Posts Tagged ‘Interest Rates’

Housing Market Needs Rehab

Friday, May 27th, 2011

It wasn’t long ago that housing seemed like the best possible investment.  Housing prices just kept going up, up, up.

Now 2011 is on track to become the sixth consecutive year of declines in new home sales and, as a consequence, prices are going down, down, down.  Unless the housing market rebounds, which appears unlikely, 2011 will see the fewest homes sold on record (records have been kept since 1963).

The Wall Street Journal notes that “The 323,000 new homes sold in 2010 was less than 60% of the number of new homes sold in 1963, even though the
population today is nearly two-thirds bigger.”

Even with interest rates at historically low rates for the past couple of years, the market has continued to decline.

Even more discouraging, The Journal notes that housing has increasingly been tied to economic cycles.

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Posted in Housing, Interest Rates, Stock Market, The Economy | 1 Comment »

Pick One: High Risk or Low Returns

Monday, May 2nd, 2011

Here’s your choice: Take on lots of risk and hope for the best or watch your standard of living erode.

The stock market has been soaring, thanks to the Federal Reserve Board’s quantitative easing program, which has continued to hold interest rates at or near record lows for several years now.

Investors came back into the market, not because the market was showing signs of strength, but because it became the least objectionable place for investors to put their money.

A 12-month certificate of deposit (CD) is yielding 1.25% interest today.  The U.S. inflation rate rose to 2.7% in March and is continuing to rise – a deliberate outcome of Fed policy.  So the real rate of return, in exchange for tying up your money for a year, is negative 1.45% (2.7% – 1.25%).

Conversely, The Russell 2000 Index of small-cap stocks recently hit a new high, having jumped 150% since March 2009, including a 9.5% gain so far for 2011.

Small-cap stocks are, of course, the riskiest stocks, representing companies with market capitalizations of $2 billion or less.  And the higher small-cap prices soar, the riskier they become and the more likely it will be that we will see a market correction.

What will happen when quantitative easing ends?  What will happen when market conditions, rather than Fed programs, dictate returns?

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Posted in Interest Rates, Investing, Quantitative Easing, Risk Management, Stock Market | No Comments »

Fixed-Income Investors Weather Sovereign Debt Crisis

Monday, May 10th, 2010

Because of our focus on managing risk, fixed-income clients of Wenning Investments generally fared well during last week’s sovereign debt crisis, even though it created widespread panic in global markets around the world. 

Clients who hold a short bond position (TBT, PST) saw an unfavorable drop in prices, but we believe that the drop is temporary.  The position is held to provide a hedge against rising interest rates.  Interest rates fell last Thursday, but the overall trend is for interest rates to rise.

Other bond holders benefited from a decline in yields, which made the bonds they hold more attractive, since bond prices moved higher during the flight to safety.

During times of uncertainty, investors buy bonds to add protection to their portfolios and to avoid losses from falling stock prices.  When that happens, bond yields are driven lower, because the demand for bonds outweighs the supply.

Thursday, during the flight to safety, the 10-Year Treasury yield fell to 3.24%, down from 4% last month.  Today, though, the yield is inching back and is at 3.56%.

According to The Wall Street Journal, “The European Union agreed on an audacious $955 billion bailout plan in an effort to stanch a burgeoning sovereign debt crisis that began in Greece.”

This agreement has calmed fears around the globe and global stock markets are trending higher on the news.

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Posted in Bonds, Investing, Risk Management, Stock Market, The Economy, Uncategorized | 2 Comments »

A Sign of Rising Interest Rates?

Tuesday, February 23rd, 2010

The U.S. Federal Reserve surprised the market last week by raising the U.S. discount rate by a quarter of a point (0.25%).

Fed Chairman Ben Bernanke insists the rate hike should not be considered to be monetary tightening, but the bond market doesn’t answer to the Fed Chairman and recognizes that the interest-rate cycle has reached the point where tightening has begun.

There are other signs that a trend of interest rates moving higher has begun.

Generally, when the stock market sells off, the bond market moves in the opposite direction.  When news about Greece’s debt problems hit the market and stock prices declined, typically we would have seen a significant flight to safety, resulting in a significant rally in the bond market.  We saw some shifting of assets to safer investments, but the shift quickly faded.

To identify a trend, investment managers typically look at the long end of the curve, and the 30-year bond showed signs of weakness, in spite of Greece’s debt problems.

Whether rising interest rates is indeed a trend should be determined during the week ahead, with new Treasury Inflation-Protected Securities (TIPS) offerings.  Up for auction will be:

  • $44 billion in two-year Treasuries
  • $42 billion in five-year notes
  • $32 billion in seven-year notes
  • $8 billion in 30-year TIPS

 The 30-year TIPS offering is the first offering of that duration since 2001, as some have considered a 30-year maturity as being unnecessarily long.  Whether the 30-year TIPS will stimulate investor interest remains to be seen.  If the auction is poorly received, higher rates will most likely be on the horizon.  Stay tuned.

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Posted in Bonds, Investing, Personal Finance, Stock Market, The Economy | No Comments »