Tag Archives: yield

A ‘New Era’ for Bonds?

The Wall Street Journal recently published an article titled How You Can Survive a New Era in the Bond Market.  The article suggests that investors adjust their bond allocations to tilt more towards high-yield (aka junk) bonds (both corporate and municipal) and global bonds, which tend to yield more than U.S. bonds.  This advice resonates with an Op Ed by Burton Malkiel, famed author of A Random Walk Down Wall Street, at the end of 2013.

The case against bonds is straightforward.  The best estimate for the expected future return from bonds is their current yield.  If you hold a bond until maturity, your total return will be very close to the current yield.  There are nuances to this rule.  With high-yield bonds, you should expect a total return that is a bit less than the current yield due to the fact that some of these bonds will probably end in default.  With bond funds, you don’t necessarily end up holding individual bonds until maturity, so the correspondence between current yield and expected return is a bit weaker.  Nonetheless, with current yields as low as they are, bond investors should not expect attractive returns from most bond classes.

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Why Bond Yields Scare Me More Than Friday the 13th

Stock investors generally don’t have much to fear on Friday the 13th. Historically, Friday the 13th is a relatively calm day for stocks. Jason Zweig, who writes The Wall Street Journal’s Intelligent Investor column, says it’s usually a good day for investors and says superstition about trading on this supposedly unlucky day is one of the market’s “dumbest myths.”

Bond yields, however, are seriously worrying to Geoff Considine.  Here’s why. Continue reading

Understanding France’s Credit Rating Downgrade

Standard and Poor’s downgraded France’s credit rating last week from AAA to AA+.  While this downgrade has gotten a lot of press coverage, there are a number of topics surrounding the downgrade that are worth noting.

First, France now has the same credit rating from S&P as the United States.  As you’ll remember, S&P downgraded U.S. sovereign debt from AAA to AA+ back in August 2011.  Second, the yield on France’s 10-year bonds is at 3.08%. While this yield is well above the U.S. 10-year Treasury yield of 1.9%, it is certainly not a sign that the bond market sees substantial credit or interest rate risk associated with France. The media response to the downgrade is reminiscent of the situation in July last year when there was a media frenzy surrounding the possibility that the U.S. would fail to raise the debt ceiling and technically default on its debts.

Third, we can better understand the markets for debt (bonds) if we also look at the markets for equity (stocks).  They are related.  The appetite of investors for risk (and that of the market as a whole) varies through time.  When investors are broadly risk averse, they are less willing to Continue reading

Can You Get 7% Per Year in Income with Only Moderate Risk?

With ten-year Treasury bonds yielding around 2%, many investors are looking for investments that can provide higher levels of yield. Barron’s just ran a cover story on this topic, titled:

“How to Get Safe Annual Payouts of 7%: Despite rock-bottom interest rates, you can still earn investment income of 7%-plus per year. How to keep money flowing during retirement.”

But is it really possible to create a low-risk portfolio with a yield of 7% or more? Continue reading