Desperately Seeking Safety

By | 2017-08-16T06:24:20+00:00 August 16th, 2017|Global Market Update|

Is anything safe? Photo: Josh Rogan. Source: Morguefile For many, safety means credit risk, full stop. Johnson & Johnson bonds are less risky than Ford bonds—the company has less leverage, stronger cashflow, and more steady revenue growth. But safety is more than just having a AAA rating. A few years ago US was downgraded from AAA to AA by S&P and interest rates still fell rather than rising. Clearly, the market was looking at something other than credit risk. Liquidity risk is real, too. [...]

Bonded Returns

By | 2017-07-17T12:21:27+00:00 March 30th, 2017|Global Market Update|

What good are bonds? Source: Credit Suisse Since the beginning of the 20th century, stocks have returned almost 10% per year while bonds have returned about half that. Because of compounding, though, a dollar invested in equities from 1900 forward would now be worth more than 140 times what a dollar invested in bonds would. And this is only reasonable. The best you can do when you buy a typical bond is get your money back, with a little bit of interest. But some [...]

No Safety in Numbers

By | 2017-07-17T12:21:38+00:00 October 28th, 2016|Global Market Update|

When are sovereign bonds no longer safe? Global Yield Curves, 10-28-16. Source: Bloomberg For decades people have invested in stocks for growth and in bonds for safety. But the global financial crisis and its economic aftermath have changed that. Now sovereign bonds around the world have extremely low yields. 30-year bonds in the US yield just over 2.5%, and that’s the highest yield anywhere. You can get higher yields in emerging markets, but those come with currency, credit, and inflation risk. There have been [...]

Bonds-a-Go-Go

By | 2017-07-17T12:34:14+00:00 September 29th, 2014|Global Market Update|

Will loyal investors swamp Bill Gross’s new venture? Source: Marketswiki On Friday Bill Gross rocked the investing world by leaving PIMCO, the two-trillion dollar asset management firm he founded, and going to work for a competitor. Gross is one of the best-known investors in the world. With his folksy charm and colorful commentary, Gross made investing in bonds cool, which is pretty tough. Bonds are inherently boring, or should be. If everything goes right, you get your money back; if something exciting happens, you [...]

Money for Nothing

By | 2014-01-08T11:30:26+00:00 January 8th, 2014|Global Market Update|

How would you like free money? That’s what the US Government will get on Thursday. Earlier this week the Treasury Department held an auction for one-month Treasury Bills—debt instruments that trade at a discount to maturity, and then pay off at par when they mature. Only on Monday there was no discount--they auctioned $18 billion in 4-week bills, for which they received $100 billion in bids. And the average bid was—zero percent. That’s right. Investors with $100 billion in cash are able and willing [...]

Bond Market Math (Conclusion)

By | 2013-10-09T10:05:51+00:00 October 9th, 2013|Global Market Update|

So how do we put it all together? Bond investors need to understand broad trends in the economy and the markets in order to invest profitably. It’s clear that the economy continues to expand, in spite of the drama we’re seeing in Washington. Interest rates are moving higher. Corporate balance sheets are healthy, and companies are expanding in emerging economies. So the right way to invest in bonds is to own bonds that either mature or reprice sooner than the benchmark; that have exposure [...]

Bond Market Math (Part 3)

By | 2013-10-07T09:57:35+00:00 October 7th, 2013|Global Market Update|

Where do bond returns come from? With rates rising, it’s important to keep bond maturities short. That way their price declines won’t hurt the portfolio too much, and investors can reinvest the principle sooner when the bonds mature. But longer bonds pay more to compensate investors for interest rate risk. Short Treasury bonds pay less than inflation now, so those investments have negative real returns. Bonds carry three major risks: interest rate risk, credit risk, and structural risk. Credit risk is the risk of [...]

Bond Market Math (Part 2)

By | 2013-10-04T09:36:15+00:00 October 4th, 2013|Global Market Update|

If rates are rising, how do bond investors make money? When rates go up bond market values go down. The return from bonds doesn’t come from the market, but from the coupon. That’s the interest rate promised when a loan is first made, and it compensates investors for the risk. So in order to invest profitably it’s important to understand the risks involved. Bonds have three principal types of risk: interest rate risk, credit risk, and structural risk. Interest rate risk is clear: bond [...]

Bond Market Math (Part 1)

By | 2013-10-03T10:08:50+00:00 October 3rd, 2013|Global Market Update|

How can bond buyers make money? Since 1981 bond investors have had the wind at their backs. Not only could they collect their periodic coupon payments, but as rates fell the market value of their bonds would rise. If investors wanted to, they could sell 10-year bonds 5 years after buying them and usually pocket a nice capital gain. In spite of periodic sell-offs, outperforming an index was fairly simple: go long. Lower discount rates would cover a multitude of errors. The rising tide [...]

Searching for Safety (Part 2)

By | 2013-06-04T09:38:06+00:00 June 4th, 2013|Global Market Update|

Where can investors find safety? Traditionally, safety was found in the bond market. Treasury Notes and Bills offered the highest possible credit protection, and their short maturities protected against inflation. The more conservative investors wanted to be, the shorter the maturity they would choose. But short doesn’t equal safe anymore. Inflation is running between one and two percent, based on what measure you use. And the Fed has kept short-term rates at zero for four-and-a-half years now. Through the magic of financial repression, the [...]