You may be thinking about using fixed-income ETFs to fill out your portfolio. Don’t. I continue to avoid fixed-income ETFs, as should you. The low liquidity of many bonds creates wide discount/premium gaps between the price and the net asset value (NAV) of the funds. If you buy the fund at a premium, you’re whacking yourself with a notional loss right out of the gate. For quick proof, take a look at my chart of the iShares iBoxx $ Investment Grade Corporate Bond Fund (LQD). The top part of the chart shows the price and net asset value (NAV) of the fund. If you buy the fund when the price is … [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.
Muni Debt Trap
You know how hard it is to be retired on a fixed income these days, especially with a risk-free rate (three-month T-bills) at less than one-tenth of one percent and with an historical expansion of government almost assuredly set to increase taxes next year. Caution: You don’t want to be like other investors who are reaching for yield and snapping up municipal bonds. Investors are not paying attention to the inherent risks they are buying. That’s why your smartest income move right now may be to avoid or reduce your exposure to these so-called “high-quality” credits. Little Rhode Island may … [Read more...]
A Gift from Greece
The debt crisis that started in Greece and is now engulfing Europe has acted as a catalyst for a sell-off in global risk assets. Investors are liquidating stocks, risky bonds, and commodities and loading up on U.S. Treasury bonds. The 30-year Treasury yield has fallen from a high of 4.84% in early April to a low of 4.05% earlier this week. If you own long Treasury bonds, you have just been given an opportunity to liquidate your position before prices collapse. And collapse they will. Investors are flocking to long Treasury bonds because they perceive them to be risk-free. That’s a farce. … [Read more...]
The #1 Investment in the World
You may recently have read the outstanding, in-depth article from Sports Illustrated “Sports Genes,” by David Epstein, who points out that “good genes” don’t necessarily equate to athletic success. Take Ethiopian runner Haile Gebrselassie, the world-record holder in the marathon and perhaps the greatest distance runner ever, who, at age five, ran six miles each way to school because that’s how you got to school in Ethiopia. “Every day is running. Every job is running: working in the fields or just getting somewhere. Life is running,” says Gebrselassie. Just as Gebrselassie wasn’t born a … [Read more...]
A Valuable Lesson
If you have been following the Securities and Exchange Commission (SEC) civil suit against Goldman Sachs, you know the SEC is suing the firm for underwriting and selling a synthetic collateralized debt obligation (CDO) without disclosing to the buyers that a hedge fund taking a short position in the deal helped select the securities referenced in the CDO. The SEC is focused on whether or not Goldman made misrepresentations to the buyers. Whether or not the allegations against Goldman are true, there is a valuable lesson here for investors. The counterparties in the Goldman synthetic CDO deal … [Read more...]
A Wake-up Call for Investors
The Dow Jones Industrial Average fell more than 5% this week. Up until this past week, U.S. stocks marched higher despite the increasing risks of a government debt crisis in Europe. This week’s sell-off indicates investors may finally be waking up to the significant headwinds the global economy still faces. If the debt crisis in Greece spreads to other Euro-zone countries, it would wreak havoc on the Euro-zone economy and neighboring countries as well. The global economy would also be impacted. The Euro-zone economy is almost the same size as the U.S. economy. If Europe dips back into a … [Read more...]
If Greece Fails, is Portugal Next?
Greek government bond yields have surged to over 16% in recent days. If Germany doesn’t step into to save the Greeks, a default is not out of the question. But the larger problems for Europe are the risk of contagion. Bond yields on other overly indebted euro-area countries are now surging. Portugal is the market’s next target. Yields on short government debt have surged 230 basis points in a matter of weeks. … [Read more...]
The Payday Indicator
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...]
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...]