Sorry to be dramatic, but it is true. There is a huge disconnect between what the Federal Reserve is saying it is going to do with short-term interest rates and what the bond market has priced in. The chart below from Bloomberg compares the path of interest rates based on Fed funds futures contracts and the median estimate of rates from the Fed’s policy setting committee. Based on the Fed’s latest projections, short-term interest rates are expected to be at 1.375% by the end of next year and 2.625% by the end of 2017. Sixteen out of the 17 FOMC participants project interest rates of … [Read more...]
Young Research & Publishing has been providing research and insights on bonds to institutional investors, corporate financial officers, business owners, and individual investors for over four decades. Richard C. Young started Young Research & Publishing in the 70s to publish the authoritative Young’s World Money Forecast, a 50-page monthly investment report for institutional land high net worth investors. Today, our research on bonds is geared toward investors in or nearing retirement who are looking to preserve and protect wealth.
Bond Bubble
I've been hearing, and reading a lot, and I mean a lot, about the bond bubble. But you know what? I’m not concerned in the least. I’ll tell you why. Yes, I know the Fed is talking about raising rates this year. But you and I know the economic reports they gloss over, and wax and wane about, have zero to do with the economy you and I deal with—the one we live and breathe everyday— you know, the real world. And yes, I know how bonds work: when interest rates go up, prices go down. I get it. But the Fed has almost no control over interest rates that you and I care about. They control the … [Read more...]
40 Years is a Helluva Long-time
Cashing in on the Fed’s zero percent interest rates while the going is still good, Microsoft is issuing $10.75 billion in bonds—an increase from an originally planned $7 billion offering. With the world’s major central banks holding or promising to buy an inordinate amount of the world’s safe debt, the supply of high-grade bonds is falling short of demand. Microsoft is one of the few remaining triple-A-rated borrowers around, so investors have jumped all over the offering. Reuters has reported investor orders of $37 billion. The offering is broken into seven tranches ranging from … [Read more...]
Where to get 7% Yields
If you are a buyer of assets and a long-term investor, the recent turbulence in markets should be viewed as a welcome development. You may find this unusual, but I must admit that I enjoy periods of volatility. Not because I relish in the misery of others, but because volatility creates opportunity. And finding compelling investment opportunities for Young Research’s subscribers and our investment boutique clients is what I spend much of my time doing (it's true, I have no hobbies). It has been a tough slog over the last couple of years. Zero percent interest rates and trillions of money … [Read more...]
Risk Off
As you can see here the tide has turned against junk bond investors. From The Wall Street Journal: The oil bust is exposing cracks in the $1.3 trillion junk-bond market, putting pressure on a key source of corporate financing and potentially crimping economic growth. U.S. junk-bond prices have fallen 8% since late June, according to data from BarclaysPLC. One-third of that drop has come this month alone, putting the market on track for its worst annual performance since the financial crisis. While much of the stress has been in the energy sector on the heels of the sharp decline in … [Read more...]
2% Yields: It Could be Worse
If you thought you had it bad with 10-year Treasury yields at 2.3%, take a gander across the pond. In Germany, 10-year government bonds yield only 0.80%. It would take 87 years to double your money at a 0.80% return. That is more than a life-time for many. The comparable number for the 2.3% return available on 10-year Treasuries is about 30 years. Still not great, but it could be worse. It could be worse for the Germans too. In Japan, the ten-year government bond yields only 0.48%. At 0.48% you would need two life-times to double your money. … [Read more...]
Bond Kings
My favorite bond funds are not known for their king like managers. And I like it that way. One would think that the world renowned Bill Gross (whose compensation reached $200 million in years past) could make things work at PIMCO. But with interest rates so low, it was getting too hard for him to make a difference. In this interest rate environment, the only way a bond fund manager is going to make a difference is by taking on more risk than his competition. It’s not rocket science. But I have a feeling investors aren't going to be comfortable with these risks, as I explained here. … [Read more...]
GNMA Up Over 2% Yesterday
I like your odds with Vanguard GNMA. Yesterday, with the DJIA falling 1.4% and the speculative Nasdaq down 1.6%, good 'ole GNMA was up about a half of a percent or 2% relative to the Nasdaq. For the year, GNMA is up 5.25% and yields 2.56%. Sometimes the difference between an ok investor and a great one is that the great one is able to take the ups and downs of the market. In the real world it's hard to do. But by having a little GNMA in your back pocket it becomes a whole lot easier. And more fun. … [Read more...]
Yields at Highest Level in Years
Don’t look now, but interest rates are at a more than three-year high. Short-term interest rates that is. The yield on three year treasury notes has crossed the 1% threshold. I know, a 1.08% yield for three-year paper is nothing to brag about, but it could be worse. From late-2011 to mid-2013, the average yield on three-year treasury notes was 0.35%. Do you know how long it takes to double your money at a 0.35% interest rate? I’m going to tell you. It takes 199 years. If you are putting away money for the grand kids, better change the will to make it your great, great, great grand kids. At … [Read more...]
My Recent Sailing Trip to the Vineyard
You can only imagine the despair when impatience rules the day. On a recent sailing trip the current in Woods Hole was dead against us. Instead of fighting the current we decided to wait for it to change in our favor. We anchored outside of Hadley’s Harbor, had lunch, went for a swim—it’s hard to imagine a more idyllic spot on the water. We made it to Edgartown on the Vineyard later in the day. Waiting out the current ended up being a great decision. Waiting out the recent junk bond sell-off was never an option for some retail investors. Mom and pop investors didn’t understand the … [Read more...]
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