Most investors often allocate a specific amount to "bonds" and then forget about them. Many genuinely believe that little ever happens in the bond market and a connection is just a bond. Investors often genuinely believe that a connection portfolio is normally pretty stable/safe and doesn't need as much time and attention and "analysis" since the stock portion of the portfolio. Besides, bonds are type of complicated and hard to determine for most investors. There has been some interesting and unprecedented things going on in the bond market in the last month or two that merit investor's full attention. This all started with the sub-prime mortgage meltdown and has quickly spread to many areas in the credit markets. Many bonds are currently unattractive as investments. It's a great time for investors to examine just how much of the portfolio they have specialized in bonds and what they own within their bond portfolios.
Three extremely unusual bond market facts recently:
1. 10-year Treasury bond yields are currently below the inflation rate (cpi). Very rare.
2. Some inflation protected bond yields have gone negative. Never happened before.
3. Tax-free municipal bond yields have also been above taxable Treasury bond yields.
US Treasury Bonds
Good quality bonds like US treasury bonds have inked well as investors have had a "flight to quality" in the markets. It has made these good quality bonds less attractive investments anticipating within my opinion. Bond prices move in the alternative direction of interest rates, and long-term (10 year) bonds are a whole lot more volatile (risky) to changes in interest rates (up and down) than short-term (1-2 year) bonds. Investors have sold riskier bonds in the recent credit market panic and rushed into US treasury bonds pushing these bond prices up, and pushing the interest rate (yields) on these bonds down to surprisingly low levels. Today 2 year treasury bonds are yielding just about 1.6%, and 10 year treasury bonds are yielding just about 3.5%. After taxes and inflation these "safe" bonds will likely result in negative real returns for investors (after adjusting for inflation). Would you genuinely wish to lock in negative real after-tax returns over another 2-10 years in your portfolio? I don't. Generally interest income on bonds is taxable as "ordinary income" at the bigger federal tax rates as much as 35% (US Treasury bonds aren't taxed at their state level). The after-tax return of a 10-year treasury bond is estimated at 3.5% * (1-.35) = 2.27% per year. In the event that you subtract the recent inflation rate of around 3% you obtain an estimated real after-tax return of -.7% per year. The real after-tax return on 2-year treasury bonds is approximately -1.9% (assuming 3% inflation). That is unlikely to satisfy many people's investment goals and retirement dreams. These "safe" investments in US treasury bonds that investors have rushed into in the last month or two don't really look so nice looking forward. Investors have bought them as a secure temporary hiding place since riskier bonds and stocks have all been declining in value recently. I believe cash/money market funds will likely provide better returns than US treasury bonds over another year, with less interest rate risk. I also think stocks will give you much better returns than US treasury bonds over another few years.
Inflation and Bonds
Rising inflation may be the #1 enemy of bond investments. Most bonds are "fixed" income investments offering the same dollar value of interest income every year (and they are not adjusted upwards for inflation). Rising inflation also has a tendency to result in higher interest rates, which in turn causes bond prices to decline (remember bond prices and interest rates move in opposite directions). There are many signs that inflation is increasing in the USA. The buying price of oil has shot as much as new record levels of $100+ per barrel in the last few months. Other commodity prices such as for instance wheat, corn, gold, and iron ore have spiked as well in the last year. The buying price of things such as for instance healthcare, college education, and food continue to boost as well. The "headline" consumer price index (cpi) has risen 4.3% in the last 12 months (as of January), but excluding oil and food it has been up 2.7%. The government's recent actions to cut short-term interest rates, increase the amount of money supply, and provide fiscal stimulus (rebates) to the economy typically lead to raised expected future inflation (and interest rates). The US dollar has weakened significantly in the last year relative to other currencies. A weaker US dollar is also inflationary as goods imported in to the US cost more in dollars.
Think about TIPS (US Treasury inflation protected bonds)?
If inflation is picking up shouldn't we buy TIPS? Inflation protected bonds have performed well recently as well because of the rush to the safety/liquidity of US treasury bonds of all types (regular and inflation-protected) and the increased concerns about rising inflation. This stampede has led to record low interest rates on TIPS as well, making them look less attractive. TIPS offer a certain annual (real) yield above the official inflation rate (cpi). This real or after-inflation yield is locked in when you buy, and at this time it is very small. On many TIPS bonds the interest rate has fallen to about zero (and some have amazingly dropped to slightly below zero), compared with their historical yields of around 2.0%. Negative interest rates on TIPS bonds never happened before. Lots of people believe that the inflation measure used by the federal government for TIPS bonds (cpi) understates the true inflation rate in the economy. If inflation is headed to 4%-5%+ TIPS will significantly outperform other kinds of bonds (which will probably incur losses). invest in bonds
The US economy and Treasury bond investments
If the economy falls in to a hard recession over another 6 months interest rates may go still lower, leading to gains in treasury bond prices from current levels. That (recession) may be the scenario that is necessary to create profit treasury bonds over another 6 months. The US economy happens to be very near or in a recession right now.Most investors often allocate a specific amount to "bonds" and then forget about them. Many genuinely believe that little ever happens in the bond market and a connection is just a bond. Investors often genuinely believe that a connection portfolio is normally pretty stable/safe and doesn't need as much time and attention and "analysis" since the stock portion of the portfolio. Besides, bonds are type of complicated and hard to determine for most investors. There has been some interesting and unprecedented things going on in the bond market in the last month or two that merit investor's full attention. This all started with the sub-prime mortgage meltdown and has quickly spread to many areas in the credit markets. Many bonds are currently unattractive as investments. It's a great time for investors to examine just how much of the portfolio they have specialized in bonds and what they own within their bond portfolios.
Three extremely unusual bond market facts recently:
1. 10-year Treasury bond yields are currently below the inflation rate (cpi). Very rare.
2. Some inflation protected bond yields have gone negative. Never happened before.
3. Tax-free municipal bond yields have also been above taxable Treasury bond yields.
US Treasury Bonds
Good quality bonds like US treasury bonds have inked well as investors have had a "flight to quality" in the markets. It has made these good quality bonds less attractive investments anticipating within my opinion. Bond prices move in the alternative direction of interest rates, and long-term (10 year) bonds are a whole lot more volatile (risky) to changes in interest rates (up and down) than short-term (1-2 year) bonds. Investors have sold riskier bonds in the recent credit market panic and rushed into US treasury bonds pushing these bond prices up, and pushing the interest rate (yields) on these bonds down to surprisingly low levels. Today 2 year treasury bonds are yielding just about 1.6%, and 10 year treasury bonds are yielding just about 3.5%. After taxes and inflation these "safe" bonds will likely result in negative real returns for investors (after adjusting for inflation). Would you genuinely wish to lock in negative real after-tax returns over another 2-10 years in your portfolio? I don't. Generally interest income on bonds is taxable as "ordinary income" at the bigger federal tax rates as much as 35% (US Treasury bonds aren't taxed at their state level). The after-tax return of a 10-year treasury bond is estimated at 3.5% * (1-.35) = 2.27% per year. In the event that you subtract the recent inflation rate of around 3% you obtain an estimated real after-tax return of -.7% per year. The real after-tax return on 2-year treasury bonds is approximately -1.9% (assuming 3% inflation). That is unlikely to satisfy many people's investment goals and retirement dreams. These "safe" investments in US treasury bonds that investors have rushed into in the last month or two don't really look so nice looking forward. Investors have bought them as a secure temporary hiding place since riskier bonds and stocks have all been declining in value recently. I believe cash/money market funds will likely provide better returns than US treasury bonds over another year, with less interest rate risk. I also think stocks will give you much better returns than US treasury bonds over another few years.
Inflation and Bonds
Rising inflation may be the #1 enemy of bond investments. Most bonds are "fixed" income investments offering the same dollar value of interest income every year (and they are not adjusted upwards for inflation). Rising inflation also has a tendency to result in higher interest rates, which in turn causes bond prices to decline (remember bond prices and interest rates move in opposite directions). There are many signs that inflation is increasing in the USA. The buying price of oil has shot as much as new record levels of $100+ per barrel in the last few months. Other commodity prices such as for instance wheat, corn, gold, and iron ore have spiked as well in the last year. The buying price of things such as for instance healthcare, college education, and food continue to boost as well. The "headline" consumer price index (cpi) has risen 4.3% in the last 12 months (as of January), but excluding oil and food it has been up 2.7%. The government's recent actions to cut short-term interest rates, increase the amount of money supply, and provide fiscal stimulus (rebates) to the economy typically lead to raised expected future inflation (and interest rates). The US dollar has weakened significantly in the last year relative to other currencies. A weaker US dollar is also inflationary as goods imported in to the US cost more in dollars.
Think about TIPS (US Treasury inflation protected bonds)?
If inflation is picking up shouldn't we buy TIPS? Inflation protected bonds have performed well recently as well because of the rush to the safety/liquidity of US treasury bonds of all types (regular and inflation-protected) and the increased concerns about rising inflation. This stampede has led to record low interest rates on TIPS as well, making them look less attractive. TIPS offer a certain annual (real) yield above the official inflation rate (cpi). This real or after-inflation yield is locked in when you buy, and at this time it is very small. On many TIPS bonds the interest rate has fallen to about zero (and some have amazingly dropped to slightly below zero), compared with their historical yields of around 2.0%. Negative interest rates on TIPS bonds never happened before. Lots of people believe that the inflation measure used by the federal government for TIPS bonds (cpi) understates the true inflation rate in the economy. If inflation is headed to 4%-5%+ TIPS will significantly outperform other kinds of bonds (which will probably incur losses).
The US economy and Treasury bond investments
If the economy falls in to a hard recession over another 6 months interest rates may go still lower, leading to gains in treasury bond prices from current levels. That (recession) may be the scenario that is necessary to create profit treasury bonds over another 6 months. The US economy happens to be very near or in a recession right now.
