European financial fears reach milestone May 27, 2012
Posted by forwardfinancialplanning1 in Economic Conditions, Investing-General, Short Term Bond Funds.add a comment
How bad is Europe’s financial dilemma? A recent German 2 year government bond auction puts this in perspective as many view these sovereign debt securities as the Eurozone’s best safe harbor for risk averse investors. Last Thursday’s auction placed 4.5 billion Euros of two year German securities into investors’ hands at a yield of zero percent. In essence, purchasers are simply hoping to have their principal returned to them after the two year period. The obvious interpretation of this event is that apparently all other alernatives are perceived as too risky. However, one wonders that if an investor was that concerned about the risk of holding a financial security, why wouldn’t they eschew the financial security and simply hold on to their cash?
Perhaps one might argue that the euro is doomed as a currency and if so, the eventual repayment of a sovereign German debt might subsequently be denominated in a yet to be issued German currency. And, a future currency note being issued by the government of the strongest European economy would most likely have the most value. So, while we can only hypothesize as to the motives of these investors, we can clearly conclude that investor fears are running extremely high on the European continent.
Well, it’s starting to happen…… December 15, 2010
Posted by forwardfinancialplanning1 in Bond Index Funds, Bond Mutual Funds, Economic Conditions, Income Taxes, Long Term Bond Funds, Short Term Bond Funds.add a comment
Several postings on this site have commented on the huge investment inflows into bonds and bond mutual funds during the past two years. These cash flows coincided with a historic decline in bond yields to levels not seen since the Great Depression. Since bond prices move inversely to yields, bond prices increased and it’s easy to surmise that the substantial cash inflows into bonds represent “performance chasing”. As investment history has proven time and time again, performance chasing usually ends badly.
The inevitable downfall may have begun. The tax compromise in Washington seems to have awakened the “bond vigilantes” to the fact that the economy will most likely continue to improve. This, of course, will cause the Fed to end its inordinately accomodating monetary policy, and result in rising interest rates.
This seems to have started in the past month. The yield on 10 year Treasury Bonds has risen from 2.4% in mid-October to 3.36% this week. As expected, the Vanguard Total Bond Market Fund (which tracks the Barclays Aggregate Bond Index) has fallen 3.4% in price (not including reinvested dividends) since November 4. To put this decline in perspective, the price drop equals more than an entire year’s interest yield. With the spector of inflation looming somewhere down the road, it will be interesting to watch how long this trend persists.
In Warren Buffett we trust? March 23, 2010
Posted by forwardfinancialplanning1 in Economic Conditions, Investing-General, Short Term Bond Funds.add a comment
Despite all the rhetoric in Washington, the federal budget deficits continue to grow as does federal government borrowing. A recent Bloomberg analysis may be providing a glimpse of the future that this incessant borrowing may bring. Bloomberg reports that in the past few weeks, two year debt securities issued by Buffett’s Berkshire Hathaway have traded at lower yields than U.S. Treasury securities of similar maturities. Similar trends were also noted in debt securities of Proctor and Gamble, Johnson & Johnson and Lowe’s. In essence, the bond market is suggesting that it sees less risk of default from these private corporations than from the Federal government. This is an incredible occurrence given that the Feds can levy taxes and print money. Hopefully, someone in Washington is taking notice as this portends that investors will soon be demanding higher yields from the U.S. Treasury in order to purchase its debt.
