Archive for the ‘Bonds’ Category

More Austerity for Europe

Monday, November 1st, 2010

Following similar measures in Greece and Iceland, Portugal’s leadership has approved its largest spending cuts since the 1970s. Economists have comented that it will likely “hurt growth” of the country’s economy, which hasn’t been a growth powerhouse to begin with:

The spending cuts, the biggest since the 1970s, may hurt Portugal’s economic growth, which has averaged less than 1 percent a year in the past decade. That trails the 1.3 percent pace for the whole euro region.

This will almost certainly lead the country into a lengthy recession until the reforms “bear fruit,” according to economists.

Nouriel Roubini Offering Free Access for Financial Crisis

Wednesday, October 1st, 2008

We advise you to sign up for RGE Monitor, run by Nouriel Roubini.

We aren’t economists, here at

We are investors, and we’re web developers; but we’re not economists.

For real economists, you usually have to pay.


One of the best economists in the world is Nouriel Roubini.

He is a professor of economics at New York University’s Stern School of Business, and he is highly sought after for his advice by think tanks and politicians.

He started talking about the U.S. national debt in the nineties. He started talking about the housing bubble in 2004. He started talking about the credit crunch in 2005.

He’s on top of things in a way that most of us, who work too many hours per week to adequately inform ourselves, can be.

His online service, RGE Monitor (short for Roubini Global Economic Monitor), is available at, and it contains a number of useful, if controversial, points of view about the current state of our economy.

Usually he offers his premium service for hundreds of dollars per year.

During this economic crisis, premium services at are free.

We are in no way affiliated with Nouriel Roubini or, and we only see this as a way to educate our readership in a way that we are not capable.

The legislation currently running through the U.S. Congress will need additional legislation to make it work for the long term. The Paulson Plan is a short-term solution, which will be ineffective come January 20, 2009, when we will have a new president and a new Congress.

It is of unequivocal importance that our citizens take the time to educate themselves about the oncoming economic crisis that this bill is prolonging (not avoiding, but prolonging).

The first step in educating yourself is getting acquainted with Nouriel Roubini’s ideas, particularly his HOME plan, which combines relief for lenders (banks, investors), as well as homeowners.

As web publishers, there are a lot of things we want our readership to do:
— Make good financial decisions about their futures and retirement
— Sign up for brokers we recommend
— Retire comfortably and early
— Protect their nest eggs so that they have something to pass on to the next generation

As citizens of the United States, however, we want our readership to educate themselves about the dangers of the credit markets that are looming beyond bad mortgages.

The crises we’re now experiencing are only symptoms of larger problems described by Mr. Roubini.

We do not make recommendations on stocks, or mutual funds. We just report what’s going on.

This is our first recommendation since our founding in early 2006:

Signup for now, while it’s free.

It is an unprecedented opportunity to educate yourself on the potential crises ahead, and an outline for how to protect yourself and your assets during these difficult times.

Worst Day on Stock Market Since WTC Attack

Tuesday, February 27th, 2007

U.S. stock markets notched their poorest performance since September 2001, right after the terrorist attacks on the World Trade Center and Pentagon.
The Dow fell 416.02, or 3.29%; the Nasdaq dropped 3.9%; the S&P 500 index fell by 3.5%. Earlier in the day the Dow had dropped over 500 points. All thirty stocks in the average were down for the day.
This fall comes on the heels of the worst day in ten years for China’s Shanghai Composite Index, which fell 8.8% yesterday.

The U.S. Equity selloff was greater than any other market, except for China, though the effect was global.
Weakness in Asia has spread global, as Japan’s Nikkei and Topix notched losses of 0.5% and 0.3%, respectively.

The United Kingdom’s FTSE and the German DAX were both down 2.3%, and the French CAC-40 dropped 2.6%.

It is possible that the bloodletting is not over, with U.S. equities, typically less volatile than emerging and developed global markets, being hit so hard. Such a selloff on Wall Street is likely to shake European and Asian markets during the coming trading sessions.

Bonds posted strong gains throughout the day, and, along with dividend-paying stocks that have been hit significantly, are expected to provide stability in the coming trading days.

Housing, Bond Rates Attack the Stock Market

Thursday, January 25th, 2007

The National Association of Realtors announced a sharp drop in existing home sales in December 2006. According to the report, existing home sales fell by over eight percent in 2006. Also, a number of homebuilders released sobering forecasts for 2007.

Heavy selling in the bond market led to the highest yields in five months. The 10-year Treasury finished the day at 98 3/32, with its yield at a lofty 4.867%.

Turbulence in the housing and bond markets seeped into the broader market, sending the Dow down 1%, while the S&P 500 and the Nasdaq slipped by 1.1% and 1.3%, respectively.

The day’s winners were eBay and Nokia, up 8.2% and 4.5%, respectively. eBay posted sales growth of 29% while Nokia announced a 19% increase in profits.

FED Basics: What Does Slowing the Economy Mean?

Wednesday, January 17th, 2007

Every day you hear it, whether Ben Bernanke had the sniffles or whether one of the Fed governors made a statement about the economy: every investor is afraid that the Fed will act to “slow the economy.”

What exactly do journalists mean by this?

The Federal Reserve is charged with keeping inflation steady, and in order to do so they have control over two major interest rates: the Discount Rate and the Fed Funds Rate. Both are interest rates charged to banks for overnight loans.

The discount rate is the interest rate charged to banks toat loan funds directly from the Federal Reserve.

The Fed Funds Rate is the interest rate charged to banks that borrow from other banks at the Fed.

The Fed Funds Rate is the more important figure, since most banks would prefer to borrow from other banks than directly from the Fed.

While neither of these interest rates directly affect investors, they do affect banks and lending rates across the spectrum. If banks have higher interest for short-term lending, then that will trickle down to their customers having higher rates for lending as well.

The bottom line is, when these interest rates are low, then it is easier to borrow money. If the Fed acts to raise these rates, it is said to be “slowing the economy,” since it gets more expensive (harder) to borrow money as interest rates climb.

This higher interest rate leads to less borrowing and, hence, less spending and a general decrease in business transactions.

So, when some journalist frets about the Fed possibly “slowing the economy” or “Tightening the money supply” (another favorite), what they are really talking about is rising interest rates.

What Are the Risks Involved with Investing in Bonds?

Wednesday, January 10th, 2007

Bonds are considered a low-risk investment vehicle and, therefore, offer a relatively modest rate of return. But there are risks involved that every investor should know about.

The two main risks that bond investors face are Default Risk and Interest Rate Risk.

Default Risk is the possibility that an issuer will not be able to meet the obligations of its bonds, namely, that it won’t have the money to pay its coupon (interest) or to repay the principal upon maturity. When an issuer defaults, investors will usually lose all or most of their investment.

Default risk is what determines the coupon, or interest rate, on a bond. A financially strong company with a history of meeting its obligations will issue bonds with a relatively low interest rate; conversely, a startup that has never reported profits and has defaulted on obligations in the past will issue bonds at a higher interest rate because there is a higher likelihood that it will default.

Diversification is the key to managing default risk. “Don’t put all your eggs in one basket,” is the applicable saying here. While credit reporting agencies like Moodys and Standard and Poors offer bond ratings that give investors an idea of the likelihood of default, no company is immune to the possibility: not Enron, not Argentina, not Ford, and not General Motors.

High yield bonds (junk bonds) should be kept to a minimum, unless your portfolio is extremely diverse and your investment style has a high risk for volatility, while investment-grade (highly rated) bonds should make up the majority of your bond portfolio. Government bonds should range across a wide spectrum of countries and governments. We all like the tax benefits of municipal bonds, but they have a much higher default risk than federally-issued Treasuries.

Also, pay attention to the duration of bonds. A short-term bond will have a lower risk of default than a long-term bond, since there is less time for an issuer to meet its obligations. As a result, short-term bonds will have a lower interest rate.

Interest Rate Risk is the risk that your investment will lose money because market interest rates have risen. Everyone talks about this every day in the financial press, and it’s how bond traders make their living. It is widely known that higher interest rates mean lower bond prices, but it is little understood.

Every time Fed Chairman Bernanke sneezes it affects the bond market, but few know exactly why.

So, here’s the lowdown:

When an investor buys a bond he or she is expecting a fixed rate of return for a specified period of time. Let’s say I buy a 20-year US Treasury bond for $10,000, and it has an annual coupon of 5%. From my $10,000 investment, I expect to get $500 a year (5% of $10,000) for the next 20 years, at which point I’ll get my $10,000 principal back.

Easy, right?

Well, if interest rates go up and the US Treasury now issues 20-year bonds for 10%, I made a bad investment. Now, my $10,000 investment could have bought a bond that yields $1,000 a year, twice as much as my piddling $500 annually. The result is that, if I were to sell my $10,000 bond, I would get less than half of my investment, since the same issuer (the US Treasury) is now issuing bonds at twice the interest rate.

This example is simplified and exaggerated. Treasuries don’t double their coupon overnight. Also, there is only one issuer in the example given above.

Imagine the scenario above played out across the entire bond universe: short-term, medium-term, long term; municipal, government, and corporate bonds; high-yield, emerging market, and investment-grade…

Throw oddballs like asset-backed securities, convertible bonds, and mortgage-backed securities and you can begin to see how interest rates affect the entire bond universe: when interest rates rise, bond prices fall. It’s that simple.

The only hedges against inflation risk are liquidity (cash) and hard assets. The ability to purchase bonds when interest rates are high is the important thing: new issues have a high interest rate, and the secondary market is depressed (think about that $10,000 bond I bought that could now be bought for $5,000).

There are other risks of bond investments, and I’ll go over them briefly.

Inflation Risk is the possibility that the coupon on your bond will not meet inflation. For instance, if inflation is 4% and your bond investment only returns 3%, you effectively lost 1% annually by investing.

Country Risk is the risk that a government bond will go into default because the issuing government is unstable or insolvent.

Call Risk, unique to callable bonds, is the risk that an issuer will call a bond, thereby canceling it, by repaying the principal before maturity.