Competitive State Of The Bond Market

Investing in Fixed Income Securities: Understanding the Bond Market (Wiley Finance)

Investors who've primarily purchased equity securities in the past have been looking for more secure investment alternatives; namely, fixed income securities. This book demystifies the sometimes daunting fixed income market, through a user-friendly, sophisticated, yet not overly mathematical format. Investing in Fixed Income Securities covers a wide range of topics, including the different types of fixed income securities, their characteristics, the strategies necessary to manage a diversified portfolio, bond pricing concepts, and more, so you can make the most informed investment decisions possible.

Price: $90.00

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Is There A Bubble In The Bond Market?

Conditions in the bond market don't match the textbook definition of a bubble, but aggressive bond investors are positioning themselves to lose stunning amounts of money.

Interest rates are currently near all-time lows, and there's a heated debate as to why. Optimists will tell you that rates are low because global governments and central banks are stimulating the world economy. Pessimists will tell you that rates are low because we are on the verge of something terrible. A recession, a depression - call it what you will, but it will be so bad that prescient investors are content to lock in today's rates for the long term.

Of course, we know that the optimists are on the right track, at least to some degree. Government intervention has created distortions in the bond market. The Federal Reserve has set the target federal funds rate between 0 percent and 0.25 percent, and is buying up U.S. Treasury bonds. By doing this, it has caused interest rates to drop across the board. From mortgage rates to bond yields to the interest rate on your bank account, rates continue to decline.

As for the pessimists? It is impossible to say at this point whether they will be vindicated, but it's clear that investors share their concerns. The last decade has scared many investors away from stocks and sent them looking for safer investments. The numbers are mind-boggling. More money flowed into U.S. bond mutual funds in 2009 than in the previous 10 years combined. As of June 2010, more money flowed into bond funds than into stock funds for 30 months in a row. So it's not just the heavy hand of the government that is pushing down interest rates; retail investors are playing a role too, by selling stocks and dumping all their cash into bonds (and thus bidding up bond prices).

So everyone is buying bonds, and no one seems to be particularly concerned with the price. Sounds like a bubble, doesn't it?

Why The Bond Market Is Not In A Bubble

The history of bubbles in the investment world dates back hundreds of years. Unfortunately, people seem to be hard-wired, and it is very difficult for us to resist investments that are on the way up. From Dutch tulips in the 1600s to tech stocks in the 1990s to the recent real estate bubble, investors keep getting snookered looking for the next big thing. These bubbles always follow the same path: Prices rise until they reach unsustainable levels, with no underlying logic or connection to fundamental valuation principles. Investors take on debt to buy more and more of the bubble investment. And all kinds of shady characters come out of the woodwork to perpetrate frauds and take advantage of the situation. In the end, the bubble pops. Investors lose massive sums of money and the fraudsters are punished.

The reason the bond market is not in a bubble is that investors can hold their bonds to maturity. Assuming their bonds don't default, investors will recover 100 percent of their principal. In addition, we are not seeing speculative activities as we have seen in other bubbles. (Is anyone taking out a second mortgage to buy Treasury bonds?) Lastly, there's no indication of fraud in the run-up in bond prices - the largest seller of bonds to Americans is the U.S. government.

In a way, this is all semantics. The situation won't be a repeat of the tech stock or real estate bubbles. But there is a lot of money at risk, and reckless investors may end up damaging their financial futures.

Potential Losses For Bond Investors

The most important concept that bond investors need to be familiar with is interest rate risk. As interest rates increase, bond prices decrease. And the longer a bond's maturity period, the more dramatically the price will drop in the event of interest rate increases.

Here is an example of how interest rate risk works. Suppose there are two bonds, both selling at par (100 cents on the dollar). The first bond matures in one year with a yield of 1 percent, and the second bond matures in 30 years with a yield of 3.5 percent. Long-term bonds typically offer higher yields because the investor has to wait longer to recover her principal. If interest rates go up 1 percentage point, both bonds will immediately lose some of their value. The one-year bond will lose about 1 percent of its value. In response to this paper loss, the investor may decide to continue holding the bond until it matures at the end of the year. She will receive her principal back, plus the 1 percent yield.

However, the 30-year bond will lose more value because of its longer maturity. Instead of 1 percent, the bond would lose about 16 percent of its value. The investor can continue to hold the bond until it matures in 30 years, but that will be a long wait. In the meantime, she has a bond worth 84 cents for every dollar she paid, and if she needs to sell her bond to pay for current expenses, she'll have no choice but to realize the loss.

The higher we assume that interest rates go in the next few years, the more staggering the potential losses become. Let's take the same two bonds that we used in our last example, and assume that interest rates go up 5 percentage points. The one-year bond will lose approximately 5 percent of its value. Again, all the investor needs to do is to wait a year, and she will receive her principal plus the 1 percent yield. The 30-year bond loses about 54 percent of its value. And bonds are supposed to be a safe investment!

The most likely scenario in which interest rates will rise is an increase in economic activity, which will lead to a healthy increase in inflation. With inflation currently near all-time lows and investors becoming more and more concerned about deflation, an increase in interest rates could be a very good sign for the global economy. Only bond investors would be hurt in this scenario, while business owners, consumers and stock investors would all be better off.

A Smart Approach To Bond Investing

I hope the previous examples have made clear the danger of purchasing long-term bonds. If you are convinced that we are headed for financial Armageddon, then locking in today's long-term rates is an attractive proposition. But buying today's long-term bonds is a bet that the economy will not recover for the next 10, 20, even 30 years. It is a bet that there will be no inflation in consumer products, medical costs or education. It is a bet that wages will not increase, and neither will rents or real estate values. This is not a bet we are interested in making for our clients.

At Palisades Hudson, we currently focus on short-term, high-quality bonds for our clients' fixed-income allocations. We also invest in bonds such as Treasury Inflation-Protected Securities (TIPS) that, unlike typical fixed-income securities, will appreciate in value as interest rates and inflation increase. While our positioning might sacrifice some yield in the short term, our main objective when investing in fixed-income vehicles is to reduce volatility. We believe that our current fixed-income portfolios accomplish that goal.

In the past, bonds have been viewed as a safe investment. Unfortunately, prices have been bid up on long-term bonds to the point where this is no longer the case. Rates will eventually rise: Make sure that your investments won't suffer when they do.

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Surviving the Bond Bear Market: Bondland's Nuclear Winter

Praise for SURVIVING THE BOND BEAR MARKET

"A confluence of events are converging to produce a rise in bond yields and a decline in bond prices. Authors Cohen and Malburg call the emerging bear market in bonds . . . 'Bondland's Nuclear Winter.' I call shorting bonds . . . 'The Trade of the Decade.' But whatever it is called, this book articulates the root cause of the developing crisis by taking you through a journey of strong analysis, great anecdotes, and visual stories."—Doug Kass, founder and President, Seabreeze Partners Management

"Baby Boomers beware—the thirty-year bond bull market is finished. Marilyn Cohen describes the bond market's coming nuclear winter and what investors must do to protect themselves. This book comes with an automated workbook to help you manage your bond investments like the pros. Learn to build a bond market bomb shelter and pick the green shoots when it is safe to come out again. Cohen prepares you for the worst, even as she hopes for the best."—Jane Bryant Quinn, author of Making the Most of Your Money Now

Price: $39.95

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The Strategic Bond Investor: Strategies and Tools to Unlock the Power of the Bond Market

Uncover the newest profit opportunities in today's bond marketplace!

The Strategic Bond Investor explains how to maximize your investing returns with bonds—one of the few reliable and stable investments left standing after all the economic chaos. Senior vice president and portfolio manager at PIMCO, Anthony Cescenzi provides an aggressive yet risk-conscious approach you can easily build into your overall trading strategy in the fixed-income market.

Completely updated to address the realities of an unpredictable economy, The Strategic Bond Investor includes new sections on the parallels between the credit and bond markets, the power of the New Fed, and ways to navigate the massive price fluctuations of the post-credit-crisis markets. In addition, you’ll find:

• Detailed description of different bond types
• Concrete data on how each one performs in various environments
• Key economic reports on how market factors like the credit crisis affect bond movements 
• Techniques for forecasting the Fed’s next move—so you can stay a step ahead of changing interest rates 
• Ways of using the yield curve and other indicators to predict the direction of the markets and the economy
  

The Strategic Bond Investor is a fully rounded education on bond investing, providing you with the know-how for safe, dependable investing now—and well into the future.

Price: $39.95

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The Bond Book, Third Edition: Everything Investors Need to Know About Treasuries, Municipals, GNMAs, Corporates, Zeros, Bond Funds, Money Market Funds, and More

Everything on Treasuries, munis, bond funds, and more!

The bond buyer’s answer book—updated for the new economy

“As in the first two editions, this third edition of The Bond Boo continues to be the ideal reference for the individual investor. It has all the necessary details, well explained and illustrated without excessive mathematics. In addition to providing this essential content, it is extremely well written.”
—James B. Cloonan, Chairman, American Association of Individual Investors

“Annette Thau makes the bond market interesting, approachable, and clear. As much as investors will continue to depend on fixed-income securities during their retirement years, they’ll need an insightful guide that ensures they’re appropriately educated and served. The Bond Book does just that.”
—Jeff Tjornejoh, Research Director, U.S. and Canada, Lipper, Thomson Reuters

“Not only a practical and easy-to-understand guide for the novice, but also a comprehensive reference for professionals. Annette Thau provides the steps to climb to the top of the bond investment ladder. The Bond Book should be a permanent fixture in any investment library!”
—Thomas J. Herzfeld, President, Thomas Herzfeld Advisors, Inc.

“If the financial crisis of recent years has taught us anything, it’s buyer beware. Fact is, bonds can be just as risky as stocks. That’s why Annette Thau’s new edition of The Bond Book is essential reading for investors who want to know exactly what’s in their portfolios. It also serves as an excellent guide for those of us who are getting older and need to diversify into fixed income.”
—Jean Gruss, Southwest Florida Editor, Gulf Coast Business Review, and former Managing Editor, Kiplinger’s Retirement Report

About the Book

The financial crisis of 2008 caused major disruptions to every sector of the bond market and left even the savviest investors confused about the safety of their investments. To serve these investors and anyone looking to explore opportunities in fixed-income investing, former bond analyst Annette Thau builds on the features and authority that made the first two editions bestsellers in the thoroughly revised, updated, and expanded third edition of The Bond Book.

This is a one-stop resource for both seasoned bond investors looking for the latest information on the fixed-income market and equities investors planning to diversify their holdings. Writing in plain English, Thau presents cutting-edge strategies for making the best bond-investing decisions, while explaining how to assess risks and opportunities. She also includes up-to-date listings of online resources with bond prices and other information. Look to this all-in-one guide for information on such critical topics as:

• Buying individual bonds or bond funds
• The ins and outs of open-end funds, closed-end funds, and exchangetraded funds (ETFs)
• The new landscape for municipal bonds: the changed rating scales, the near demise of bond insurance, and Build America Bonds (BABs)
• The safest bond funds
• Junk bonds (and emerging market bonds)
• Buying Treasuries without paying a commission

From how bonds work to how to buy and sell them to what to expect from them, The Bond Book, third edition, is a must-read for individual investors and financial advisers who want to enhance the fixed-income allocation of their portfolios.

Price: $35.00

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