As I write this, Canadian 30-year bonds yield 1.674% per year. If we assume that Canada will be able to maintain its 2% inflation target, these bonds will lose purchasing power for the next 30 years. Investors today are willing to tie up money for 30 years and get back less at the end of it all. This seems remarkable to me.
Of course, investors can choose to sell these bonds before they mature, but if we follow the life of an individual bond, its owners will share the loss of purchasing power for 30 years. Some investors may hope yields will drop further creating a capital gain. Some may think inflation will drop or that we might even have deflation. Others may think that alternative investments, such as stocks or real estate, will fare worse.
I don’t know if bond investors are being rational, but I find it hard to look past the apparent near certain loss of value. Over 30 years I’m hoping my stocks will roughly triple in real value and that my house will hold its value. I may be disappointed, but it’s hard to buy bonds with disappointment seeming to be a near certainty.
Bonds have the virtue of reducing portfolio volatility. This is useful for investors who can’t handle too much volatility or who have enough money that they don’t need to take much risk. However, these benefits aren’t enough to get me past the thought that buying bonds today is a money-losing proposition.