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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………..


Occasionally, they do something right in D.C. February 14, 2015

Posted by forwardfinancialplanning1 in Bond Mutual Funds, Economic Conditions, Intermediate Term Bond Funds, Long Term Bond Funds, Short Term Bond Funds.
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It’s usually pretty easy to find something to complain about when one considers what’s going on in Washington DC. If not, many in the media would be out of work. However, some recent reading led me to conclude that occasionally, they do something in Washington that could actually be described as “smart”.

It’s no secret that interest rates around the world are at rock bottom levels. U.S. banks and credit unions are paying depositors virtually pennies in interest on substantial balances. The interest yields in Europe and Japan are even lower, which makes US Treasury debt look very favorable to foreigners. Due to this substantial worldwide demand, the US government is able to finance its borrowings at very favorable rates.

How favorable? A year ago, 30 year US Treasury securities yielded about 4%. As of January 30, 2015, this figure was 2.2%. And, the term structure of the US government’s borrowings has lengthened. Treasuries maturing in three years or less comprise only 48% of US government debt compared to 58% six years ago. The portion of debt coming due within the next year is approaching levels last seen in the 1950’s. The government now pays less interest than it did in 2008, despite the fact that the amount of outstanding US debt has more than doubled to $12.5 trillion during this time period.

These circumstances might be akin to an astute household which refinances its mortgage debt when 30 year fixed rates have fallen greatly. Perhaps they lock in a home equity loan to pay off some higher cost debt while interest rates are way down (For the sake of argument, we’ll ignore the fact that they may be collateralizing a previously unsecured debt). And while it must be conceded that excessive debt is never a good thing, it’s highly unlikely that the US government is going to run a budget surplus any time soon. Similarly, it’s a rare household that can buy a house without a mortgage. So, if we accept the notion that the US government is going to borrow (and that the household will borrow for a home purchase) locking in historically low rates for longer periods of time is actually pretty smart behavior.

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.