but that doesn't really matter. Not surprisingly, both have a very similar yield to maturity of around 4.1%. This is roughly what is currently achievable for 30-year US bonds. See https://www.finanzen.net/anleihen/us-staatsanleihen?orderBy=BondList:MaturityDate:desc ! Both have a coupon of 4.75% and 3.625% respectively. To get both to the current interest rate level of 4.1%, one has a market value of 112% and the other of 92%! If we now assume that in a year's time the current interest rate level will be 3%. What will happen to the prices then? Since the coupon is fixed, only the other variable can be adjusted. The price must inevitably rise in order to bring the yield to 3% at maturity. This is not witchcraft or voodoo, but the result of a functioning market. The stock market is simply not a communist-style bond issuer according to a five-year plan. Nobody will buy the 3% bond if they could have the 4.1% bond for a 10% premium. That is simply math. That's why the market price is equalized to the yield to maturity. And I wouldn't sell my bonds at these prices either, as I would have a much higher yield by holding them!
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11Lun
@kleberj I know how bonds work, but I think it's good that you've summarized it again, then we're both talking from the same basis 👍 In the end, you've already given me an answer as to why you believe in a rally. If the deposit rate falls to 3%, you hope that it will also fall at the long end. You are assuming an interest rate cut of around 2.25% from the current level, which I find extremely sporting. Furthermore, due to the inverted yield curve, this does not mean that interest rates at the long end will also fall (sharply) and thus lead to the hoped-for price increase. This is because future interest rate cuts are already expected and priced in by the market. The rule of thumb interest rate change*duration = price change only works with a normal upward sloping yield curve. In addition, US bonds have a currency risk/opportunity that is not normally remunerated. But since nobody can see into the future, I'll keep my fingers crossed and hope for strong returns!
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