29. January 2010 by Dan Walkow, CFA, CMT.

Following on China’s lead the Central Bank of India is tigthening monetary policy and has indicated that there is more to come. As the old adage goes ” Don’t fight the FED”, of China and India that is.

Tighthing monetary policies such as raising bank reserve requirements and raising interest rates are tools Central banks use to slow down the economy and arrest inflationary pressures. Tends not to bode well for both equity and bond markets.

See the story here.

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8. January 2010 by Dan Walkow, CFA, CMT.

The following is an excerpt from an article in the Globe & Mail: 

With central bank interest rates sitting near zero they only have one direction to go, and it’s just a matter of when. As rates rise, bond prices fall. Historically, however, corporate bonds offer more protection against rate hikes than government bonds. In 1994, for example, as rates shot up after the recession, the returns on government and corporate bonds in aggregate was a negative 4 per cent. Corporate bonds themselves declined only 3 per cent and short-term corporate debt remained mostly stable, he says. There are several options for getting into the corporate bond market. Individuals can buy bonds directly through a discount trading firm and hold them for their interest payments or try to sell them for capital gains. This approach lets an investor cherry pick individual bonds for their yields and performance. But there are shortfalls to this method, largely because bonds are bought and sold by traders in what is essentially an over-the-counter market. It’s a forum that lacks transparency and liquidity for the retail investor, who won’t get the same price as a large institutional buyer or seller. “It’s all about flow,” says Mr. Palombi. “If you’re not in the flow, you can’t execute your strategy.” It’s also very difficult for an individual investor to build a diverse portfolio of bonds because there are more characteristics to consider than there are for a stock. In addition to industry sector, spreads and credit, investors must weigh the different characteristics of the many bonds a company may issue. There are so many variables, in fact, that it can be difficult for an individual bondholder to understand why any single bond may suddenly lose money, he warns.  Read the full Globe & Mail article here.

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24. November 2009 by Dan Walkow, CFA, CMT.

 The US Treasury sold $44 billion of two-year notes at a yield of 0.802 percent, the lowest on record, as demand for the safety of U.S. government securities surges going into year-end.Investors are piling into short-term Treasuries on concern that this year’s rally in risk assets has outpaced growth prospects and as Federal Reserve officials signaled interest rates will remain near zero for an extended period. Rates on some Treasury bills turned negative last week for the first time since last December, when global credit markets froze.

How low can we go? By the time the investment dealers take a markup on T-Bills the interest rate to a retail investor is next to nothing. This is nothing new but furthers emphasizes the point on the previous post that when interest rates turn upward there is going to be pain in bond-land. Read more here.

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23. November 2009 by Dan Walkow, CFA, CMT.

Deficit-ridden governments around the world, led by the United States, require massive amounts of funding and they raise money by selling bonds. In particular there is a movement afoot to reduce reliance on selling short term investments like Treasury Bills and increase long term funding like 30 year bonds. It is like locking in your mortgage payments  at low interest rates for 30 years as opposed to having a floating rate mortgage.

This is a smart move at this juncture in the economic cycle, for governments, corporations and individuals alike. There is a very strong possibility we are at generational lows in interest rates and the competition for long term funding will ensure that the direction of interest rates will be up, perhaps dramatically so.

The interest  rate stage is set and investors who hold bond mutual funds, annuities and longer dated bond maturities could feel the wrath of the coming interest rate tsunami in a very significant way. Buyer beware!

For more read this embedded story by the New York Times on how the massive funding needs by the United States is going to change the interest rate landscape, good for long term borrowers not good for investors. Read the story here.

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11. November 2009 by Dan Walkow, CFA, CMT.

The municipal bond market’s message to California: Enough with the borrowing already!

Over the last seven weeks the state has sold more than $21 billion of short- and long-term debt for budget-related reasons and to finance voter-approved infrastructure projects.

That flood — in a period when muni bond yields nationwide already were rebounding after diving in summer — has helped to boost yields more than they might otherwise have risen, some analysts assert. More here at the LA TIMES.

The most recent muni bond offering this past Tuesday by California was priced to pay 4%  for a 4 year maturity, up from the prior offering a few weeks ago of  2.48%.

Not bad for a tax free investment. Worth a look!

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8. August 2009 by Dan Walkow, CFA, CMT.

US Treasury Bonds lost 5.5 percent this year and are on a pace to post an annual loss for only the third time since Merrill Lynch started calculating returns. The index rose 14 percent last year as the global economy lapsed into the worst recession since World War II.

Yields on 10-year debt touched the highest level in almost two months after a report yesterday showed American employers eliminated fewer jobs than forecast in July and a gauge of manufacturing climbed to an 11-month high. The Treasury announced plans to auction a record $75 billion of notes and bonds next week and signaled that issuance of inflation-linked debt would rise in 2010.

Adminstered interest rates will be kept low by monetary authorities, for fear of knee-capping the economic recovery but the market determines longer term interest rates and trend for long term interest rates is up.

Long term mortgages and loans at interest rates of 3-4% will look like bargins of a generation not that many years from now.

See more on Bloomberg.

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31. July 2009 by Dan Walkow, CFA, CMT.

It would appear China is backing off buying US treasury bonds. China is the largest creditor to the US and, regardless of the rhetoric, have been concerned with the US dollar devaluation. They have been calling for a international reserve currency, this lack of buying at the bond auction is another signal that they are taking action. This from the WSJ today:

Shaky auctions of Treasury notes this week reignited concerns about whether the government can attract buyers from China and elsewhere to soak up trillions in new debt.

A fuse was lit this week when traders noted China’s apparent absence from direct participation in two Treasury bond auctions. While China may have bought Treasurys just before the auctions, market participants read the country’s actions as a worrying sign that China and other foreign investors may be ratcheting back purchases at a time when the U.S. is seeking to fund a $1.8 trillion budget deficit.

This week alone, the U.S. deluged the bond market with more than $200 billion in record-size sales. The U.S. has had little trouble finding buyers in recent months. But that demand is fading, and the Treasury market has become volatile. Many are selling in favor of riskier assets such as corporate bonds, stocks or even higher-yielding debt of other countries. This portends higher interest rates for the Treasury, and it may need to find alternative sources of cash like issuing more inflation protected Treasury bonds.

Tension on Wall Street trading desks began building late last week when the Treasury surprised the market with plans for a record week of sales. A Monday sale of $90 billion in Treasury bills with maturities of as much as a year went well. But China appeared absent from the following two sales, which totaled $81 billion of debt, traders say. Read more here.

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3. June 2009 by Dan Walkow, CFA, CMT.

 Pimco Bond Czar in the June Letter—The current annual deficit of $1.5 trillion does not even address the “pig in the python,” baby boomer, demographic squeeze on resources that looms straight ahead. Private think tanks such as The Blackstone Group and even studies by government agencies, such as the Congressional Budget Office, promise that Federal spending for Social Security, Medicare, and Medicaid will collectively increase by 6% of GDP over the next 20 years, leading to even larger deficits unless taxes are increased proportionately. Collectively these three programs represent an approximate $40 trillion liability that will have to be paid. If not, you can add that present value figure to the current $10 trillion deficit and reach a 300% of GDP figure – a number that resembles Latin American economies such as Argentina and Brazil over the past century.

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19. May 2009 by Dan Walkow, CFA, CMT.

By insisting on bailing out bank bondholders to the tune of 100 cents on the dollar, John Hussman says, the government has crowded out $1 trillion of private investment and almost guaranteed double-digit future inflation.

Read the whole story>

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