Archive for the ‘Bonds’ Category

Think Like a Rat

Friday, March 28th, 2014

Experiments show that if you put rats in a maze and give them a jolt of electricity when they go the wrong way, they will eventually go the right way.

Apparently, humans may not be that smart.Two white laboratory rats in a maze

OK, we’re smarter than rats.  We know better.  But we believe what we want to believe.  And right now, a majority of those who invest believe the “trend is our friend.”

We forget that what goes up must come down, regardless of how many bonds the Fed buys.  It’s a scary world and no amount of irrational investor confidence can keep the market aloft forever.

In the first decade of the new millennium, we lived through two difficult bear markets, each of which chopped stock prices nearly in half.  The bear market of 2000 to 2003 was caused by the irrational belief that tech stock prices moved in only one direction.  The bear market of 2007 to 2009 was caused by the irrational belief that housing prices moved in only one direction.

So here we are just five years removed from the last bear market and investors are acting as though stock prices move in only one direction.  Investors have already forgotten that bubbles burst.

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We Told You So

Friday, January 24th, 2014

Sometimes the best investment advice is to do the opposite of what everyone else is doing.

When the stock market was in free fall during the financial crisis, many investors who had hung on for as long as they could take it finally gave up and sold their stocks, locking in huge losses and missing out on a historic rally.

Last summer, with the first hint that the Federal Reserve Board would be tapering its bond purchases, interest rates began to rise and investors sold bonds in record numbers.  In many cases, investors moved more money into stocks, as the market continued to set records throughout 2013 after a brief drop that was fueled by taper talk. Bond Chart

That’s proven to be a mistake, as bonds have so far outperformed stocks in 2014.  In fact, 10-year Treasuries have outperformed the S&P 500 by about 620 basis points.

We’ve suggested that investors not give up on bonds and likewise suggested that gold may shine again, in spite of its tarnished 2013 performance.  Recent trends suggest that it’s worth repeating this advice.

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Paper Taper

Friday, December 20th, 2013

So the taper begins in January.  Big deal.

That was the market’s initial reaction anyway.  In fact, the market viewed this week’s announcement as a positive, setting yet another record.  Conversely, when Fed Chairman Ben Bernanke first brought up the possibility of a taper in May, he sent the market reeling.  So talking about buying bonds has a greater impact than actually buying bonds.  Who knew?

Some believe the stock market rallied because The Fed made it clear that it will remain accommodative and that interest rates will remain near zero until the apocalypse.  That being the case, though, why did bond yields soar?  Go figure.Taper Impact

The taper announcement is not a big deal, though, because everyone knew it was coming – everyone except for the economists whose job it is to tell us when tapering is coming.  First they guessed wrong that it was coming in October, then they guessed wrong that it wasn’t coming in December.  Keep that in mind when you hear them tell you the economic benefits of more bond buying and more government spending.

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Getting Your Bond Portfolio in Shape for 2014

Friday, December 13th, 2013

It’s time to start thinking about New Year’s resolutions.  It’s an American tradition to resolve to lose weight, exercise regularly, be nicer, work harder and give up everything you enjoy.

But who are we kidding?  Such resolutions are made to be broken.  So this year, why not make a resolution and keep it?  This year, resolve to pay attention to bonds.

That’s right.  Boring old bonds.  They don’t have the flash that stocks do, they lack the immediate thrill that cash can provide because of its liquidity and they’re not as mysterious as alternatives.  Yet, if you give them a chance, bonds can play a major role in ensuring that your retirement will be secure.Cost of zero interest rate

Bonds are not without risk – especially in a rising interest rate environment – but they can help you protect your principal, produce income and add to your total return.

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Taperphobia Hits Wall Street

Friday, November 22nd, 2013

A taperphobia epidemic has Wall Street in a panic yet again.  “Taperphobia” is an irrational fear of common sense.  Symptoms include a falling stock market, soaring bond yields and ongoing anxiety attacks.  There is a cure, but it’s expensive – it costs at least $85 billion a month, but that’s enough to cure all of Wall Street and send the stock market soaring.

Taperphobia was discovered by Federal Reserve Chairman Ben Bernanke in May, when he invented a new definition for the word “taper,” using it to describe the gradual slowdown of quantitative easing (another phrase he invented, which translates to “buying bonds forever”).Philly Fed

Symptoms of taperphobia subsided through calm reassurances of ongoing bond buying to eternity, but they returned in October, because most economists had predicted with absolute certainty that tapering would begin then.

It didn’t, so taperphobia subsided again.  But now, thanks to discussions by board members included in minutes of the Federal Reserve Board, many believe that tapering will begin soon.

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Breaking China

Friday, November 22nd, 2013

If the United States relies on China as its main lender, what happens when China is having difficulties with its debt?

We may soon find out.  As the Financial Times reported, “several banks have had to delay or dramatically reduce Chinese bond issues as the impact of a tight onshore credit market begins to be felt.”China

Zerohedge noted that Chinese bond issuers are dealing with the drying up of interbank market liquidity, increased competition from wealth management and trust products, and other problems.  At the same time, one analyst said, “China is much more funding dependent than in the past.”

Chinese issuers are steering around their problems by increasing offshore issuance, raising a record $51.6 billion outside of China so far this year, which is more than double the $24.5 billion raised in the same period last year, according to Dealogic.

Unless the People’s Bank of China changes its attitude on liquidity, the analyst said, “it’s going to end pretty ugly.”

America – The New Europe?

Friday, September 13th, 2013

Defaulting on bond payments isn’t just for Europe anymore.  Detroit and several cities in California have defaulted on bond payments.  Now Puerto Rico may be in trouble, as its bonds are trading as if they are going to default.

This week, the yield on Puerto Rico’s general obligation bonds (PR G.O.) pushed up over 10%.  That led the Government Development Bank on Tuesday to announce that it would scale back bond sales for the rest of 2013.

Puerto Rico’s bonds offer a double tax advantage, which should help hold their yield down.  Yet when considered on a tax-equivalent basis, PR G.O. yields this week exceeded CCC corporate yields, based on the Merrill CCC Index YTW.

Puerto Rico’s junk bond status reflects a weak economy, but it also signals that the island is in deep financial trouble.  And the problems extend beyond Puerto Rico, given that it is part of a growing list of state and local governments with financial troubles.

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Market Reaction To Comments Reflects Market Efficiency

Friday, June 21st, 2013

It’s worth keeping the efficient market hypothesis in mind when considering the impact of Fed Chairman Ben Bernanke’s announcement this week that bond buying will be coming to an end.

The efficient market hypothesis suggests that share prices always incorporate and reflect all relevant information. While the hypothesis may be flawed, it should be no surprise that markets react to information, and that the announcement itself would have an impact, even though no one knows for certain when quantitative easing (QE) will end or when “tapering” or bond purchases will begin.

The price of a security at any given time reflects not only the performance of a company in the context of overall market conditions, but future expectations. So markets panicked because the Fed chief acknowledged the obvious – that QE will be ending someday.

Today’s Dow Jones Industrial Average.

Other than admitting the obvious, The Fed’s comments were inconclusive, with plenty of “ifs,” “ands” and “buts,” and the market performance has been similarly inconclusive, jumping up and down enough to make investors seasick.

Today’s S&P 500 Index.

That queasy feeling is caused by volatility, which we discussed last week.

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Swinging Markets Ahead

Sunday, June 16th, 2013

Volatility is back in a big way.  It’s back not only in the stock market, but in the bond market.  It’s back not only in the U.S., but in China, Japan and other countries.  It’s back not only in developed countries, but in emerging markets.

Just a few signs that volatility has returned:

  • The Dow Jones Industrial Average (DJIA) has had intraday swings of more than 100 points in 10 straight sessions.  On five of those days, the market finished up; on five, it finished down.
  • The Chicago Board Options Exchange Volatility Index (VIX) has jumped more than 40% since May 17.
  • Trading in VIX futures set records for each of the first four months of the year.  May was the third most active trading month ever.
  • The yield on 10-year U.S. Treasuries hit a 14-month high of 2.27% during Tuesday’s trading.

The VIX, also known as the “fear gauge,” jumped from a low of 12.26 on May 17 to 17.25 on Tuesday, but it is still at a relatively low level.  In 2011, it was regularly over 30 and in 2008, it rose over 80.

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Take Advantage of Rising Interest Rates by Understanding Duration

Friday, June 7th, 2013

Recently, there has been a lot of news about rising interest rates ending the bond rally.

Investors who have a significant percentage of their investments in bonds may be getting nervous, but there’s a simple strategy for protecting principal and taking advantage of increasing interest rates.

Bonds generally make up a significant portion of a diversified portfolio, so if the bond rally is over, it is important to be positioned in bonds that will maintain their value in a rising interest rate environment.

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