The need for Yield

[Jurgis]

So from that standpoint, the reason for investing in a bond isn't to maximize yield per se, but to gain a benefit of holding less volatile securities. By searching for one with a higher yield, you're immediately negating that strategy of "holding less volatile securities" since return goes up with risk.

 

You are right of course, but there's a spectrum of fixed income securities.

 

E.g. you could hold all your cash in money market that has zero volatility and zero yield. Or you can hold it in 3 month treasuries that has teeny tiny volatility and some yield. Or you can hold it in 1-3 year treasuries that has tiny volatility and more yield. You can't just dismiss the latter as negating the strategy of holding less volatile securities, since even 3 year treasuries will have way lower volatility and potential drawdown than stocks for example.

 

You could argue that it doesn't matter much if you get 0 yield or 1.5% yield. But possibly it does. Clearly, you'd give a lot to a stock fund manager who outperforms market by 1.5%. So why not care about 1.5% difference in fixed income?

[Wild]

So from that standpoint, the reason for investing in a bond isn't to maximize yield per se, but to gain a benefit of holding less volatile securities. By searching for one with a higher yield, you're immediately negating that strategy of "holding less volatile securities" since return goes up with risk.

 

You are right of course, but there's a spectrum of fixed income securities.

 

E.g. you could hold all your cash in money market that has zero volatility and zero yield. Or you can hold it in 3 month treasuries that has teeny tiny volatility and some yield. Or you can hold it in 1-3 year treasuries that has tiny volatility and more yield. You can't just dismiss the latter as negating the strategy of holding less volatile securities, since even 3 year treasuries will have way lower volatility and potential drawdown than stocks for example.

 

You could argue that it doesn't matter much if you get 0 yield or 1.5% yield. But possibly it does. Clearly, you'd give a lot to a stock fund manager who outperforms market by 1.5%. So why not care about 1.5% difference in fixed income?

 

This is a great nuance to breakdown my statement, since my statement was sort of a blanket "catch all" statement. I know the posts above me started to dabble in the conversation of Emerging Markets to find higher yielding bonds, and that's more where my argument came from.

 

I don't think anybody would dispute that T-Bills are a better investment than Money Market, and that the yield can be significantly higher on a basis-point perspective. But the general tone I got from the posts so far weren't looking at T-Bills as the "need for yield" but more in the range of alternative debt instruments or ones that are underutilized by the market. From that standpoint, that's more where my rationale was coming from.