Posts Tagged ‘Bonds’
Your Cue to Abandon Treasuries
By Evaldo Albuquerque, editor, Exotic FX Elite
How would you feel if Warren Buffet suddenly dumped all his U.S. stocks?
Buffet is arguably the best stock investor ever. So I know I would be concerned. I’m guessing you wouldn’t feel confident about your own stock portfolio either if “the Oracle of Omaha” completely eliminated his exposure to local stocks.
Of course Buffet isn’t doing that. But something just as drastic is happening in the fixed-income market.
Bill Gross, manager of the largest bond fund in world, has completely eliminated his exposure to U.S. Treasuries.
His fund now holds 0% of U.S. Treasuries.
I like to think of Gross as “the Warren Buffet of the fixed-income world.” His decisions are just as important. The fact that he doesn’t want to have any exposure to Uncle Sam’s bonds sends a critical message to the market.
And if you are searching for retirement income, his message is especially important to you…
“Don’t Be the Biggest Fool”
In 2007, investors were flipping houses for a quick profit. It didn’t matter if houses were grossly overvalued. As long as you could find someone willing to pay more, it made sense to invest in housing.
That’s a real life example of what’s called the “greater fool theory.”
According to this theory, an investor buys an overvalued asset because he hopes to sell it at a higher price to another investor, who’s planning to do the same.
That kind of selling from fool to fool can’t last. Eventually, rationality returns to the markets. Then, the last investor becomes the greatest fool who now owns an asset that’s about to plummet in value.
The same thing seems to be going on in the Treasury market right now. Who would lend money to the U.S. government for a decade for a mere 3.3% yield? Not many. Such low yields don’t compensate investors for the risk of inflation.
Inflation Steals a Treasury Bond’s Value
The chart above shows the tight correlation between bond yields and inflation.
When inflation rises, bond investors start demanding higher yields to compensate for the loss of purchasing power. If yields rise, any bonds you own today that pay lower yields will drop in value. It makes sense – everyone will want new bonds that pay higher yields.
In early 1980s, inflation forced yields as high as 15.8%. If we see a similar episode of inflation now, investors buying 10-year Treasuries today will suffer an estimated loss of about 61%.
By getting out of Treasuries now, Gross is making sure he won’t be the biggest fool.
The Message from the Bond King is Crystal Clear
The best fixed-income investor in history doesn’t want to touch U.S. Treasuries with a 10 foot pole. You couldn’t get a message clearer than that: stay away from them too.
You don’t have to be an investment genius to understand his reasons.
Unprecedented debt spending from the U.S. government and continuous money printing from the Fed are two very good reasons to stay away from U.S. Treasuries.
Those two factors will ensure the dollar’s long-term downtrend continues for the next decade (even if there are short-term bounces along the way).
But you don’t have to fall victim to the declining dollar and the loss of your purchasing power.
Where to Build Income for Your Retirement
From an investment perspective, Gross advice is to stay clear of “bonds in dollar denominated terms.”
So if Gross is selling Treasuries, where is he putting his money? Well, one of his favorite investments is bonds denominated in foreign currencies that pay higher yields. With those assets, you not only get a higher income, but you also diversify away from the dollar.
Personally, I prefer simply buying higher-yielding foreign currencies for the long-run. There are plenty of foreign currencies that pay much higher yields than Treasuries (yields as high as 22 times the lowest-paying Treasuries).
Also, holding foreign currencies helps protect your purchasing power – because these currencies are much more likely to rally against the dollar in the long-term.
Federal Reserve Chairman Ben Bernanke still believes inflation will be contained. Meanwhile the world’s best bond investor is dumping U.S. Treasuries and getting out of U.S. dollars.
Who would you rather believe: the man who’s debasing the dollar or the best fixed-income investor ever? I would listen to the Bond King if I were you.
Best Regards,
Evaldo Albuquerque
Editor, Exotic FX Alert
The Next Major Disaster Developing for Bond Holders
A must-read FREE report for investors in fixed-income markets like Treasury bonds, municipal bonds or high-yield bonds
By Elliott Wave International
Elliott wave analysis can warn you of trend changes when the rest of the investment public least expects a market reversal. With that in mind, we have created a new report for our free Club EWI members: “The Next Major Disaster Developing for Bond Holders.”
In this free report, you get some of the latest commentary on fixed-income markets adapted from various Elliott Wave International’s publications, including 2010 issues of Robert Prechter’s monthly Elliott Wave Theorist and its sister publication, The Elliott Wave Financial Forecast.
Enjoy this excerpt — and for details on how to read this important Club EWI report free, today, look below.
The Next Major Disaster Developing for Bond Holders
(excerpt)The Elliott Wave Theorist — October 2010
(By Robert Prechter, EWI president)…History shows that investors have been attracted like moths to a flame to four consecutive pyres: the NASDAQ in 2000, real estate in 2006, the blue chips in 2007 and commodities in 2008. Now they are flitting across the veranda to a mesmerizing blue flame: high yield bonds. Bonds pay high yields when the issuers are in deep trouble and cannot otherwise attract investment capital. The public is chasing a large return on capital without considering return of it. …
The Elliott Wave Financial Forecast — October 2010
(By Steve Hochberg and Pete Kendall)The rise in optimism since early 2009 has allowed corporations to issue the lowest grade debt at a record rate, even more than in the middle of the incredible expanding debt bubble of the mid-2000s. The annual total of $189.9 billion to date is a record, and the entire fourth quarter still lies ahead.
This is a stunning testimony to just how desperate investors are for the returns they grew so accustomed to during the old bull market. The Moody’s BAA-to-Treasury spread (see chart in the free report — Ed.) has been widening since [April] and has made a series of lower highs in August and again in September. This behavior reveals an emerging preference for perceived safer debt even as junk bond issuance races higher. It is a critical non-confirmation…
Read the rest of this important report online now, free! Here’s what else you’ll learn:
- How Investors Are Looking Past Red Flags in Muni Market
- What You Should Know About Today’s “High-Grade” Bonds
- The Answer To Bond Selection
- MORE
This article was syndicated by Elliott Wave International and was originally published under the headline The Next Major Disaster Developing for Bond Holders. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.
Advance warning: Danger of bond market collapse!
 |
If you think 2010 is going to bring investors a carefree, nonstop ride to glory, think again!
Profit opportunities abound, and we intend to be among the first to lead you to them.
But we’re also here to give you advance warnings of threats that can sneak up from behind and catch you by surprise.
Case in point: The danger that Treasury bonds will fall sharply in price, drive up long-term interest rates and ultimately threaten the U.S. recovery.
This is an advance warning because long-term interest rates are still very low. Even if they rise from here, their impact on the economy may not be felt right away.
But if you hold medium- or long-term bonds, you need to get out NOW — before you suffer further damage.
 |
Using nearest futures contracts as the metric, the price of a 10-year Treasury note tumbled from a high of 130.09 on December 18, 2008, to a low of 114.98 on June 18, 2009.
It then spent most of the year’s second half trying to recover from that debacle.
But just in the last few days of December, while most traders were away or asleep, a renewed plunge in Treasury-note prices erased nearly all the gains since June … threatening new lows, paving the way for a new plunge in prices, and driving a new surge in 10-year yields.
The price decline in 30-year Treasury-bond prices has been even more dramatic: An historic 27-point plunge from 142.62 on December 19, 2008, to 115.67 on June 18, 2009 … followed by a feeble recovery … and now, as with Treasury notes, a new, ominous price decline and surge in yields.
The impact on consumers is unmistakable:
Even while Washington seeks to flood mortgage markets with easy money, 30-year fixed-rate mortgage rates are moving sharply higher. And even as the Fed does everything in its power to get Americans to spend, U.S. banks are tightening their credit standards and slapping on new fees.
The causes of the bond market troubles are equally obvious:
We have …
- The biggest and most permanent federal budget deficits in our country’s history — $1.4 trillion of red ink in fiscal 2009 and AT LEAST another $7 trillion in deficits over the next decade.
- The biggest government borrowing binge of all time. Just in the last week of the year, the Treasury Department borrowed $44 billion with the sale of 2-year notes, $42 billion with 5-year notes and $32 billion in 7-year notes, for a total of $118 billion — a new record. Expect more of the same throughout 2010.
- The most inflationary monetary policy of all time, including a sudden, record-smashing DOUBLING of the nation’s monetary base in 2009.
And most ominous of all …
A Government Gone Wild!
This is not a matter of personal opinion or political philosophy. Regardless of your particular persuasion, you cannot deny the folly of Washington’s escapades …
- The U.S. Federal Reserve has tossed its traditional rulebook in the trashcan. It has opened its credit window to brokerage firms, guaranteed trillions of junk credit of the private sector and bought up over a trillion in junk mortgages.
- The U.S. Treasury has bailed out the nation’s largest and most outrageous risk-takers — not only institutions like Fannie Mae, Freddie Mac, Citigroup, Bank of America, AIG, and GM … but, indirectly, also high-rollers like Goldman Sachs and JPMorgan Chase.
- And now, adding madness to insanity, the U.S. government is opening the gauntlet to even more of the same:
On Christmas Eve, the Treasury Department announced it will remove the limits on any and all aid to Fannie Mae and Freddie Mac for the next three years.
The intended consequence was to allay investor concerns that these two mortgage giants will exhaust the available government bailout funds.
Treasury officials know that an estimated 3.9 MILLION U.S. homes went into foreclosure last year … and, they know that they can expect more of the same in 2010. So they’re literally pulling all stops to funnel funds into this market.
But the unintended consequences are potentially greater concerns:
- An even deeper hole in the federal budget,
- An even larger avalanche of Treasury borrowings,
- Still lower bond prices, and, inevitably,
- Far higher long-term interest rates.
Most Financial Institutions Highly Exposed
If America’s financial institutions were prepared for higher interest rates, this might not be quite as serious. But as I demonstrated two weeks ago, nothing could be further from the facts. (See “Three Government Reports Reveal New Looming Risk.”)
Specifically …
- The Federal Deposit Insurance Corporation (FDIC) reports that many more banks are now taking on higher levels of interest-rate risk, leaving them overly exposed to rate rises at precisely the wrong time. They’re stuffing their portfolios with long-term mortgages, which invariably fall in value when interest rates rise. And they’re relying too heavily on short-term financing, which will inevitably be more expensive when rates rise.
- The U.S. Comptroller of the Currency (OCC) reports that America’s largest banks now hold $172.5 TRILLION in derivatives that are directly linked to interest rates, the most of all time. That’s over THIRTEEN times the amount they hold in credit derivatives — a primary cause of the 2008-2009 debt crisis.
- And the Federal Reserve reports that banks aren’t the only ones vulnerable to higher interest rates. Also exposed are credit unions, life and health insurance companies, plus property and casualty insurers.
Bottom line: Don’t march into 2010 as if the word “risk” had been stricken from investment lexicon like four-letter words in a grammar school dictionary.
It hasn’t been; it’s still there. And it mandates continuing caution — to buy excellent values … with strong fundamentals … prudent risk management … and plenty of cash in reserve.
Good luck and God bless!
Chinese Bond Sale Tests Global Demand
By Chris Nicholson
New York Times
China started selling yuan-denominated sovereign bonds in Hong Kong for the first time on Monday, testing international demand for its currency with the $879 million issue as it moves to widen the yuan’s exposure and appeal to markets abroad.
Bank of China and Bank of Communications, the two lenders managing the 6 billion yuan sale, said in news releases on Monday that the two-year bonds would have a yield of 2.25 percent, and the three-year bonds would yield 2.7 percent – higher rates than those offered to investors on the mainland.
Although no information was immediately available about how well the bonds were selling, analysts expected retail investors in Hong Kong would be interested in them.
The bonds are open to subscription until Oct. 20.
Zhi Ming Zhang, a currency analyst at HSBC in Hong Kong, cited investors’ “bullish feelings on the yuan,” even if officials in Beijing are not expected to allow the currency to appreciate until exports recover.
The Chinese yuan, also known as the renminbi, does not float freely against other currencies, but has its exchange rate set by the Chinese authorities.
U.S. officials have long called for a freer float for the yuan, since keeping it low gives Chinese exports an advantage against goods denominated in other currencies.
But the debt sale also faces hurdles. It is limited to investors who have renminbi accounts in Hong Kong banks, which curtails potential demand.
Hong Kong, the former British colony that has been a special administrative region of China since 1997, has its own currency, the Hong Kong dollar, which is pegged to its U.S. counterpart.
And Hong Kong investors, wary after a scandal involving Lehman Brothers bonds last year, are more conscious of risks and have been subscribing to bond issues more slowly than they used to, Mr. Zhi said.
The sovereign bonds are unsecured, and are “backed by the full faith and credit of the Central People’s Government of the People’s Republic of China,” according to the bank news releases Monday.
China’s National Day, the mainland equivalent of the Fourth of July in the United States, will be celebrated Thursday, and the timing of the sale may be an attempt to capitalize on patriotic sentiment among local investors.
The higher yields in Hong Kong – compared to mainland yields of 1.82 percent on two-year bonds, and 2.31 percent for three-years – should also help shore up demand.
In July, China made three government bond sales, and fell short of its targets each time.
At the ceremony kicking off the bond sale, Vice Finance Minister Li Yong said he believed “the yuan bond market will continue to develop and it will develop very quickly.”
Still, Mr. Zhi said he did not expect Beijing to make any further moves to introduce yuan-denominated bonds internationally after the sale, whose results will be announced Oct. 22.
China has been taking steps to promote the yuan in international markets this year, as the U.S. dollar has weakened and Beijing’s foreign currency reserves have slid in value.
SOURCE: http://www.nytimes.com/2009/09/29/business/global/29yuan.html?ref=global
