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Does this seem stupid to everyone else too???? February 25, 2015

Posted by forwardfinancialplanning1 in Bond Index Funds, Bond Mutual Funds, Economic Conditions, Intermediate Term Bond Funds, Long Term Bond Funds, Short Term Bond Funds.
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Read where Germany has just sold 5 year government debt securities at a yield of -.08%. In January, they sold the same securities at -.05%. Also saw where Finland recently issued some government debt at a negative yield. My question for all readers is, “How can this make sense??”

A negative yield on a newly issued bond essentially means that the German/Finnish governments actually GOT PAID to borrow money!!! Some of the explanations for this perverse behavior cite the requirement for commercial banks to hold these high quality debt securities to meet regulatory capital requirements. That is, the banks in a fractional reserve system have to hold something of value to protect their depositors. This makes sense, but wouldn’t the banks accomplish the same thing (and avoid an expense) by simply holding on to their cash? Purchasing an investment that’s guaranteed to lose money is totally illogical. Just the same, I wish I could get paid to borrow money………..


It’s deja vue all over again in the bond market April 17, 2013

Posted by forwardfinancialplanning1 in Bond Index Funds, Bond Mutual Funds, Intermediate Term Bond Funds, Long Term Bond Funds.
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We’re sure that Yogi Berra would have some words of wisdom to describe what’s taken place in the bond market this year. The year began with all of the “smart money” heralding the Great Rotation from grossly overpriced bonds into somewhat underloved stocks. And, for the first eight weeks or so, it appeared that they were correct. The interest rate on ten Year US Treasuries flirted with 2.00% and the Barclay’s US Aggregate Bond Index (a good proxy for the general bond market) actually reported a loss (-0.12%) for the first quarter. Stock prices rose and equity mutual funds reported cash inflows. Pundits everywhere were forecasting still more of the same in the second quarter.

However, here we are in mid-April and the interest rate on the Ten Year US Treasury has not only completely retraced its ascent, it has actually fallen to 1.70%, below its December 31, 2012 close of 1.76%. And, all of the professional money managers who had shorted bonds are licking their wounds and scrambling to cover their positions. Does this retreat to lower interest rates make sense? Perhaps not, but we clearly must be reminded from time to time of the wisdom of John Maynard Keynes’ observation, that “the market can stay irrational longer than you can stay solvent.”

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.
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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.

Seeking yield??? Use caution!!! December 23, 2009

Posted by forwardfinancialplanning1 in Bond Index Funds, Bond Mutual Funds, Intermediate Term Bond Funds, Money Market Mutual Funds.
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Many savers have been frustrated by the record low yields we have been experiencing with seemingly safe, short term instruments like savings accounts, CD’s and money market mutual funds.  This has caused many to “stretch” for higher yields by shifting their dollars into bond mutual funds.  Morningstar recently noted this trend in an article that observed that money market fund balances have fallen from a high of $3.6 trillion in January 2009 to a low of $3.2 trillion as of October 31.  This outflow from money market funds was accompanied by an inflow into taxable bond funds of  $233.7 billion.  Meanwhile, domestic stock mutual funds continued to see outflows for the first nine months of 2009  totalling $4.4 billion.  A logical conclusion is that many investors are incorrectly perceiving bond mutual funds as a higher yielding, yet comparably safe alternative to money market funds.  Bond mutual funds will clearly offer higher yields than money market funds as evidenced by the 3.74% yield (30 day SEC yield as of 12/22/09) of the Vanguard Intermediate-Term Bond Index Fund compared to the paltry 0.06% yield (7 day SEC yield as of 12/22/09)  of the Vanguard Prime Money Market Fund.  However, don’t be fooled into believing that this additional yield comes without risk.  Bonds funds can and do fluctuate in value!!  A case in point is the recent drop of the aforementioned Vanguard bond fund from an NAV of $10.93 per share on December 17 down to $10.77 on December 22.  This  1.46% decline consumed several months worth of the so-called higher yield.   So, keep in mind that bond funds, while clearly less volatile than equity funds, do entail risks. Funds that will be needed in the very immediate future do not belong in bond mutual funds.