A Happy New Year? Not For Bonds


WSJ bond prices chartA recent Wall Street Journal article highlighted the Russian Roulette investors are playing in the bond markets.  The slightest upward tweaks in interest rates sends bond prices falling… and when prices fall, you lose money if you have to sell.  Bond buyers nowadays need to be making a ‘yield to maturity’ play, and plan on holding whatever they buy for the duration.

Case in point:

In the first two days of the year, prices for the benchmark 10-year Treasury have tumbled, sending the yield above 1.9% intraday Thursday, the highest level in eight months.

The article continues along with this intriguing piece:

The sudden moves have put investors and analysts on guard. Some are beginning to question whether Treasury yields, which have been stuck between about 1.60% and 1.80% for the past six months, may kick higher. Some wonder if they may even soon surpass 2%, a level they haven’t breached since last April. Many investors have been reluctant to bet against long-term Treasurys, in large part because the Fed has been such a big buyer of the debt and because intermittent shocks over the past few years—from worries about the U.S. economy to Europe’s debt crisis and troubles in the Middle East—have consistently sent investors scurrying to Treasurys for safety.

That has helped propel the bull market in Treasurys into a third decade.

Read that carefully- the FED is the largest buyer of the Treasury debt, keeping the rates artificially low and stable, and propelling a bull market in treasuries into a third decade.

Snake, eating its own tail?  How long can the charade last?

In a totally unrelated section of the paper, Rich Karlgaard, an excellent write at Forbes, had a WSJ editorial about Ponzi schemes.  He focused on Herbalife, but I suspect his keen and penetrating intellect could rip the Fed/Treasury farce apart.  We might not like what he has to say however.

Read Rich’s article here- it’s good.
A Short Seller Takes on a Vitamin Vendor


Muni Bond Tax Breaks On The Table In Cliff Talks

Taxes Lost  To Muni Bonds

Taxes Lost To Muni Bonds


In a stunning turn of  tables, even the tax-free nature of muni-bonds are on the chopping block in  our current buget turmoil.

Many of our readers are heavily invested in Munis so this article wil lsurely be important, interesting and relevant.

Here’s the Source:

And here’s a key summary:

By exempting municipal bond interest from federal taxes, the government creates an incentive for investors to buy them, which helps hold down the borrowing costs of the states, cities and other entities that issue them. Curbing the exemption would likely reduce demand for the bond

Investors are willing to accept lower yields for municipal bonds because their interest income is exempt from federal income taxes and from taxes in the state in which the bonds were issued. In some high-tax areas, such as California, the bonds are also exempt from local income taxes.s, pushing those borrowing costs higher.

No Easy Money in Muni Bonds


Jason Zweig is usually a surly and negative financial commentator.   I can’t recall the last time one of his columns said much positive about any financial marketplace.  This week is no exception as he takes aim at Muni  bonds, which many of our clients considering Secondary Market Annuities also hold.

I guess his position makes sense for someone  going IN to Munis in this marketplace… yields are so low that you must plan on holding to maturity (at 1-2%…), as any uptick in rates will result in a loss of principal.

But for those holding good munis with an attractive yield not threatened by maturity or a call provision, just hold tight.

This may sound  funny coming from someone selling financial products that compete with Munis.  But the truth is, a good yield on a tax free asset is just worth keeping.  Without question.

But What About Secondary Market Annuities?

Now that said, some of our clients are invested in Munis that have good yields, but the bonds are coming due, or are callable.  For those situations, Secondary Market Annuities are a great  alternative or re position investment.

Take a Muni yielding 5% tax free- it might have been issued 5 or 10 years ago, and if you  hold such a gem, you bought it a long time ago.  Your friends though you were weird settling for such a super low return then…. but you look like a genius now as it’s that’s a GREAT  tax free yield.

But then say your bonds mature in 2013.  You know you have liquidation coming soon, and you have to replace the investment.  What can compete?

We have clients in this exact situation… and they are choosing Secondary Market Annuities with yields in the 5-6% range.

They are replacing the yield on their Muni portfolio, selling their bonds that have short maturities, and re positioning in the best way they can find now.

And I think it’s a great strategy.


Read Mr Zweig’s dour assessment of Munis here if you want.  As with most of his work, he’s negative and arrogant at the same time, but does make some good points.