Peek of the Week
The Markets
If it looks like a bond, and it acts like a
bond…oh…that’s the problem. Government bonds aren’t acting the way investors
expect.
Last week, 10-year U.S. Treasuries – which, typically,
are thought to be safe and stable investments – suffered the biggest one-week
sell off since June 2013, according to The
Wall Street Journal. Treasuries finished the week yielding 2.4 percent, a
gain of 0.3 percent. In the world of stodgy, backed-by-the-full-faith-and-credit-of-the-U.S.-government-bonds,
that’s a big change.
The performance of U.S. bonds paired with that of
German government bonds. Bloomberg Business
reported 10-year Bunds delivered their worst weekly performance since 1998. On
Friday, the German benchmark bond settled at 0.8 percent after rising to almost
1 percent on Thursday. In late April, the yield on Bunds was at an all-time low
of 0.049 percent.
So, what’s going on? Why are bond values fluctuating
so much? Barron’s said the problem is
a lack of liquidity in fixed-income markets:
“The global financial system is awash in liquidity,
created by central banks as they have driven short-term interest rates to zero
(or even below) and expanded their balance sheets by the equivalent of
trillions of dollars. And so the world is swimming in cheap money. At the same
time, liquidity is said to be at a low ebb in the financial markets, especially
for bonds… As a result, transactions that once didn’t cause prices to budge now
send them lurching from trade to trade… And the advice from central bankers on
both sides of the Atlantic about this new volatility? Get used to it.”
One reason for the lack of liquidity is the relative
scarcity of market makers, reported Barron’s.
In the past, banks made markets – buying and selling for their own accounts –
which created liquidity, but new regulations have curtailed those activities.
Looking beyond bond market illiquidity, there was
economic good news in the United States: employment numbers improved. However,
investors worried that could push the Federal Reserve toward a rate increase
sooner rather than later, and U.S. stock markets finished flat to lower for the
week.
Data as of 6/5/15
|
1-Week
|
Y-T-D
|
1-Year
|
3-Year
|
5-Year
|
10-Year
|
|
Standard & Poor's 500 (Domestic Stocks)
|
-0.7%
|
1.7%
|
7.9%
|
17.6%
|
14.8%
|
5.7%
|
|
Dow Jones Global ex-U.S.
|
-1.7
|
4.5
|
-4.5
|
10.4
|
6.3
|
3.4
|
|
10-year Treasury Note (Yield Only)
|
2.4
|
NA
|
2.6
|
1.6
|
3.2
|
4.0
|
|
Gold (per ounce)
|
-2.3
|
-2.9
|
-7.0
|
-10.7
|
-0.8
|
10.5
|
|
Bloomberg Commodity Index
|
-0.7
|
-3.9
|
-24.8
|
-7.7
|
-3.9
|
-4.3
|
|
DJ Equity All REIT Total Return
Index
|
-2.1
|
-3.8
|
5.0
|
12.2
|
14.9
|
7.5
|
S&P 500, Dow Jones Global
ex-US, Gold, Bloomberg Commodity Index returns exclude reinvested dividends
(gold does not pay a dividend) and the three-, five-, and 10-year returns are
annualized; the DJ Equity All REIT Total Return Index does include reinvested
dividends and the three-, five-, and 10-year returns are annualized; and the
10-year Treasury Note is simply the yield at the close of the day on each of
the historical time periods.
Sources: Yahoo! Finance,
Barron’s, djindexes.com, London Bullion Market Association.
Past performance is no
guarantee of future results. Indices are unmanaged and cannot be invested into
directly. N/A means not applicable.
When a government has a lot of debt, is
it better to implement an austerity
plan and pay the debt down? Or, take advantage of low interest rates and invest
in the country?
Since
the financial crisis, countries around the world have racked up a lot of debt
through stimulus programs, financial bailouts, and other monetary and fiscal
rescue efforts. When Should Public Debt
Be Reduced?, a new paper published by the International Monetary Fund
(IMF), reported advanced economies currently have some of the highest debt
ratios of the past 40 years.
So,
should they be paying off their debts? It all depends on how much ‘fiscal
space’ your country has, according to the IMF. The Economist explained it like this:
“This concept [fiscal space] refers to the distance between
a government’s debt-to-Gross Domestic Product ratio and an “upper limit”,
calculated by Moody’s, a ratings agency, beyond which action would have to be
taken to avoid default. Based on this measure, countries can be grouped into
categories depending on how far their debt is from their upper threshold… It is
a decent measure of how vulnerable a government’s finances are to a shock.”
The
IMF report concluded countries already at the upper limit – like Japan, Italy,
Greece, and Cyprus – are out of luck. They must take action to reduce debt
levels. However, for countries that have fiscal space, there may be merit to
the idea of “simply living with (relatively) high debt and allowing debt ratios
to decline organically through output growth.”
In
other words, if the country’s economy grows faster than its debt, the debt will
become a smaller percentage of GDP, resolving the debt issue gradually over
time. Given enough time and economic growth, the problem could resolve itself.
The
IMF cautioned these conclusions do not constitute policy advice. The paper was
intended to fuel debate about the proper course of action for rich, but
indebted, countries.
Weekly
Focus – Think About It
“You have brains in your head. You have feet in your
shoes. You can steer yourself in any direction you choose. You're on your own,
and you know what you know. And you are the guy who'll decide where to go.”
--Dr. Seuss, American writer
and cartoonist
Best regards,
Leif M. Hagen
Leif
M. Hagen, CLU, ChFC
LP Financial Advisor
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Securities
offered through LPL Financial Inc., Member
FINRA/SIPC.
* This newsletter was
prepared by Peak Advisor Alliance. Peak Advisor Alliance is not affiliated with
the named broker/dealer.
* The Standard & Poor's
500 (S&P 500) is an unmanaged group of securities considered to be
representative of the stock market in general. You cannot invest directly in
this index.
* The Standard & Poor’s
500 (S&P 500) is an unmanaged index. Unmanaged index returns do not reflect
fees, expenses, or sales charges. Index performance is not indicative of the
performance of any investment.
* The 10-year Treasury Note
represents debt owed by the United States Treasury to the public. Since the
U.S. Government is seen as a risk-free borrower, investors use the 10-year
Treasury Note as a benchmark for the long-term bond market.
* Gold represents the
afternoon gold price as reported by the London Bullion Market Association. The
gold price is set twice daily by the London Gold Fixing Company at 10:30 and
15:00 and is expressed in U.S. dollars per fine troy ounce.
* The Bloomberg Commodity
Index is designed to be a highly liquid and diversified benchmark for the
commodity futures market. The Index is composed of futures contracts on 19
physical commodities and was launched on July 14, 1998.
* The DJ Equity All REIT
Total Return Index measures the total return performance of the equity
subcategory of the Real Estate Investment Trust (REIT) industry as calculated
by Dow Jones.
* Yahoo! Finance is the source
for any reference to the performance of an index between two specific periods.
* Opinions expressed are
subject to change without notice and are not intended as investment advice or
to predict future performance.
* Economic forecasts set
forth may not develop as predicted and there can be no guarantee that
strategies promoted will be successful.
* Past performance does not
guarantee future results. Investing involves risk, including loss of principal.
* You cannot invest directly
in an index.
* Consult your financial
professional before making any investment decision.
* Stock investing involves
risk including loss of principal.
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Sources:
