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Fixed Income Update

Reach without Grasp

Why does the bond market react to money policy?
Thomas Freidman of the New York Times said of the Bush administration that "the President has the reach but doesn't have the grasp". He made that reference about the handling of the Iraq situation, which, because I write about money, I will avoid. But like so many Presidential policies, they all tend to run in along the same theme.

Take for example the message released by John Snow, Secretary of the Treasury and Alan Greenspan, chairman of the Federal Reserve Board. These two money chiefs were in attendance at the G7 meeting over this past weekend and from that convergence of major industrial countries came what might have been called an accord. An accord is usually some sort of agreement, both behind closed doors and afterwards that suggest a concern for some sort of currency valuation that would have a global economy.

This piece appears as commentary on the economy.

Notes:
Why Fixed Income Investors should Relax

Bonds can indeed recover from the fate that has befallen them of late. As I have said before that the rotation of money from bonds into stocks was long overdue. The belief that bonds were too expensive (which was correct) and stocks, which many believed were priced right (and they are not) has taken the oomph out of a good run in bonds. But there is hope and if you follow this investment closely you will understand that now maybe the when to get back in.

Bonds are overpriced when their yield falls to 1.00% above inflation. Inflation is poised to increase if the Fed has any say so. From its paltry level now, it could reach 2% or slightly better in the next six to twelve months. This would push the yields on bonds up to 5% or better on 10 year Treasuries. But the only way you are going to take advantage of this safely is to be in a good short to medium term bond fund now. The lows in this market are attractive and not likely to go lower.

Believe it or not, the best way to look at the stock market is from a bond investors point of view. And that view apparently has been corrected.

Previous Notes:
We goofy folks who run websites tend to monitor the traffic that visits. Some do it to attract advertisers, some like me do it to monitor trends. Six months ago, this page was a heavily trafficked location. Nowadays, not so much. What happened that turned our interest in this type of investment away?

For no good reason although many have been trotted out, the stock market, in the face of ever increasing federal deficits, started to broadly rally. Investors who were enjoying hefty returns in bonds for the last several years suddenly hightailed it over to the greener pasture of equities. This may be a mistake.

Today, Nokia warned the market that the near term sales on its hand held units wasn't going to be too good. This alone, not heightened global instability, but news that was somewhat unsettling sent investors out of equities and into bonds. More news of this kind is on the way. Equity investors are beginning to wonder even before the somber upcoming news hits if what has happened in the last few months has any solid ground to rest on.

When the government wants to borrow money, it announces an auction. Based on the availability of these bonds, or supply, bondtraders react and attempt to position themselves. But the government is a savvy borrower and in their latest auction they kept their begging to a mere $29 billion. This stabilizes yields and makes borrowing harder for corporations. The worth of corporate bonds is based on the spread between the offering and that of a similar Treasury note. Over the last couple of months that spread has deteriorated. This lack of spread makes corporate bonds unattractive cutting off a major source of cash for companies wishing to raise capital.

If the market for corporate bonds collapses any further and the equity market finds out that the rally was ether, the hoped for recovery of the economy might be a bit slower and bit more jobless before it gets better. It would be a short term guess.

f you are following the bond markets closely, you are probably concerned with a number of items affecting those previously handsome returns. The global economy continues to strengthen, long term interest rates have risen slowing the refinancing binge most of America has been on. With the fall of the Mortgage Bankers Index by 1.6%, the largest drop since June of 2002, the thinking is we have reached a sort of plateau in bonds.

John Snow, Secretary of the Treasury is attempting to bring China's currency in line with their trading partners. By keeping the Yuan indexed against the dollar, their products are valued a good deal cheaper than the U.S. feels they should be. Snow's rookie status may hinder talks with this economic power.

Making Money Worthless
What do you do if you're the Federal Reserve Board and you feel the specter of deflation creeping in the shadows? What do you do if you can find a reason to revive a former solution to a very different problem? You do it without fanfare. You do it without seeming to have done it and you simply change the names of the players to reflect the changing times.

The GrandMaster Speaks
Bill Gross has been making the rounds. Mr. Gross if you don't know is the fund manager of the largest bond fund in the world, the PIMCO Total Return. With an entry fee of $1 million, he is considered by many to be the grandmaster of bond investing. The reason for this sudden interest in his work is not wanted. He much prefers the limelight when it is shining on his abilities rather than his lack of foresight.

A Natural Alignment
I cringe every time I hear someone trot out 1987 as the comparable year to this one. These are obviously old schoolers who do not see the recent swing in bond yields as a natural occurrence to the alignment of all of the economic numbers. The problem is we are not of the old school.

The Worth of Corporate Bonds
Transparency has always been a problem with investing. It is no different when using corporate bonds

When Interest Rates are Cut On 06.24, the Federal Reserve Board cut interest rates for the thirteenth time. Will this quarter point cut have any effect on me? So if it seems that for the average Dick and Jane, the rate cut may tend to have a negative effect either way. The borrowers get in deeper debt and the savers get nothing for their efforts. So why would they lower rates again in the first place? Previous Questions

When the Heroine Buys Bonds

Dear Editor -- I am writing a novel wherein my protagonist makes a stupid decision to buy into a bond fund because she needs regular cash infusions to supplement her monthly income. The bond fund tanks and she loses her principle as well as any monthly income. I have just discovered how little I know about bond funds, and I was hoping you could answer some questions for me.

Thank you so much for any help you can give me here. I appreciate your time and your patience.

Sincerely,
Catharine

After I answered her questions, she wrote back to thank me for "my lucid answers" and added further clarification about her protagonist's fate, something that would not have happened to lead characters when the stock market looked ever more stratospheric in the late nineties.

Catharine writes: