Muni bonds are cratering. The iShares National Municipal Fund is down more than 5% since the beginning of November. Rising long-term interest rates, a flood of new muni issuance, and lingering state and local budget issues are all contributing to the violent move down in muni bond prices. … [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.
Stock Market Bulls on Shaky Ground
The chorus of bullish stock-market pundits on CNBC has become deafening in recent months. The justification for buying stocks that I hear most often from this crowd is that stocks are cheap because bond yields are low. Many bulls will tell you that you should dump your bonds in favor of stocks because stock yields are higher than bond yields. This sounds like a compelling argument in favor of stocks. And based on the multiyear highs of recent investor-sentiment polls, many individual investors agree. After being conditioned by inflated stock prices for two decades, loads of investors … [Read more...]
TIPS Signal Higher Inflation
The bond market made history this week: investors paid to lend the government money. The government may want to throw a parade. Investors shouldn’t. On Monday, five-year Treasury inflation-protected securities (TIPS) were auctioned off at a negative yield of -0.55%. Demand was so strong that the Treasury auction was oversubscribed by a 2.84 bid-to-cover ratio—the number of bids received divided by the number of bids accepted. Anything above a ratio of two is considered a successful auction. TIPS can be an attractive inflation hedge because the principal value increases with inflation. As a … [Read more...]
TIPS: Paying to Lose?
What would you pay for inflation protection? Investors buying Treasury Inflation Protected Securities (TIPS) are now willing to pay as much as 0.37% annually for inflation protection. In other words, these investors are buying bonds that are guaranteed to lose money in real terms in order to protect their assets from inflation. Before you mock the idea, consider the alternatives. Nominal 5-year treasuries yield only 1.11%. Assuming inflation of 2%, that’s a negative .89% real return. In the treasury market these days, the winner is the investor who loses the least after inflation. … [Read more...]
A Steaming Stew of Toxic Bonds
With short-term interest rates pinned near zero and long rates moving downward on the prospect of more Fed money printing, conservative investors and savers are being starved of yield. These investors are busy scouring the investment landscape for opportunities to pick up yield. The hucksters and promoters smell opportunity. If it’s yield you need, Wall Street has you covered. The Street’s financial engineers have cooked up a steaming stew of complex structured products that promise all the income you could ever want. How does an 11% yield sound? Wall Street’s peddlers can set you up with a … [Read more...]
Don’t Miss This Opportunity
Long-term interest rates are at their lowest level in over four decades. Today, the Treasury can borrow money for 30 years at an interest rate of less than 4%. Adjusted for trend inflation, Uncle Sam is looking at a rate below 1%. Long rates of less than 4% are even more surprising given the sorry state of public finances and the vast supply of high-powered money sitting on bank balance sheets. The prospect of an oversupply of treasury issuance or rising inflation could send interest rates soaring. Long bonds would get crushed in such a scenario. Today’s ultralow long bond rates are a grave … [Read more...]
More Trouble in the PIIGS Pen
Despite the best efforts of European policy makers, the CDS of the Euro-area’s PIIGS countries continue to signal severe stress. Ireland is the latest country to come under pressure from financial markets. Irish CDS have recently reached a new high. The market is anticipating that a default may be the only sustainable solution for some of these countries. … [Read more...]
A Risk Worth Taking
In today’s environment of low interest rates, there are few places to turn to add yield to your portfolio. Sure, you can tie up your money in 30-year Treasury bonds to lock in a 3.70% yield, but you will take it in the neck when interest rates rise. A 1% increase in interest rates will result in a devastating 20% price decline in 30-year coupon bonds. Not exactly the type of risk most fixed-income investors are looking to take. A better strategy for adding yield to your portfolio is to take prepayment risk on mortgage-backed securities (MBS). I am not talking about the toxic private label … [Read more...]
An Alternative to Ultra-Low Treasury Yields
The short end of the yield curve remains punishing for investors. Yields on two-year notes are now below the lows reached at the height of the financial crisis, and five-year notes yield a scant 1.68%. Going out longer on the yield curve still isn't an answer to paltry yields, though. Long bonds are significantly overvalued from both long- and short-term perspectives. The low level of Treasury yields is both frustrating and maddening. Policymakers are attempting to recapitalize the banking system by engineering a steep yield curve. The Fed has essentially lowered the risk-free … [Read more...]
Vanguard CEO’s Biggest Worry
You can probably count on one hand the people you trust to give you sound investment advice. For a number of reasons, talking about money even with them isn’t always the easiest thing to do, and often it’s worse than talking about religion and politics. Trust is paramount. Two companies that have gained the trust of individual investors are Vanguard and Fidelity (disclosure: Richard C. Young & Co., Ltd., invests in some Vanguard funds and uses Fidelity as a custodian for client accounts). Billions of dollars have poured into both firms while less desirable firms have dealt with net … [Read more...]
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