Daily Gains Letter

bond market


Government to Run Budget Deficits Until 2038; How Can Money Printing Stop?

By for Daily Gains Letter | Nov 4, 2013

Budget Deficit Until 2038The stock market is certainly getting all the attention these days, but not a lot is said about other disturbing fundamentals. These fundamentals are troublesome, and if they aren’t fixed, the U.S. economy could end up in a downward spiral in a very short period of time. With these conditions, those who are saving and investing for the long term can face a significant amount of scrutiny.

I’m talking about the U.S. national debt and the U.S. government posting another budget deficit.

When someone goes to get a loan, the bank usually asks how much in assets the person has or what their credit score is; this way, the bank can judge their ability to pay back the loan. If a person has a significant amount of debt already and a bad credit score, then banks will be hesitant to give them anything. There’s no rocket science behind this; the chances of a person with bad credit and a lot of debt defaulting on their liabilities are very high.

When I look at the U.S. economy, I see something very similar and wonder if those who are buying U.S. bonds, thereby giving loans to the U.S. economy, will one day say, “No, we will not give you any money.”

You see, since the financial crisis, the U.S. government has been registering a massive budget deficit. For example, in fiscal 2012, the U.S. government posted a budget deficit of over $1.0 trillion. In fiscal 2013, the U.S. government registered a budget deficit of $680 billion—slightly lower than the preceding years, but a deficit nonetheless. (Source: “Final Monthly Treasury Statement of Receipts … Read More


How the Debt Fiasco Will End for Long-Term Investors

By for Daily Gains Letter | Sep 24, 2013

Long-Term InvestorsThe financial crisis struck the U.S. economy five years ago. Those who remember the collapse of Lehman Brothers know how much uncertainty was actually there. It seemed the U.S. economy was going to halt and the financial system would collapse. Ripples across the global economy were felt. Nothing looked safe—it was a total bloodbath. Investors had many questions, including if they would be able to protect their nest eggs.

As a result of all this, to fight the uncertainty and handle the issues at hand, the U.S. government and the central bank jumped in and started to spend. They bailed out the big banks in the U.S. economy to make sure everything would continue to run smoothly. We passed through that successfully, and the worst didn’t come upon us.

Sadly, as all this happened, we saw troubling trends starting to form in the U.S. economy.

Look at the national debt.

As the government started to rev up its spending spree, it posted a budget deficit and eventually borrowed money. To give you some idea, in January of 2008, when the behemoth was starting to awaken, the national debt of the U.S. economy stood at $9.2 trillion. Fast-forwarding to now, it stands at $16.7 trillion. Simple math suggests this is an increase of more than 81%. (Source: “The Daily History of the Debt Results,” Treasury Direct web site, last accessed September 20, 2013.)

Unfortunately, it doesn’t end here. Not too long ago, Treasury secretary Jack Lew sent a letter to the U.S. government saying that if they don’t increase the national debt limit currently in place by October, the U.S. economy … Read More


Taper or No Taper, Here’s How to Protect Your Portfolio

By for Daily Gains Letter | Sep 12, 2013

Protect Your PortfolioWill the Federal Reserve taper quantitative easing in September? This question has become the main topic of discussion among investors, since reducing or ending quantitative easing can have significant implications on the broader market. By the way, the Federal Open Market Committee (FOMC) meets on September 17 and 18. (Source: “Meeting calendars, statements, and minutes (2008-2014),” Federal Reserve web site, last accessed September 9, 2013.)

It’s no surprise that there is speculation. We are hearing some say the Federal Reserve will start to slow its purchases, and others are saying it won’t. It’s all becoming very confusing, to say the least.

Investors who are looking to invest for the long term need to first evaluate the situation by looking at what we know.

Last year, when the Federal Reserve started buying $85.0 billion worth of mortgage-backed securities (MBS) and government bonds, it said it would continue this operation until the unemployment rate hit 6.5% and the inflation outlook was 2.5%. (Source: “Press Release,” Federal Reserve web site, December 12, 2012.)

Where do we stand on unemployment and inflation?

Unemployment

Unemployment in the U.S. economy has certainly improved—if you look at the numbers on the surface, at least. In August, the jobs market report found that the unemployment rate in the U.S. economy was 7.3%, slightly lower from July, when it was 7.4%. Sadly, this is nowhere close to the Federal Reserve’s target; as a matter of fact, it’s running at more than 12% from its target. (Source: “The Employment Situation — August 2013,” Bureau of Labor Statistics, September 6, 2013.)

Inflation

According to the data provided by the Bureau of … Read More


When It Comes to Retirement, Investors Need to Focus on This Little Four-Letter Word

By for Daily Gains Letter | Aug 22, 2013

Investors Need to Focus on This Little Four-Letter Word“I think it’s all about taking risk; you have to take more of it—get out of your comfort zone. You can’t just keep doing the same thing and expect different results—it’s that simple.” These were the exact words from my friend, Mr. Speculator, on portfolio management. “I am not looking for just a menial 10% return,” he added. “I am in it for a much bigger gain. To gain more, you have to risk more.”

Mr. Speculator is right about one thing: to gain more you have to risk more.

However, long-term investors who are saving for retirement, their kids’ education, or anything else for that matter, should not follow the lead of Mr. Speculator. Taking high risks can be dangerous, and at times, it’s no different than gambling. Being willing to risk it all is not a good investment management technique.

When it comes to retirement, investors need to have a very strong focus on one four-letter word—“risk”—or else one move in the wrong direction could make a dent in their portfolio—which may cause them to push back their retirement or give up on their plans altogether.

Take a look at the current bond market, for example; clearly, the risks are increasing. Look at the chart of the yield on 10-year U.S. Treasury notes below:

10-Year Treasury Note Chart

Chart courtesy of www.StockCharts.com

The yields have increased roughly 75% since the beginning of May.

Bond investors are fleeing. According to the Investment Company Institute, in June, U.S. long-term bond mutual funds had a net outflow of 60.4 billion—this was the first since August of 2011. In July, they continued to flock to the … Read More


Bond Market Headed for a Collapse?

By for Daily Gains Letter | Aug 9, 2013

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Investors beware: the bond market is treading in dangerous waters. The risks are increasing, and if all the pieces of the puzzle fall into place, it can make a significant dent in your portfolio.

Look at the chart below of yields on long-term U.S. bonds. It shows the yields continuing to increase, while bond prices are falling.

Since the beginning of May, the bond market has seen a massive sell-off. Going by the chart above, yields on the 30-year U.S. bonds have increased more than 30%. This is significant and shouldn’t go unnoticed, because long-term U.S. bonds are used as a benchmark for rates on other bonds in the bond market. If the U.S. bonds decline in value, their yields increase, and the bond market usually moves in the same direction.

We are seeing that investors have started to flee the bond market already.

DL_Graph1

According to the data from Investment Company Institute, in June, the U.S. long-term bond mutual funds witnessed their first outflow since August 2011, with outflows amounting to more than $60.4 billion. In May, there were inflows of $12.2 billion. (Source: “Historical Flow Data,” Investment Company Institute web site, last accessed August 8, 2013.)

Why is this happening? The Federal Reserve, which has kept the bond yields lower by becoming a major purchaser of U.S. bonds, is contemplating when it should decrease the amount of its monthly bond purchases. There is fear that a cut in the Fed’s bond buying could further escalate the sell-off in the bond market.

On top of this, there’s a notion that the U.S. economy is getting better. Investors usually run towards … Read More


With Both Bonds and Stocks Declining, What’s a Smart Investor to Do?

By for Daily Gains Letter | Jun 28, 2013

U.S. bondsStarting near the end of 2012 and then going into 2013, there was a significant amount of noise around the concept of the “Great Rotation.”

The idea behind this concept is that low yields on U.S. bonds would cause investors to sell their bonds positions, which would eventually bring bond prices down, driving investors toward stocks. That would send the key stock indices higher.

Now, since the Federal Reserve announced that it might be pulling back on its quantitative easing, the concept of the Great Rotation seems to be gaining some traction once again. And investors are asking if it’s really going to happen.

Looking at the chart below of 10-year U.S. bond yields, it’s very clear that investors don’t like the U.S. bonds—they are selling. The yields on 10-year U.S. bonds have skyrocketed; they are now more than 44% higher than they were at their lowest level in August 2012.

STNX 10 Year Treasury Note Yield INDEX

Chart courtesy of www.StockCharts.com

According to TrimTabs, an investment research company, through to June 24, investors sold $61.7 billion worth of bond mutual funds and exchange-traded funds (ETFs). While this may not sound big, this is the highest sell-off since October 2008, when investors sold $41.8 billion worth of mutual funds and ETFs. (Source: Bhaktavatsalam, S.V., “U.S. Bond Funds Have Record $61.7 Billion in Redemptions,” Bloomberg, June 26, 2013.)

Now that we see investors fleeing the bonds market, shouldn’t they go to the stock market, thereby causing the markets to climb higher?

Yes, according to the concept of the Great Rotation, the key stock indices should be climbing higher. Sadly, the reality is the opposite: as the bond prices … Read More


Soaring Bond Yields Suggesting Bigger Sell-Off in the Bond Market Ahead?

By for Daily Gains Letter | Jun 10, 2013

Soaring Bond Yields Suggesting Bigger Sell-Off in the Bond Market Ahead?The U.S. bond market seems to be the topic of discussion among investors these days. The pundits of the financial media are constantly screaming out their stance on where it’s headed next and how it will play out for the investors who are involved.

While the majority seems to be favoring a possible downturn in the U.S. bond market, others are saying we might stay at these levels for some time, and are even suggesting buying on the dips. No matter what their opinion may be, they all seem to have solid reasons for their take.

Aside from this, what we already know is that bond yields are on the rise. I mentioned in these pages not too long ago that May wasn’t a great month for the bond market—the momentum was more towards selling. Yields on 10-year and 30-year U.S. Treasuries have surged significantly over the course of the month.

Remember, rising yields of 10-year and 30-year U.S. Treasuries are important for the entire U.S. bond market, because they act as a benchmark for other types of bonds, such as corporate bonds.

Looking at the selling in the U.S. bond market and the increased talks of downturn, I question how big of an impact a collapse in the bond market could really have on the overall wealth of investors and how much money is on the line.

According to the Securities Industry and Financial Markets Association, the outstanding U.S. bond market debt stood at $38.13 trillion at the end of the fourth quarter of 2012. (Source: “Statistics,” Securities and Financial Markets Association web site, last accessed June 6, 2013.) … Read More


Do Low-Yield Stocks Provide Better Income Potential?

By for Daily Gains Letter | Jun 4, 2013

Do Low-Yield Stocks Provide Better Income Potential In a high-interest environment, fixed-income assets like Treasuries, bonds, and certificates of deposit (CDs) are a staple for risk-averse investors. They provide regular investors with a stable place to park their retirement money while collecting a steady return.

By keeping interest rates artificially low, the Federal Reserve has sent income-yield-hungry investors running for the much riskier stock market. While the Federal Reserve recently hinted it might taper its $85.0-billion-per-month quantitative easing policy, investors are hardly willing to reconsider traditional fixed assets.

And why should they? Sure, it’s been six years since investors’ nerves were thrashed from the market crash and four years since the recession ended, but the economy doesn’t look or feel any different, despite the S&P 500 and Dow Jones Industrial Average touching new highs almost weekly.

For many investors nearing retirement or already retired, high-yield dividend stocks have become the new bond market. Unfortunately, some investors looking to pad their retirement account have been too heavily focused on that one solitary metric.

Not all high-yield dividend stocks are created equal. Where an investor might have avoided a stock because of red flags, today, they are considering the same stock waving the same flags, simply because they offer a strong dividend—regardless of whether or not they have enough money to do so.

Investors looking for steady capital appreciation and strong dividend growth are not usually looking for a financial roller coaster to invest in. But that’s what they’ll get if they don’t do their research.

In December 2012, Just Energy Group Inc. (NYSE/JE) was trading above $9.00 per share and paid out $1.24 annually. In February of this … Read More


15% Rise in 30-Year U.S. Bond Yields in One Month Reason to Sell?

By for Daily Gains Letter | Jun 3, 2013

15% Rise in 30-Year U.S. Bond Yields in One Month Reason to SellThe recent decline in U.S. bond prices and the increase in yields have gotten a significant amount of attention. Some are saying the bond market is going to see a severe downturn ahead, while others are calling it a buying opportunity. Should investors jump in and short the bonds? Or should they buy even more?

Staying away from the noise, long-term investors shouldn’t just jump to a conclusion by looking at the short-term price movement. This behavior can cause a significant amount of damage to an investor’s portfolio.

Take a look at the chart below, which shows the yield on 30-year U.S. bonds:

30-Year T-Bond Yield Chart

Chart courtesy of www.StockCharts.com

Without a doubt, the yield has increased, shooting up in just a month to 3.27% from below 2.85%. Last time the yield on 30-year U.S. bonds increased by a similar amount, it took about three months, from mid-December 2012 to March of this year.

What’s certain is that the short-term momentum is clearly headed towards selling, with investors running away from long-term U.S. bonds. Since mid-July of 2012, the 30-year U.S. bond prices have been declining and are in an apparent downtrend, making lower lows and lower highs; the price of a 30-year U.S. bond has declined from $153.00 to currently hovering close to $141.00.

According to the Investment Company Institute, long-term bond mutual funds witnessed inflows of almost $16.1 billion in March. Sadly, comparing this to the inflows of March of 2012, they were 47% lower. At that time, inflows in the long-term bond mutual funds were $30.8 billion. (Source: “Historical Flow Data,” Investment Company Institute web site, last accessed, May 30, … Read More


Sell-Off in the Bond Market Imminent?

By for Daily Gains Letter | May 3, 2013

Bond Market ImminentIn its most recent statement, the Federal Open Market Committee (FOMC) said it will continue to print $85.0 billion a month. With this money, it will buy $45.0 billion worth of long-term government debt and $40.0 billion worth of mortgage-backed securities (MBS) each month.

How long will it continue to do this? As the statement suggests,     “The Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability.” (Source: “FRB: Press Release–Federal Reserve issues FOMC statement–May 1, 2013,” Board of Governors of the Federal Reserve System web site, May 1, 2013.)

At the very core, what this essentially means is that there will be an increased supply of U.S. dollars. The Federal Reserve has printed a significant amount of money since the financial crisis to bring liquidity into the U.S. financial system. Its balance sheet has grown over $3.0 trillion, and as it continues to do the same for an unspecified amount of time, it will only increase. For example, even if the Federal Reserve stops printing (quantitative easing) at the end of 2013, its balance sheet will grow by $1.0 trillion regardless.

In the short run, the printing may work, the unemployment may decrease, and the inflation may stay tamed, but eventually, with what the Federal Reserve has accumulated over the years—the mortgage-backed securities and government bonds—it will have to sell them back into the bond market.

For investors in the bonds market, this may not be good news, because it poses a significant threat … Read More