Posts Tagged interest rate
Interest rates may rise, but won’t be anything dramatic
Posted by Oksana Grebenjuk in Banks on Октябрь 13th, 2010
The U.S. economy is headed for a sustainable recovery, albeit not as robust and previously expected, while the risk of entering into a double-dip scenario remains very small. Moreover, it’s only a matter of time before interest rates start rising again.
Robert J. Ostrowski, chief investment officer for the taxable fixed income group at Federated Investors, said any rate hikes will not be dramatic.
“It is unlikely growth will be strong to ignite inflationary pressures that heretofore have been drenched to the core,” he said. “Thus we believe rates will remain range-bound for the next three months.”
Although the recession ended about a year ago, many Americans remain waiting for a real recovery.
Indeed, outside of manufacturing, Ostrowski noted, corporate earnings and cash-flushed corporate balance sheets, the economic data continues to be soft to mixed, with housing bouncing around a bottom, employment growth almost nonexistent and consumer spending so-so.
“A lot of damage was done by the longest and deepest recession of the post-World War II era, and fixing it is going to take time,” he cautioned. “It doesn’t help that the political environment has turned so toxic that there’s nothing close to a consensus on what to do. Business and the markets hate uncertainty and lack of clarity.” Read the rest of this entry »
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 »
Yen falls as BoJ surprises markets with rate cut
Posted by Oksana Grebenjuk in Currency on Октябрь 7th, 2010
The Bank of Japan (BoJ) surprised financial markets on Tuesday by cutting policy rates to zero and announcing an emergency 35 trillion yen monetary easing program.
Announcing a comprehensive monetary easing policy at the end of its two-day Monetary Policy Meeting on Tuesday, BoJ stated clearly it is pursuing the virtually zero interest rate policy and that it will maintain the policy until it is convinced that price stability is in sight.
A BoJ statement said the central bank will «encourage the uncollateralized overnight call rate to remain at around 0 to 0.1 percent, effective immediately.»
As part of further monetary easing, the central bank said it will add 30 trillion yen lending facility to provide banks with cheap loans. The central bank also said it was setting up a temporary 5 trillion yen ($60 billion) fund to buy Japanese government bonds, short-term government securities, commercial papers and corporate bonds.
The decision to lower the policy interest rate was unanimous. Read the rest of this entry »
Indonesia claws its way to economic superpower status
Posted by Oksana Grebenjuk in Trading Markets on Октябрь 5th, 2010
Indonesia is one of the «rising stars» of emerging Asia and some economists believe this vast nation will one day become a regional superpower, behind only China and India, as global economic activity increasingly shifts towards east Asia, away from the faltering developed nations of the west and Japan.
The country is delivering a torrid 6 percent annual GDP growth rate. Indeed, the Jakarta Stock Exchange has soared almost 40 percent this year, recently touching a new record closing high.
The Asian Development Bank expects Indonesia to grow its economy by 6.1 percent this year, and 6.3 percent in 2011.
“Economic recovery in many Western countries affected by the global financial crisis is uncertain,» Deloitte Asia Pacific CEO Chaly Mah told The Jakarta Post in a recent interview. «It’s relatively patchy. They are still struggling with economic challenges, and the unemployment rate remains high. There is still no clear sign of economic growth there.»
Indonesia, boasting a population of 240-million, also features a huge working class population (estimated at 58-million), an expanding manufacturing base, moderate labor costs, a sound financial services sector, tremendous natural resources (including oil and gas reserves), as well as a relatively stable political system. 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 »
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 »
Housing’s a wreck. Builders rally. Huh?
Posted by Oksana Grebenjuk in Investing on Август 25th, 2010
Existing home sales plummeted in July. New home sales sunk as well, hitting a record low. And even though luxury homebuilder Toll Brothers reported a surprise quarterly profit Wednesday, that was largely due to a tax break. Sales were down slightly from a year ago and orders dropped 16%.
Despite this, some investors appear willing to once again bet that the housing market has hit bottom. Shares of Toll Brothers (TOL) were up more than 2% in early afternoon trading.
The S&P SPDR Homebuilders (XHB) exchange traded fund, which holds other builders such as KB Home (KBH) and Pulte (PHM), as well as building materials makers and home improvement retailers, rose 1.5%.
It’s a strange reaction to say the least. The broad market is down because of more gloomy housing data. But the companies that are most directly tied to the health of the housing market are up?
It doesn’t make a heck of a lot of sense. It may be a case of traders betting for the umpteenth time that this is finally a bottom for housing.
That’s a mistake. Now that the tax credit for homebuyers has expired, it’s difficult to imagine what can juice the real estate market again in the near-term. Read the rest of this entry »
Greek uncertainty hurts euro
Posted by Oksana Grebenjuk in Currency on Апрель 27th, 2010
Confusion about the timing and amount of emergency aid for Greece prompted investors to sell the euro on Monday as markets worried whether the euro zone country will manage to avert a debt default.
The euro dipped briefly below $1.33, falling against the greenback for the seventh trading session in the last eight. It also hit a three-month low against sterling on investor concern about potential conditions attached to a loan for Greece.
The Federal Reserve’s policy meeting this week drew renewed attention to when the U.S. central bank will likely begin raising interest rates. The dollar rose above 94 yen as investors bet the Fed would raise rates before year end, well ahead of any move by the Bank of Japan.
Confusion over aid for debt-stricken Greece arose on Monday after German Chancellor Angela Merkel said the euro zone member, which on Friday had requested emergency aid, must commit to further savings measures and show it can return to a sustainable economic path before Germany can approve aid.
Greece had tried to reassure investors over the weekend that the 45 billion euros ($60.5 billion) in aid from the European Union and the International Monetary Fund would arrive in time to avert the euro zone’s first sovereign default. Read the rest of this entry »
Bank Lending Still Slow To Recover
Posted by Oksana Grebenjuk in Banks on Март 30th, 2010
The Federal Reserve has started to normalize it’s banking policy by raising the discount rate last week, increasing the rate at which it charges banks for overnight lending. The Fed shrank the spread between the discount rate and federal funds rate early on in the liquidity crisis in 2007 and will probably return to the traditional spread sometime this year as they begin withdrawing their unprecedented stimulus to the banking system.
That being said, banks are still being fairly tight with their lending and while their capital levels have recovered somewhat, they are still in store for more losses with the labor and housing markets in their current states. Foreclosures are still on the rise and with employment opportunities scarce, that trend will likely continue for some time.
While the economy is expected to grow this year by around 3%, the free flow of credit is lagging noticeably behind in the recovery. As long as inflation remains muted the Fed would like to keep the federal funds rate near zero for some time.
Banks have recovered to the point where the Fed would prefer them to borrow from each other rather than using their discount window function as lender of last resort. Another factor that banks are carefully watching is how Congress will revamp banking regulation and how it will impact them in the long run. Read the rest of this entry »
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