Posts Tagged bond
Fishing For «The Six Best U.S. Dividend Stocks»
Posted by Oksana Grebenjuk in Fund Markets on Октябрь 12th, 2010
There is a running argument regarding whether or not dividend paying stocks are interchangeable for bonds. The pro-bond side argues in favor of the stability of bond prices and the predictability of bond interest. The pro-dividend paying stocks side argues in favor of the potential for increasing dividend income coupled with possible capital appreciation. In the end, it all comes down to the question of risk versus reward.
In the spirit of full disclosure, we currently favor the dividend paying stock position and for the present eschew investing in bonds. Our position is predicated on the idea that because interest rates are so low the risk profile of bonds in general has become uncharacteristically high. The following graph shows that 10-year treasury note rates have been falling since the mid-1980s. Furthermore, although they rose from 1960 through the mid-1980s, today’s 10-year treasury bond is lower than it was during the mid-1960s.
During periods of falling interest rates, bond prices will be stable since the price of pre-issued long-term bonds will tend to rise prior to maturity. Of course, as the bond gets closer to maturity, the price will move to par value. Conversely, during periods of rising interest rates the price of pre-issued long-term bonds will fall in order to make them competitive with new bonds being issued with higher interest rates. Another way to think about this is to understand that when interest rates are very high bonds are cheap and vice-versa.
Therefore, at 2.3% interest 10-year treasury bonds are extremely expensive based on historical norms. If you divide the current 2.3% interest into the hundred percent cost of a bond, the 10-year treasury bond is selling at over 43 times interest. That’s pretty high. To put this into perspective, at today’s rate a 10-year treasury bond would take over 43 years to pay you back your original investment. Read the rest of this entry »
Earnings-yield on S&P 500 at two decade-high
Posted by Oksana Grebenjuk in Favourites, Fund Markets on Октябрь 6th, 2010
The earnings yield (EY) on the S&P 500 index is now above 7 percent, which is typically the kind of yield an investors would get from an average junk bond.
EY amounted to 7.09 percent for the S&P 500 as of June 30, 2010 — the highest quarter-end level in two decades.
This either means that stocks are very cheap (relative to bonds) and might make an attractive buy; or that investors have such a pessimistic view of the economy that they expect earnings growth to slow down over the next few quarters (or even years), given the grim economic backdrop.
EY is simply the earnings per share for the recent 12-month period divided by the current market price per share.
Generally speaking, if the EY of a broad stock index is less than the rate of the 10-year Treasury yield, stocks could be considered overvalued. If the earnings yield is higher, stocks might be considered undervalued relative to bonds
Traditionally, stock investors have demanded an extra risk premium of several percentage points above the risk-free rates of Treasuries to compensate for the greater risk inherent in owning equities. Read the rest of this entry »
Who Is Going To Be Wrong: The Bond Market Or Stock Market?
Posted by Oksana Grebenjuk in Fund Markets on Октябрь 4th, 2010
One of the more bizarre contradictions of the recent rally in equity markets, is the complete refusal by the bond market to budge from its deflation/recession view. In most cases, the equity and bond markets trade according to the same economic outlook.
If the market believes inflation/growth is on the way, stocks rally and bonds fall (yields rise). Conversely, when the outlook is for deflation/recession, equities fall and bonds rise (yields decline).
However, there is currently a deep divide today as the stock market (and commodity market for that matter) trades like growth and inflation are on the way, but the bond market is holding to its deflation/recession view. Below is a 3 year chart which compares the 10 year treasury to the SP 500.
You can clearly see that while the two can briefly diverge, they eventually converge on the same economic consensus. So the question is which market is right and which one is wrong? To be honest I really don’t know at this point. Read the rest of this entry »
A Hazard Of Buying Bond Funds Now
Posted by Oksana Grebenjuk in Favourites, Fund Markets on Сентябрь 30th, 2010
A number of us here at Weiss have been warning you about the dangers of buying bonds in this ultra-low-interest-rate environment, especially longer-dated U.S. Treasuries.
But as I recently told my Dad’s Income Portfolio subscribers, I think mainstream investors are still ignoring the risks they’re taking with bonds, particularly when it comes to fixed-income mutual funds and exchange-traded funds.
And this topic is so important that I want to explore it a little more today with you. After all …
Investors Have Been Snapping Up
Bond Funds at a Record Pace Lately
According to the Investment Company Institute, investors were net sellers of stock market mutual funds in the first seven months of this year, withdrawing more than $30 billion.
At the same time, they plowed a net $273 billion just into taxable bond funds! Read the rest of this entry »
Forget Stocks. This Year, Bonds Have Had More Fun
Posted by Oksana Grebenjuk in Fund Markets on Сентябрь 14th, 2010
It’s no secret U.S. stock investors have suffered through roller-coaster volatility this year for no real return, while fixed-income investors have been having a ball. The longest-dated Treasury mutual funds have returned nearly 20%. Equities, meanwhile, have done zilch.
Even short-term Treasury debt has been a better bet than anything benchmarked to the three major market averages — and the yields on 3- and 6-month T-bills are negative.
Take the S&P 500 ($INX) as the benchmark for the U.S. stock market. It has generated a return this year of negative 0.07%, according to Morningstar. (That’s price performance plus dividends though Sept. 8.)
Now have a look at the Barclays U.S. Aggregate Float Adjusted bond index, a broad benchmark for U.S. bond market performance. It has generated a total return of 7.42%. That’s been great news for investors in the retail-friendly Vanguard Total Bond Market Index (VBMFX) which tracks the index: It has returned a healthy 7.28% so far.
No wonder more than $30 billion flew out of U.S. equity mutual funds from January to July, according to the Investment Company Institute — and more than $185 billion gushed into bond funds. Bond prices have gone bonkers. Read the rest of this entry »
Is It Time To Sell Long-Bonds?
Posted by Oksana Grebenjuk in Fund Markets on Сентябрь 9th, 2010
As the market declines and fear sets in, there has been a pronounced movement from equities to bonds. This cash in-flow has helped fuel higher bond prices and lower interest rates. For some portfolios, bonds have been one of the few positives over the last 24 months. Is it possible that bonds are the next big bubble to burst?
Jeremy Siegel certainty thinks so based on his recent Wall Street Journal article The Great American Bond Bubble. In the article, he opined that the bond bubble may have far more serious consequences for investors than the internet and technology bubble that burst some 10 years ago. The Nasdaq has yet to recover those losses as it is currently selling at less than half the peak it reached a decade ago.
The longer a bond’s maturity, the more volatile its price. Thus, long and intermediate bonds stand to lose substantially when rates reverse, as noted in the aforementioned article:
If over the next year, 10-year interest rates, which are now 2.8%, rise to 3.15%, bondholders will suffer a capital loss equal to the current yield. If rates rise to 4% as they did last spring, the capital loss will be more than three times the current yield. Is there any doubt that interest rates will rise over the next two decades as the baby boomers retire and the enormous government entitlement programs kick into gear? Read the rest of this entry »
Dealers Digest Central Bank Views And Buy Bonds
Posted by Oksana Grebenjuk in Investing on Сентябрь 1st, 2010
Friday’s initial response to the words from Ben Bernanke is being reversed on Monday. Bond yields jumped sharply as the Fed Chairman said that the FOMC stood ready to perform whatever action necessary to safeguard the economy from failing. Investors immediately looked beyond the action of further quantitative easing and took this as a sign that ultimate economic recovery would be bearish for bonds.
Eurodollar futures – Short-end Eurodollar futures are making gains again on Monday with the rise in deferred maturities almost at a double-digit pace. September treasury note futures have climbed by a half-point this morning to stand at 125-23 to yield 2.59%. The initial response to the speech at Jackson Hole in Wyoming was a fear that meaningful measures to support the U.S. economy would revive growth sufficiently so as to put the era of extremely low interest rates at risk. But as dealers ponder further this morning the renewed buying suggests that they recognize that although the Fed is prepared to act, it can’t go the distance without a confluence of other resources pulling in the same direction at once.
European bond markets — September bunds have recovered from Friday’s slump to 133.25 as weaker longs were knocked out of the market. The contract has climbed once again on Monday to 134.19 where the yield of 2.13 stands seven basis points below that at Friday’s close and compares to last Monday’s record low of 2.09%. The demand for German bunds remained firm despite the headwind of relatively bullish economic data. A European Commission report showed a rise to a two-year peak in confidence in the economic outlook. An unsourced report running in today’s Financial Times says that the ECB will extend its emergency aid to the region’s banking system through 2011. Euribor futures made minor gains on the story. Read the rest of this entry »
Winfrey Hires a Star Manager
Posted by Oksana Grebenjuk in Budget on Май 20th, 2010
Oprah Winfrey has made a fortune in television, magazines and movies. Now she has hired someone to manage it.
Ms. Winfrey, one of the most powerful brands in media, has begun setting up a so-called family office to handle her personal investments, according to people familiar with the situation. Her first hire: Peter Adamson, a well-regarded investor who currently serves as chief investment officer for Eli Broad, the Los Angeles billionaire and philanthropist.
The move comes as Ms. Winfrey begins a new chapter in her professional life. In January she plans to launch her own channel, the Oprah Winfrey Network, a joint venture between Ms. Winfrey’s Harpo Inc. and Discovery Communications Inc. that aims to reach 80 million homes in the U.S.
A spokeswoman for Ms. Winfrey confirmed the hire but declined to elaborate. Mr. Adamson didn’t return emails and telephone calls seeking comment.
Ms. Winfrey historically has been private about her financial affairs, but this is believed to be the first time she has established a full investment organization around her fortune.
Wealthy investors typically hire managers at banks and brokerage firms to handle their financial affairs. A family office is considered a step up from such an arrangement, with a team of advisers working exclusively, and directly, for the client. Read the rest of this entry »
Greek Two-Year Notes Rise
Posted by Oksana Grebenjuk in Fund Markets on Апрель 19th, 2010
Greek two-year notes posted their first weekly advance since March after the European Union and the International Monetary Fund agreed to a 45 billion-euro ($61 billion) plan to help Greece avoid a default.
The two-year yield fell the most on record on April 12, a day after the accord was announced, before the notes pared gains on concern the aid will be delayed as national parliaments vote on the proposals. The securities recovered after Prime Minister George Papandreou moved closer to triggering the package by arranging a meeting with the European Commission, European Central Bank and IMF for April 19.
“Greece rallied on this news and will continue to do so with every positive step toward access to ongoing official support,” said Giles Gale, a fixed-income strategist at Royal Bank of Scotland Group Plc in London. “Every false step, the main risks lying in the European political process, will push yields higher.”
Two-year yields fell 27 basis points to 6.89 percent as of 5 p.m. in London yesterday, after rising 188 basis points the previous week. Greek 10-year yields rose for a third week, adding 26 basis points to 7.47 percent.
Greece’s budget deficit, at 12.9 percent of gross domestic product, is the largest in the EU. The country’s failure to convince investors it can narrow the gap helped send the yield premium for Greek 10-year bonds over similar-maturity German bunds, the region’s benchmark government securities, to 442 basis points on April 8, the most since the euro’s debut in 1999. Read the rest of this entry »
Five Lessons From Your ’09 Tax Return
Posted by Oksana Grebenjuk in Budget, Favourites on Апрель 15th, 2010
Your 2009 taxes are done. Congratulations! But you’re not done yet. (Sorry.) While you have all your 2009 tax forms and documents handy, this is the perfect time to analyze last year’s finances and use those insights to lower your taxes in 2010 and beyond.
The sooner you get started, the more you can save. So, take a big breath and then take these five steps:
1. Avoid a Big Tax Refund
You think you love getting a tax refund. What’s not to like about found money? But a refund is really just the return of a year-long, interest-free loan that you extended to your spendthrift Uncle Sam.
You can do much smarter things with that money, like putting it into a retirement plan or a college savings fund. So if you will be receiving a 2009 refund of more than a few thousand dollars and you’re an employee, adjust your withholding at work. If you’re self-employed, lower your quarterly estimated tax paymentsaccordingly.
If your 2010 income will be less than $75,000 ($150,000 if you’re married and will file jointly), be sure your tax withholding has been properly adjusted for the new Making Work Pay Tax Credityou’re entitled to receive this year. This credit (up to $400 for singles and $800 for couples) should be reflected in the amount of taxes taken out of your paycheck. But you may need to submit a revised W-4, especially if you’re holding down multiple jobs or you’re married, since your employer wouldn’t know about your extra work or your spouse’s income. Read the rest of this entry »
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