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This is a screenshot from the top-level bond table on etrade.com, and I am having a hard time understanding it. I understand how bonds work, and what maturity/coupon/yield/etc are, but I'm not sure how to read the numbers here, because they don't make sense as percentages or as multipliers.

For instance, take the category CDs for 1Y-- the top-left cell. It can't be that the yield is 1.46x initial investment, that wouldn't make sense or nobody would really buy anything else. But it also can't be 1.46%, because that would imply that a 30Y US Treasury bond only yields 2.78%, which is nonsensically low.

I know I'm getting something wrong here, but I don't know what it is. What do these numbers mean?

enter image description here

temporary_user_name
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    Other sources confirm that the 30-year Treasury rate is indeed right around 2.78%. Why do you think it's nonsensical? (Keep in mind these are annual yields.) – Nate Eldredge Jun 29 '17 at 00:46
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    But it also can't be 1.46%, because that would imply that a 30Y US Treasury bond only yields 2.78%, which is nonsensically low. Prepare to be disappointed. – Patrick87 Jun 29 '17 at 01:01
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    Why do you think a long-term zero-risk return of 2.78% is "nonsensically" low? – quid Jun 29 '17 at 01:38
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    I'm sorry I guess I just fail to see why anyone would buy something with such low returns. Why not just buy index funds instead....? "The average return of the S&P; 500 stock index for the 10 years ending Dec. 31, 2012 was 7.10 percent. The S&P; 500 index mutual funds from Fidelity and Vanguard produced returns of 7.03 and 6.99 percent annually, respectively." – temporary_user_name Jun 29 '17 at 04:20
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    @Aerovistae Index funds are not risk-free. If, for example, you have a pension fund to invest and have to deliver a certain level of income every year to the pensioners, you can't take the risk that a market crash might wipe you out, because you can't reduce the payments for a decade or two until the market recovers. – Mike Scott Jun 29 '17 at 05:34
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    @Aerovistae, risk. – quid Jun 29 '17 at 05:36
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    @Aerovistae In 2008, the S&P 500 lost about 30%: http://www.multpl.com/s-p-500-historical-prices/table/by-year Would you prefer -30% in an S&P 500 index fund or +2.78% in a bond? – chili555 Jun 29 '17 at 15:19
  • @chili555 True, but that's not necessarily practically relevant. In the last ten years (2007 - 2017), which includes that 30% loss, the S&P 500 is up over 60%, or almost 5% annually. I would be interested if you could find any 10-year period in the past 60 years that showed a yield as low as these bonds, let alone negative. For anything over 5-7 years an index fund is no risk for all practical purposes. So the reason people buy bonds isn't risk, it's perception of risk (or short-term risk). – Nicholas Jun 29 '17 at 16:42
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    @Nicholas You are quite correct. However, try telling a 78-year-old retiree that you are sure they will recover their losses if they can just hang on for ten more years! For some, a ten-year time frame is intolerable. – chili555 Jun 29 '17 at 19:11
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    @Nicholas "For anything over 5-7 years an index fund is no risk for all practical purposes" not true - the 10-year periods between 99-08 and 2000-2009 were both losses for the S&P. The risk is certainly much lower for longer period but it is not zero. For your second question, there are 5 10-year periods since 1966 with returns less than 3% - periods ending in 1974 (1.3%), 2008 (-1.4%), 2009 (-1.0%), 2010 (1.4%), and 2011 (2.9%). There are 18 such 5-year periods since 1966. – D Stanley Jun 29 '17 at 19:35
  • @chili555 That's true, and that's why I stipulated the time period. The original question included 5, 10, 15, and 20 year bonds, and I'm not sure a 78-year-old retiree is the target market for those. – Nicholas Jun 30 '17 at 15:38
  • @DStanley I stand corrected. I spot checked a few decades but didn't have a tool to search for them. Thank you for pointing them out. I concede that point. I wonder over what minimum time period the risk based on historical data becomes zero. – Nicholas Jun 30 '17 at 15:40
  • Bigger price - lower yields. What is your question? About price or performance or value? Bonds have no more value then stocks, and stocks have no more value then bonds.

    Both could easily climb into singularity, into infinitely small single dot, black hole of Zero Price which will accumulate everything given enough time.

     – sanaris Jun 30 '17 at 21:16
  • @Nicholas There's always risk in holding stocks, even over long periods of time. There's never a point when the risk becomes zero. Historical data is very limited, specially if you only look at US stocks (and the US has had a pretty good century compared to other countries). – Earth Apr 15 '19 at 19:38

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that would imply that a 30Y US Treasury bond only yields 2.78%, which is nonsensically low.

Those are annualized yields. It would be more precise to say that "a 30Y US Treasury bond yields 2.78% per year (annualized) over 30 years", but that terminology is implied in bond markets. So if you invest $1,000 in a 30-year T-bond, you will earn roughly 2.78% in interest per year. Also note that yield is calculated as if it compounded, meaning that investing in a 30-year T-bond will give you a return that is equivalent to putting it in a savings account that earns 1.39% interest (half of 2.78%) every 6 months and compounds, meaning you earn interest on top of interest.

The trade-off for these low yields is you have virtually no default risk. Unlike a company that could go bankrupt and not pay back the bond, the US Government is virtually certain to pay off these bonds because it can print or borrow more money to pay off the debts.

In addition, bonds in general (and especially treasuries) have very low market risk, meaning that their value fluctuates much less that equities, even indicies. S&P 500 indices may move anywhere between -40% and 50% in any given year, while T-bonds' range of movement is much lower, between -10% and 30% historically).

D Stanley
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  • Just for fun (re that "virtually no default risk"): http://www.zerohedge.com/news/2017-03-15/beware-debt-ceiling – timday Jun 29 '17 at 15:28
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Yes those are really yields. A large portion of the world has negative yielding bonds in fact.

This process has been in motion for the past 10 years for very specific reasons. So congratulations on discovering the bond market.

CQM
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But it also can't be 1.46%, because that would imply that a 30Y US Treasury bond only yields 2.78%, which is nonsensically low.

The rates are displayed as of Today. As the footnote suggests these are to be read with Maturities.

A Treasury with 1 year Maturity is at 1.162% and a Treasury with 30Y Maturity is at 2.78%. Generally Bonds with longer maturity terms give better yields than bonds of shorter duration. This indicates the belief that in long term the outlook is positive.

Dheer
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Those are the "right" yields. They are historically (but not "nonsensically") low.

Those yields are reflective of the sluggish U.S. and global economic activity of the past decade. If global growth were higher, the yields would be higher.

The period most nearly comparable to the past 10 years in U.S. and world history was the depressed 1930s.

(I am the author of this 2004 book that predicted a stock market crash (which occurred in 2008), and the modern 1930s, but I was wrong in my assumption that the modern 1930s would involve another depression rather than 'slow growth.')

Tom Au
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It's worth pointing out that a bulk of the bond market is institutional investors (read: large corporations and countries).

For individuals, it's very easy to just put your cash in a checking account. Checking accounts are insured and non-volatile.

But what happens when you're GE or Apple or Panama?

You can't just flop a couple billion dollars in to a Chase checking account and call it a day. Although, you still need a safe place to store money that won't be terribly volatile. GE can buy a billion dollars of treasury bonds. Many companies need tremendous amounts of collateral on hand, amounts far in excess of the capacity of a checking account; those funds are stored in treasuries of some sort.

Separately, a treasury bond is not a substitute investment for an S&P index fund. For individuals they are two totally different investments with totally different characteristics. The only reason an individual investor should compare the return of the S&P against the readily available yield of treasuries is to ensure the expected return of an equity investment can sufficiently pay for the additional risk.

quid
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