Huh? I said they are not buying them for their yield. The gain is coming from convexity. Don't see the correlation with my school.
because countries only have 3 things they can buy with their dollars. Oil, gold, or treasuries. If they buy oil, the price skyrockets and their economies tank. If they buy gold, just a single billion dollars into the gold market pushes prices up, so when they want to sell, they can expect the same thing. Treasuries are very liquid, they can be bought and sold with billion of dollars without moving the market. So its sit on the cash, or sit on treasuries earning 1%.
the main thing you are missing is that in a deflation there is a "flight to quality". a checking account or demand deposit is a liability on the banks balance sheet. your money is nothing more than a few digits which will disappear if the bank goes under. since all banks in a fractional reserve system are inherently fraudulent and vulnerable to a bank run you are at serious risk of losing everything. there is FDIC deposit insuracce but that is only $250k. for millions and billions FDIC is useless. treasuries are a direct claim on physical federal reserve notes. so you are safe no matter how many banks fail. sitting in cash literally means sitting in short term treasuries. keeping hundreds of millions with a bank would be the height of stupidity. there are some outstanding articles from this gentlemen named professor fekete which I will post here when I find them. bond speculation is of course another reason. traders are basically front running the fed.
the OP is talking about corp. bonds YTM is most used in bonds return calculation. YTM does include appreciation(or depreciation) of the price itself. http://www.investopedia.com/terms/y/yieldtomaturity.asp http://finance.yahoo.com/bonds/composite_bond_rates http://cxa.marketwatch.com/finra/BondCenter/TRACEMarketAggregateStats.aspx http://cxa.marketwatch.com/finra/BondCenter/BondDetail.aspx?ID=MzY5NjdIQVkzIA== yield in examples above mean YTM. price appreciation\depreciation + coupon as you can see GE coupon is 2.65%, but price is $104.16 at maturity par will be $100,not 104 or 105 and return (if you buy today at 104) will be less than 1% . i did no see any bonds returning 5-10%, unless you buying something that matures in 30+ years
I've been long U.S. fixed income futures for several months. I get paid on price appreciation and nothing else. Look at a weekly and monthly bar chart for God's sake - Stevie Wonder could have seen that one coming. Already started scaling out, three more points on the TY and I'm flat.
Speculators get paid on price. All knowledge, from every market participant, and all of the requisite fundamentals regarding the fair pricing of an instrument is contained in that last price tic.
You are stating this after the fact. Should we take your words for it? You are now LONG going forward (for the purpose of this forum). We will see what you return will be. Price used to track this is Friday August 13, 2010.
The price and yield are directly connected. How much price appreciation can you really expect on a 1% bond? If its a 5 year bond at 1% and then interest rates go to 0 you'll get about a 5% appreciation in the value of the bond. That's your maximum upside. If people get sane and realize that they're lending money to a bankrupt entity (Uncle Sam) interest rates will go up and your 1% bonds will get clobbered. At these interest rates the downside is definitely worse than the upside.