U.S. Treasuries are watched by all market participants, because the U.S. Treasury market is the largest bond market in the world. Therefore, U.S. Treasuries are the benchmark by which other bond markets in the world trade by.
The U.S. Treasury department issues debt obligations. These range in various lengths, from very short-term to very long-term. Debt that has an obligation of less than one year is called a “bill.” Debt obligations from one to 10 years are called “notes” and debt obligations that are longer than 10 years are called “bonds.” The 10-year Treasury note is important, as many other interest-bearing securities are priced off this heavily traded security. Since many investors around the world watch the rates of the 10-year Treasury for signs of economic strength or weakness, it is vital for all investors to be aware of the interest rate environment.
When it comes to long-term investing, one factor that needs to be considered is that the dividend yield can provide a large portion of the total return. While everyone likes to pick the highflier that will move up a tremendous amount, the truth is that having a portfolio of stocks that continually increase their dividend yield can help increase total returns of a portfolio.
It is expected that for 2013, S&P 500 companies will pay out at least $300 billion in dividends. This is an even higher amount than the $282 billion paid in dividends for 2012. (Source: Demos, T., Russolillo, S., and Jarzemsky, M., “Firms send record cash back to investors,” Wall Street Journal, March 7, 2013.)
Long-term investing that incorporates companies issuing a stable and increasing dividend yield over time can help mitigate the gyrations of the market.
Not only are corporations flush with cash and looking to pay an attractive dividend yield as compared to U.S. Treasuries, but companies are also buying back record levels of shares.
According to Birinyi Associates Inc., in February, corporations announced a total of $117.8 billion in share buybacks, the highest monthly total since 1985.
Generally speaking, both share buybacks and issuing a dividend yield are positive for long-term investing. However, I do worry that companies are buying back shares at levels that are elevated.
I think it would be far more beneficial for long-term investing if corporations had a flexible approach regarding paying back cash. Meaning, when the stock price declines, corporations should then accelerate share buybacks, and when their share prices are up significantly, corporations should increase their dividend yields…. Read More
One area that worries me most about the current Federal Reserve monetary policy action is the unintended, long-term consequences of the current program. Unintended consequences are the side effects that can sometimes be more harmful in the long run than the short-term benefit of the initial program.
Keeping monetary policy extremely easy in such an unprecedented manner for so long can have serious long-term ramifications.
The most obvious side effect is that, with the greater availability of easy money, funds are flowing into assets, driving up prices. The question is: will investors who are spending money on assets fueled by cheap money end up suffering significant losses down the road?
I am glad to see that some members of the Federal Reserve are beginning to voice their concerns regarding monetary policy. Recently, the Kansas City Federal Reserve President, Esther George, stated, “We must not ignore the possibility that the low-interest rate policy may be creating incentives that lead to future financial imbalances.” (Source: Torres, C., “Fed Concerned About Overheated Markets Amid Record Bond Buys,” Bloomberg, January 17, 2013.)
One potential worry is that the low interest rate environment resulting from this monetary policy action is causing investors to search for yield in increasingly riskier assets.
One area that has seen a strong increase in demand is speculative-grade bonds, or junk bonds. According to Credit Suisse, an index of over 1,500 junk bonds is now yielding a record-low 5.9%. (Source: Ibid.)
The problem is that when the Federal Reserve begins to tighten monetary policy, many if not all of the investments made over the past couple of years might suffer significant … Read More
There is no question that the bond market has changed radically since the financial crisis hit in 2008. The Federal Reserve has since embarked on a campaign to buy U.S. Treasuries at a rate that is unprecedented.
Here is a statistic that illustrates the radical shift that has taken place in the bond market in 2008: In 2006, foreigners bought 82% of all U.S. Treasuries issued. Today, foreigners buy a total of 26% of all U.S. Treasuries issued, with the Federal Reserve absorbing what the market is not buying (source: MacroMavens).
Undeniably, fund and hedge fund managers are shifting money into U.S. Treasuries to protect themselves from the crisis in Europe, which is certainly fuelling demand for U.S. Treasuries in the bond market.
However, foreign central banks are the real big purchasers of most of the U.S. Treasuries issued. Before the financial crisis hit, foreign central banks bought U.S. Treasuries on a consistent basis in the bond market. Since the financial crisis hit, central banks have had to put out their own fires at home.
China was the largest purchaser of U.S. Treasuries, but the country now has a slowing economy it needs to deal with. Reports of empty cities and companies saddled with the debt from those empty cities, which are not producing any revenue, illustrate how China needs the money to handle its own problems at home.
China has also made clear its intention of owning hard assets over any other currency. China has become a huge buyer of oil and gold in recent years.
Japan was the second largest buyer of U.S. Treasuries before the financial crisis … Read More
The economic data continue to come in much weaker than central bankers have been hoping for around the world. With the financial crisis in Europe continuing to unfold, and now China slowing down substantially, all of this is putting pressure on the U.S. economy as well. We are seeing a slowing across the board, and this has investors looking for safety and yield. Safety is coming in the form of U.S. Treasuries. However, investors seeking income need to look further than U.S. Treasuries and so are turning to dividend yield. This has pushed prices of dividend paying stocks up, and conversely, the dividend yield has come down.
The distortion that U.S. Treasuries are making with a yield of approximately 1.6% is profound. Income seekers can no longer hold U.S. Treasuries with any expectation of a positive return over the next 10 years. When taking into account any level of inflation, U.S. Treasuries look like a bad investment for the next decade. While many aren’t placing funds in U.S. Treasuries for its yield but for safety, this leaves the income-seeking investor in a difficult position. They are now forced to look for stocks with a dividend yield to provide income.
One sector many investors overlook is preferred shares. Preferred shares offer a higher dividend yield than common shares. Because they don’t trade as often, many investors aren’t aware of them. One easy way to get a diversified portfolio is through an exchange-traded fund (ETF) like the iShares S&P U.S. Preferred Stock Index Fund (NYSE/PFF).
This ETF has over 250 holdings of preferred shares with an attractive dividend yield. With one share, … Read More