Stampede into Bonds 12/1/2011

by Sergio Mariaca on Dec 1, 2011 12:55:00 AM |Share:

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U.S. Treasury debt had its best quarter since the first quarter of 2008. Treasuries maturing in 10 years or more returned 23% during the quarter, according to Barclay’s Capital index data. Not since 1995 have investors done so well owning longer-dated U.S. government debt. However, according to the Fed economists, expectations for interest rates, growth and inflation indicates 10-year notes are the most overvalued on record. (Source: WSJ, October 1, 2011 – Stocks Log Worst Quarter)

Yields on the U.S. Treasury 10-year note fell to 1.71%, the lowest yield since the 1940s. With overall inflation running around 3.6%, that indicates that many investors were effectively accepting a loss. And, in the case of U.S. Treasury bills, investors at times throughout the quarter bought securities that offered no yield at all. Essentially, investors were parking money with the U.S. Treasury, at least expecting to get back the same amount in 3 months. For many investors, all that mattered was certainty. (Source: WSJ, October 3, 2011 – Spooked Investors)

The Federal Reserve has promised to keep short-term rates low for another 2 years and it keeps the rate on 10-year bonds down by printing money and using that to buy the bonds. Artificially low interest rates may stimulate people to buy homes and use their credit cards, but they have the opposite effect on people with money in the bank. For example, widows used to live off the interest on their bank deposits. How can you do that when the yield is only about 0%? Many investors have their money in Treasury bonds because they are considered “safe.” They are safe only in the sense that you know what is going to happen. You know they’re going to make you slightly poorer.

The Bond Market

by Sergio Mariaca on Sep 1, 2011 3:07:00 PM |Share:

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Many investors continue to prefer bonds, even with interest rates at historically low levels.  “Every time there is a little bit of a ripple, you see….individuals moving into Treasuries and other bonds,” said Lisa Shalett, chief investment officer at Merrill Lynch Global Wealth Management. “There is an absolute focus on principal protection and capital preservation, with a desire to drive returns almost exclusively from income,” Miss Shalett said.  (Source:  WSJ, July 1, 2011)

Many investors acknowledge that although bond yields are low, many think that prices of Treasury securities could keep climbing (at the same time their yields are falling) as long as the economy continues to show signs of sputtering and the threat of financial chaos in Europe continues.  Many investors wonder whether the bond market can still continue its solid return. “Investors in U.S. Treasuries are being lulled into a false sense of security by positive returns this year because their yield isn’t high enough relative to inflation,” according to Bill Gross who oversees the largest bond fund at Pacific Investment Management Company, LLC. (Source: Investment News) Past performance is no guarantee of future results.

One of the major concerns of bond investors at this time is the possibility of rising interest rates, which can translate into losses for bond investors. As you probably know, interest rates and bond prices work opposite of each other. As interest rates go up, the value of bonds goes down.  In a recent presentation, Daniel O’Neil, president and chief investment officer of DirexionShares, said, “A 1% rate hike could drop the value of a 30-year U.S. Treasury Bond by 14.5%.”  (Source:  Financial Advisor Magazine, July 2011)
Countries such as the U.S. are intentionally keeping interest rates low to help reduce record debt levels, Mr. Gross said.  The Federal Reserve has kept its target rate at a record-low range of 0.00-0.25% since December 2008 to help stimulus growth in the face of the worst recession since the Great Depression.  (Source: Investment News, June 5, 2011)

Let’s now change the subject to municipal bonds. Since late last year, many investors have been selling their municipal bonds amid fears that cash-strapped states might not be able to make their bond payments. Many advisors, however, say that these concerns are overblown and that the entire sector is getting judged unfairly.


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