Bill Gross is out with a scathing new Investment Outlook on Dr. Bernanke’s misguided monetary activism. [expand title="Click here to read more."] Below are the highlights. You can read the letter in its entirety here. Central banks – including today’s superquant, Kuroda, leading the Bank of Japan – seem to believe that higher and higher asset prices produced necessarily by more and more QE check writing will inevitably stimulate real economic growth via the spillover wealth effect into consumption and real investment. That theory requires challenge if only because it doesn’t seem to be … [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.
These Interest Rates Are Up
When interest rates go up, it will happen overnight, and you won’t know about it until it’s too late. That’s the predicament the state of Illinois found itself in after it decided to shelve a bond deal literally hours before issuing them Wednesday. Why? Because the market demanded a higher rate of return than the state wanted to pay or could afford to pay. The state had hoped to raise $500 million (read: money to pay for pensions) with a school and transportation offering. But it got a good dose of sticker shock when it realized how much it would cost in interest payments. What did state … [Read more...]
When the Levee Breaks
Some hedge funds are using leverage to boost returns. They’re doing it with bonds. With bond yields so low, it’s one way to meet the demands of their clients. But I wonder whether their clients understand the risk that they’re taking. After all, a lot of the beneficiaries are retired teachers who can’t afford to lose money to reckless investment decisions. I read one strategy that uses two-to-one leverage with the bond side of the portfolio. That’s great when interest rates go down. Remember, bond prices move in the opposite direction from interest rates. But it will be ugly when interest … [Read more...]
Municipal Bond Trap
Quite a few people have asked me about investing in municipal bonds lately. Now that the fiscal cliff is in the rearview mirror and the debt ceiling is dead ahead, more tax increases can’t be too far off. But either way, I don’t like municipal bonds. The downside risk you’re taking for the yield isn’t enough for me. The few municipal bonds that I might consider would be in states that don’t have any state income tax, so buying them defeats the purpose of tax-free investing at the state level. Then, there are the states that really need the money. They are not what I’d consider a good … [Read more...]
Taxpayers on the Hook for Risky Student Loan Bet
In early 2010 at the urging of the Obama administration, Congress forced the private sector out of the student loan business. Two-and-a-half years later the Department of Education owns the majority of the student loan market, and America’s taxpayers own the accompanying risk. Josh Mitchell writes in the Wall Street Journal: The federal government now provides the bulk of student loans. Federal loans accounted for more than 90% of all student borrowing in the 2010-2011 academic year, according to the College Board. Nonfederal loans—including those issued by states, banks and credit … [Read more...]
Euro-area Black Magic
From the lead article in this morning’s Wall Street Journal: “With foreign investors almost completely absent from Spanish bond markets for months, Spanish banks have propped up the government, which is now forced to turn to Europe for help propping up the weaker banks. Meanwhile, the stronger banks are shying away from buying government bonds—for fear they would be dragged down, too.” Just so this is clear, the Spanish government whose only source of funding is Spanish banks, just bailed out those same banks by taking on an additional $125 billion in debt. Problem solved? Global equity … [Read more...]
Bond Yields Turn Negative
If you thought 25 basis point yields on two-year US Treasuries were bad, take a look at the yields on German Bunds. Two year German government bond yields are now negative. Investors (and rightfully panicked Greek and Spanish savers) are now paying for the right to lend Germany money. 30-year German government yields have also plummeted. Germany can borrow for 30-years at a rate of only 1.6%--a full percentage point less than the U.S. If you are looking for a return on your capital, the German bond market isn’t the place to invest. … [Read more...]
Bond Risk
Insurance companies manage risk—their own risk. When it comes to insuring new-issue muni bonds, the only game in town is Assured Guaranty Ltd. They’re staring down the barrel of a ratings downgrade by Moody’s Investors Service. Risky muni-bond investing is about to get riskier. Check out The Wall Street Journal’s For Muni Bonds, Less Assurance: The last remaining insurer of new municipal-bond issues is bracing for a fall that could bring its industry to a new low—and possibly increase borrowing costs for some small local governments. Moody’s Investors Service warned in late March that it … [Read more...]
Your 2012 Bond Fund Resolution
I hope you made some good money in bonds last year, because it was not a good year for all bond funds. Through November, Bill Gross’s Pimco Total Return Bond Fund, perhaps the most widely held bond fund in 401(k)s, underperformed 90% of its peers, according to Morningstar. Morningstar estimates outflows of $3.6 billion through November. Jeff Tjornehoj, senior analyst at Lipper, expects moderate outflows of around $200 million from the Pimco fund for December, marking the first outflow in a calendar year since the fund’s inception in 1987. Many 401(k) participants suffered in 2011 with their … [Read more...]
A Crucial Bond Fund Metric
When it comes to your bond money, you want to live to fight another day. To make sure you do, I recommend that you keep the duration short and the credit quality high. Duration measures a bond’s sensitivity to interest rates. It’s the predicted percentage change in a bond’s price given a 1% change in interest rates. So if a bond has a duration of 2, and interest rates change by 1%, the price of the bond will change by 2%. A well-known financial publication recently produced a list of defensive bond funds. Only one of the funds had a short enough duration for my comfort level. So pay attention … [Read more...]
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