Alert! My Payday Indicator is signaling the worst environment for investors during my investment career. Conservative investors have been left with scraps on the floor; there isn’t even a decent chuck burger to be had, let alone a T-bone steak. At the end of 2009, investors were asked to take on more risk and receive less reward than at any other time since I’ve been in this business. My Payday Indicator replicates a portfolio invested 50% in Dow Jones Industrial Average stocks, and 50% in three-month T-bills. As you can see from my chart, the yield on this portfolio is the lowest on … [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.
Searching for Yield?
With yields of 0.15% on T-bills and 2.6% on five-year CDs, the temptation of many investors is to reach for yield. Don’t do it. When you reach for yield, you are either taking on too much credit risk or too much maturity risk. With a flood of government debt issuance in the pipeline, and a bloated Federal Reserve balance sheet, much higher interest rates are a dangerous prospect. Don’t forget that a seemingly modest 1% rise in interest rates could decimate a long-bond portfolio. I’m talking about losses upwards of 20%. That’s not what most bond investors sign up for. Instead of reaching for … [Read more...]
A Must Own Asset Class
If the last decade has taught investors anything, it is that taking greater risk does not always result in greater return. An investor who put his entire portfolio in a basket of developed-world equity markets at year-end 1999 would have earned all of 2.34% over 10 years. And to earn that 2%, this investor would have endured two of the worst bear markets in history, with peak-to-trough declines of 45% and 53%. What's more, an investment in conservative full-faith-and-credit-pledge short-term U.S. Treasuries was up 55% over the last 10 years. The 2000s were without a doubt a dismal decade … [Read more...]
Avoid These Securities
February 26, 2010 One sector of the financial markets that is greatly underpricing risk today is municipal bonds. State and local governments are facing extraordinary budget pressure. The recession has eviscerated tax revenues, but spending requirements have not dropped. During the last fiscal year, some state and local governments relied on federal stimulus money to balance their budgets. But federal handouts cannot be relied upon indefinitely. The federal government has funding problems of its own. And tax increases aren’t always an option. To deal with extraordinary budget pressure, … [Read more...]
The Real POP in Investment Returns
Putnam Investments’ full-page colored advertisement in this week’s WSJ was hard to miss—the Putnam marketing team made sure of that. In the ad, they tout their suite of Absolute Return Funds, which seek to do well in any type of market environment, up or down. As is often the case, and certainly is here, if it sounds too good to be true, it is. The funds have outperformed their laughable benchmarks, but have failed every one of mine. It used to be a well-known fact at Proctor & Gamble that the smart people worked in engineering and the really smart ones worked in marketing. I’ve been … [Read more...]
A Guide to 2010 Investment Returns
In 2010, the monetary policies of the world's three largest central banks are likely to play a big role in the performance of global equity markets. The vast majority of the world's wealth—close to 80%, by some estimates—is concentrated in the U.S., Japan, and the euro area. My chart shows that the GDP-weighted risk-free rate in these three economies is only 0.14%. A 0.14% T-bill rate would not be a concern if the global economy were still in free fall, but it isn't. The global economy bottomed in the second quarter of 2009. The IMF projects that the global economy will grow by 4% in 2010. … [Read more...]
How to Boost the Yield on Your Portfolio
January 22, 2010 Punishing yields of 0.05% on three-month T-bills and .85% on short-term Treasury notes are devastating to the millions of investors who rely on income from their portfolios to fund living expenses. The temptation for many of these investors is to reach for yield. Some investors are loading up on long bonds. You can pick up an additional 3% in yield by moving into long bonds, but you also add an extraordinary amount of risk. If rates move up, investors in long bonds will get creamed. I’m talking about losses that dwarf what many investors experienced in the recent bear market … [Read more...]
Investment of the Decade
Trust has been kicked to the curb by Washington and Wall Street. Not a smart move, as the former prepares for mid-term elections and the latter feels the effects of investors voting with their feet. Many clients and brokers have fled the big Wall Street firms for independent advisors. Washington and Wall Street may realize too late that trust is a terrible thing to waste. The bailout of Bear Stearns, Lehman's bankruptcy, the controversial merger between Merrill Lynch and Bank of America, and Citigroup's near collapse had little to do with their client brokerage accounts. In fact, brokerage … [Read more...]
A Truly Ghastly Environment
November 25, 2009 This is a truly ghastly environment for yield-conscious investors. Three-month T-bills yield 0.03%, two-year T-notes 0.73%, five-year T-notes 2.09%, and ten-year T-notes a whopping 3.3%. Who is locking up money for ten years at a 3.3% yield? The Fed’s balance sheet is bloated with reserves, and the federal government is running massive budget deficits. Isn’t this inflationary? You betcha. But the combination of an extremely steep yield curve and the Federal Reserve’s promise to leave the fed funds rate near zero for an extended period of time has created a massive carry … [Read more...]
The Bull Market in Corporate Bonds
According to Bloomberg, YTD net inflows into mutual funds that focus on corporates, bank loans, and munis are $295 billion, compared to net outflows of $31 billion in equity funds. The flood of money moving into the corporate bond market has driven down yields and compressed credit spreads in some sectors to levels last seen in 2007. For investors who initiated positions in corporates early this year, the rally has been breathtaking. Short-term investment-grade bonds are up double digits in an environment where short-term Treasuries yield less than 1%. For savers, retired investors, and those … [Read more...]