26. March 2010 by Dan Walkow, CFA, CMT.

The great bull market in bonds, read the decline in interest rates is over. It has been a fantastic cycle since 1981 for bondholders and mortgage holders for almost a full generation. Interest rates always went down and until recently stayed down. Its over.

The massive monetary stimulation by governments the world over now has to be financed and given massive amount of financing required the price of money (interest rates) is on the rise; its only the beginning.

Last year’s meltdown and subsequent “monetary rescue” by central banks is a game changer and has signifigant ramifications for investing and borrowing alike.

For investors this means bond prices will be under pressure and capital appreciation of fixed income investments will be limited at best and pose signifigant downside risk over the next several years.

For borrowers such as mortgage holders the risk of increasing mortgage rates is almost a certainty, in my opinion, time to lock in that floating rate or at the very least refinance using one of those split mortgages where you can fix a portion and let the balance float. If you do not you will face higher mortgage costs in a few years perhaps as much as double.

We have and continue to position client portfolios with a rising interest rate environment in mind, you should too!

Read what Bill Gross at Pimco, perhaps the worlds largest and most successful bond investor has to say here.

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

China has rattled financial markets by moving faster than expected to tighten its grip on liquidity as a strong recovery and rising asset prices threaten to cause overheating in the world’s third-largest economy.

Societe Generale said in a research note in the wake of Tuesday’s auction that the central bank’s wording of “flexible and targetted” was currently still tightening.

“The hike in the reserve requirement and the draining of liquidity while in fashion with the notion of flexibility and targetting, cannot be dismissed as anything other than tightening no matter how minor at this stage,” SG said.

China is leading again, this time putting the brakes on by raising interest rates and tightening bank reserve requirements to arrest runaway stock market and real estate speculation. Will the rest of the world follow?

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

The recent Boeckh Investment Newsletter pens my concerns in much more elegant prose than I can. Well written it lays out some history and where we are now.

Read it here at the Pragmatic Capitalist.

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

The question facing investors which will have the most impact over the next several years is whether deflation or inflation will prevail. Neils Jensen of  Absolute Return Partners LLP lays out the deflationary view.

 As investors we are faced with the consequences of our decisions every

Are we facing a deflationary spiral1 or will the monetary and fiscalstimulus ultimately create (hyper) inflation?

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

Charts courtesy of dshort.com (Click to Enlarge)

As a result of very high inflation numbers emanating from the 1970’s governments were faced with a very big problem. Union settlements forced adjustments to include a “COLA” adjustment to pensions and benefits and tax brackets. This beget a significant increase in employer and government liabilities as they had to “pay up” every year to account for inflation.

Not good. How do you fix the problem? Why you change the way the inflation index is calculated introducing something called “hedonistic delflators”. The Consumer Price Index has been fiddled twice over the last 20 years.

Headline inflation is about zero as reported in recent days according to current day calculations.

What would the rate be if they left the CPI calculation alone? Click the chart above to find out.

 You will not be surprised, but if you are a senior with indexed benefits, you are not going to be happy!

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

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