U.S. bonds are watched by all market participants, because the U.S. bond market is the largest bond market in the world. Therefore, U.S. bonds are the benchmark by which other bond markets in the world trade.
The U.S. Treasury department issues debt obligations, including long-term bonds. U.S. bonds range in length, from very short-term to very long-term. The government issues U.S. bonds for current spending needs, with the intention to pay back the total plus interest over the life of the debt instrument. U.S. bonds are quite important as many other interest-bearing securities are priced off this heavily traded security. Since many investors around the world watch the rates of U.S. bonds for signs of economic strength or weakness, it is important for all investors to be aware of the interest rate environment.
Since the beginning of the Great Recession, we’ve all been waiting for economic growth in the global economy to begin expanding once again. While it has yet to materialize, not all economies are performing at the same rate, and there are ways to maximize your investments.
Recently, the International Monetary Fund (IMF) reduced its forecast for the level of economic growth for the global economy. The IMF now projects economic growth for the global economy of 3.1% in 2013 and 3.8% in 2014. (Source: “Emerging Market Slowdown Adds to Global Economic Pains,” International Monetary Fund web site, July 9, 2013.)
As I’ve stated in these pages many times, the eurozone remains a significant problem in the global economy, as does a slowing level of economic growth in China. Both of these economic regions represent a huge portion of the global economy, and the inability for either one to reaccelerate its economic growth level is worrisome.
And the slowing economic growth problem is being compounded by increasing interest rates. One interesting twist regarding the higher interest rates in the U.S. over the past few weeks has been that they have now become attractive to international investors. The result is that investors are now selling emerging market bonds and buying U.S. bonds.
That has led to some nations experiencing higher yields, causing problems with their financing costs. Over the past week, we’ve seen yields rise in many nations, including Portugal and Spain.
With many parts of the global economy struggling to grow, having higher interest rates certainly isn’t a recipe for an increase in economic growth.
While the U.S. isn’t generating exceptionally … Read More
According to the minutes from the Federal Reserve meeting on December 11–12, it now appears highly likely that the aggressive quantitative easing policy might end sooner than most people had expected. This is a shock to many market participants who had expected an extended period of time under the current quantitative easing policy by the Federal Reserve.
The minutes of the Federal Reserve meeting show that several members stated they believe that the current quantitative easing policy will end, “well before the end of 2013.” Other Federal Reserve members expressed their opinion that this quantitative easing policy will need to be completed by the end of 2013. Many market participants expected this current quantitative easing policy to last well into 2014, perhaps even into 2015. (Source: “Minutes of the Federal Open Market Committee,” Federal Reserve, January 4, 2013.)
The reason this statement is so important is that multiple Federal Reserve members voiced concerns and were of the opinion that the current quantitative easing policy needs to be reduced or completed sooner rather than later. While there was one Federal Reserve member who stated at a meeting before that no further bond purchases are needed, one voice is not enough to alter the opinion of an entire committee. But now, there are many Federal Reserve voices raising concerns.
Because this is the first real evidence that a large number of Federal Reserve committee members are voicing the opinion that the current quantitative easing policy will need to end relatively soon, one must take note. This is a pivotal point for potential change in monetary policy.
With this in mind, if the … Read More
One of the biggest investor mistakes by the average retail investor is to be late to cash in on an investment theme. These investor mistakes are not limited to just the stock market, but all types of investments. If we look at investor mistakes by the retail public for buying real estate, most people were bullish at the top of the market and were selling, or were forced to sell, their real estate at the bottom. Buying high and selling low is one of the most common investor mistakes by the majority of the public.
Since 2008, the biggest trend for the average investor has been to get out of stocks and to park money in U.S. bonds. EPFR Global, a provider of data, reports that since 2008, equity funds have had a net redemption of $467 billion, compared to bond funds that have seen an influx of $1.1 trillion. (Source: “Desperately Seeking Yield,” The Economist, November 10, 2012, last accessed January 2, 2013.)
According to Morningstar, money flowing into bond mutual funds accelerated in 2012, with 26% of household investments in U.S. bonds up from 14% in 2008. This was during a year in which the S&P 500 was up a solid 13%, now up over 111% since the low in March 2009. Meanwhile, 10-year U.S. bonds are currently offering a negative yield after inflation, meaning people are willing to lose money over 10 years because they are so scared of the market. (Source: “Bond Craze Could Run Its Course in New Year,” New York Times, December 31, 2012.)
This type of thinking is one of the most common … Read More