Archive for the ‘Bonds’ Category

Bond Bubble Bursting?

Thursday, December 23rd, 2010

We’ve been quite early–not necessarily relative to others, but certainly relative to the timing–on our thinking that bonds were a bubble waiting to burst.  We thought that the first time a bond fund investor sees a minus sign next to bond fund, it’s “see ya.”  With money market yields close to you-pay-us, we’ve thought that a likely place to go to is stocks, what with their ample dividend yields and decent, recent performance.

They just hit the sell button.  (This chart goes back to the beginning of 2009.)

Where they go with proceeds is anyone’s guess, but it’s pretty tough to meet retirement goals with modest interest rates and falling bond prices.


Markets setting up for hopes dashed

Monday, August 9th, 2010

If you haven’t heard by now, last Friday’s jobs report on U.S. Nonfarm Payrolls didn’t go over so well.  Naturally, the President saw hope in a portion of the release, but it took some seriously rose-colored glasses.

Here’s a quick recap:

  • Economists expected a drop of (-)65,000 jobs, because those sharp folks knew that census workers would begin to be furloughed/downsized/fired/canned, but they evidently expected a pick-up in private payrolls to offset that drop.
  • Instead, payrolls fell by (-)131,000.  What’s more, the June figure was revised downward, from an initial release of 125,000 jobs lost to 221,000 jobs lost.
  • The Private Payrolls increase, which seemed to be sparked by an optimistic ADP’s Employment Change report of Wednesday, which only reports on private payrolls, was 71,000 instead of the hoped-for 90,000.
  • The Unemployment Rate stayed at 9.5% instead of increasing to 9.6%.  The unemployment rate always goes up after a recession as the labor pool swells up as more job seekers re-enter the labor force.
  • On the positive side of the ledger, Average Hourly Earnings grew by 0.2%, far better than the drop of (-)0.1% in June, and the President found hope in the increase in Manufacturing Payrolls.  They rose by 36,000, 4x the June number and far more than the hoped for 13,000.

So how does one explain the market’s performance, shown below?  The market dropped shortly after the opening, and the opening nonsense is often reversed, but there was very little positive to be found in this most important of economic reports.  Indeed, at this point in the game, it is the most important report, bar none, whatever that means.

According to a couple of sources, it was rumored that the Federal Open Markets Committee; i.e. the Fed, which is to meet tomorrow, is prepared to announce another round of monetary policy measures meant to stimulate the economy.  So far, traditional monetary policy has amounted to pushing on a string, so the market is hoping for another round of Quantitative Easing–QE to the informed.  For those of you worried about the government printing money that’s what QE is.  In this case, they wouldn’t exactly be printing money, just reinvesting principal-paydown proceeds from Mortgage Backed Securities (MBS) into . . . Treasuries or more MBS.

According to some of those same sources, those hopes are likely to be dashed.  As we like to say–and like most things, it’s not original to us–hope is not an investment strategy.  It is, however, a decent speculation strategy, so long as you can sell the idea (and your securities) to a greater fool.

If the Fed does not announce new measures, the market tanks.


Yet another magazine cover

Tuesday, June 29th, 2010

Since as early as mid-2008 we’ve been talking about problems with municipality finances.  Our concerns stemmed from the effect of the recession on tax receipts, and that was compounded by what are now common stories about public pension problems.

Our concerns arose from a couple of items that the Williams Inference Service folks raised.  Here’s a recap.

Fourth quarter of 2005 – file titled, “Local Debt” – featured rising local taxes and efforts to cap them.  Finished with excerpt from Money Chronicles

“[b]ut the really serious local debt crisis nobody is talking about yet is . . . local government debt . . . Take the states.  Out of 50, 43 of them are close to bankruptcy.” 

Alarmist? sure, but it caught one’s attention.

Fourth quarter  of 2008 – file titled, “Main Street” – talked about the pension issue (“perhaps the bigggest time bomb of all is something that remains a secret . . . “), declining sales tax revenues (“And states, unlike households and business, have few reserves set aside for a rainy day.”)

First quarter of 2009 – file titled, “Firemen’s Pensions”

“Thee Federal government is focused on the bailout package . . . This leaves pension obligations as an afterthought.  This ticking time bomb will have repercussions far into the next decade.”

Between and since these events stories about municipality troubles have begun migrating from page 16 to page 1, the point at which the problems should be widely discounted and the end of the trend may be near.  Well, you can’t get more page 1 than a TIME magazine cover story like this one.

Meanwhile, our Strategas service recently pointed out several datapoints that are bullish for municipal finance in a report titled, “STATE(S) OF CONFUSION: DISPELLING THE MYTHS ABOUT STATE & LOCAL GOVERNMENT FINANCES.”

An ideal situation would have been for municipal bond yields to have risen over this period.  Then we could look for a peak and an opportunity to back up the truck, as they say, and buy muni bonds.  In fact, yields have largely declined over this period, as can be seen below.  Also on display is the breakout through the downtrend in yields, so yields are on the rise.

While rising yields aren’t evidencing the increased fear/awareness, what might be is the way municipal bonds have lagged the rally in Treasuries.  If the fears are at a peak it might suggest that munis have some catching up to do.  Even without the ultra-low yield on display in Treasuries, it makes sense to sell Treasuries and buy munis.

Make no mistake:  there will be trouble with municipalities.  They’ll include communities affected by the oil spill and those in trouble with pensions.  You’ll read stories like this one:

Tough times: The city of Maywood, California, is laying off all city employees and hiring contractors for police work and all other essential business, the Los Angeles Times reports. Having been bankrupted by financial incompetence, the City Council decided to fire all 100 city workers. It will contract police services from the LA County Sheriff’s Department and get street maintenance, finance, and administrative services from a neighboring city.  Full story here.

These anecdotes, however, shouldn’t be used to paint an entire asset class, and, indeed, with the press featuring such a story on the front page, it suggests the fever pitch should be approaching an endWe would use any yield spikes as an opportunity to buy solid municipal bonds.


Even Paranoids Have Enemies

Wednesday, September 30th, 2009

Most folks welcomed the arrival of the Treasury Department’s inflation-linked securities, known as Treasury Inflation Protected Securities, or TIPS.  For the grammatically-anal among you–card-carrying member, myself–you buy TIPS and you buy aTIPS; it’s not plural or singular, just what they are.  You can click on over to TreasuryDirect, via this link, to see learn how TIPS work (using it as a plural sounds so much better, sort of like a futures contract does).

Some Trilateral Commission/conspiracy types, however, were skeptical since it left the fox guarding the hen house.  The principal amount of a TIPS is adjusted each month for the change in [__]flation–”in” or “de,” and the interest payment goes up or down, accordingly.  The Consumer Price Index for all items–doesn’t exclude energy and food prices–is used for the inflation adjustment.  So Uncle Sam calculates the factor that determines the interest payment and the maturity value of the security, and it’s on the hook for the potential increase.  Suffice it to say, for the cynic there’s plenty of reason for the government to prefer deflation as it relates to TIPS.

Never happen, right?  ‘Government’s wouldn’t do that, would they.

You’ll have to decide that for yourself, but the following might help. 



Municipal bonds a little too attractive?

Thursday, August 20th, 2009

Here’s a page 16 story that might be working it’s way to the front.

It’s a wonder that municipal bonds are still largely tax free.  Some states tax residents for income generated on other states’ bonds, while others further attempt to funnel funds by only exempting home-state bonds from state tax if they’re from certain types of municipalities.  Still, the big tax savings comes from the bonds being exempt from taxes at the Federal level.

Bloomberg featured a story (below) on a CBO proposal to capture some tax revenues that might be had were the bonds taxable.  Here would be the results: (more…)