Posts Tagged ‘bonds’

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Even if Mom is still doing your laundry, you can always make graphs

Tuesday, February 22nd, 2011

Even if the graphs are, oh, maybe just a little misleading. Take this one, for example. It appears to say that the reason certain European countries are in worse financial shape than others is because more of their men want to stay at home playing videogames.

See? Italy, Greece, Spain, and Portugal are over there on the right, with more of their menfolk living with the parents. And, conveniently, those same countries rank high on the riskiness (a.k.a. sovereign risk) of their government bonds (a.k.a. sovereign debt).

If he lives with his parents, you might want to think twice. About buying his government’s debt. (via The Economist)

But in case your statistics teacher hasn’t drilled this into your heads yet, correlation is not causation. This is a real-world example of that. Just because you can make a chart with a nice line on it doesn’t necessarily mean that one factor causes the other. Think about this:

  • The % of men living with their parents may be another way of describing the % of men who are unemployed (or underemployed). That would certainly be a factor in a country’s financial health.
  • Adult kids living with their folks might be due to a really expensive housing market, which is another factor in a country’s financial situation.
  • The countries with the highest % of men living with their parents all have cultural traditions that encourage kids to stay with their parents until they marry, or sometimes even after.
  • Ireland doesn’t have this culture of stay-at-home-til-you’re-40, but their bonds are still considered risky investments. If you just focus on the red line, you might miss this important point.

In conclusion:

  1. Correlation is not causation
  2. Think before you reblog
  3. If you can’t do either of those things, at least read the comments

China Sells Off Part Of Its Piece Of The American Pie

Wednesday, February 16th, 2011

“WASHINGTON — China, the biggest buyer of U.S. Treasury securities, reduced its holdings in December for the second straight month.

Overseas demand for Treasurys helps lower the interest rate the U.S. government pays on its debt. If the United States had to finance its debt through U.S. investors alone, the government would have to pay higher rates. American companies and consumers would also pay higher rates.”

What do you think?

Remember when we asked about the U.S. back-up plan on the off chance our biggest foreign debt holder decided to sell off our Treasury bonds? Well.

Maybe they’re just rebalancing their national portfolio. Or following the age-old rule of “don’t put all your eggs in one basket?”

U.S. Becoming Less Trustworthy? TILE Two-Liners 1.10.11 >> 1.14.11

Monday, January 10th, 2011

MONDAY

  • Portugal promises to pay you a handsome 7% interest rate if you lend it some money by buying a bond. Of course, the country may go bankrupt trying to pay you back. (BBC News)

TUESDAY

  • Economic growth in China, U.S., France, and Japan may lead the way to a good year for the rest of the world. (The Wall Street Journal)

WEDNESDAY

  • Whew! Portugal doesn’t have to bribe bond buyers with handsome rates after all. European markets stop freaking out about a potential bailout. (The Washington Post)

THURSDAY

  • Mother nature shows interest in finance, dumps water on Australia. Flooding could cost the country up to 1% in economic growth this year! (BBC News)

FRIDAY

  • You’re not the only one who should be worrying about your credit score – because of rising debt, the U.S. may lose its sparkling AAA credit rating. (The Wall Street Journal)

Flipping Positions, Dividends Paying Out More Than Bonds

Wednesday, September 8th, 2010

For the first time in 15 years, a usually-small bonus payout is earning investors more money than long-term corporate bonds!

  • Dividend-paying stocks are handing a higher return percentage to investors than corporate bonds issued by the same companies, in part because in the short-term, companies are pretty flush with cash, but nobody knows what the long term holds.
  • The recession drove down the prices of most S&P 500 companies, but at the same time their profits have soared. This means their stock prices are relatively cheap, considering the health of the companies.
  • Bond yields have been low since the start of the recession for many reasons, including the Fed’s rock-bottom interest rate and uncertainty about the future of the economy.

Facts & Figures

  • Interest on 10-year Treasury bonds was 2.42% last month
  • Kraft dividends are up to 3.82% – that’s 0.18% higher than their bonds expiring in 2018

Best Quote

“The economy is slowing down, but productivity has been so great in this country and companies have been able to make good profits,” said Duessel, the Pittsburgh-based equity market strategist at Federated. “Companies that would have cut their dividends already did so. It’s an unusual time where, yes, their profits are good, their cash is good, they can afford to pay more in dividends.” – Linda Duessel, Equity Market Strategist for Federated Investors

Savings Bonds are…

Friday, June 18th, 2010

Savings bonds are government-issued debt securities (doled out by the U.S. Department of the Treasury) that help pay for the U.S. government’s borrowing needs. They are supplied in face-value denominations from $50 – $10,000, with local and state tax-free interest and semiannually adjusted interest rates. Savings bonds are considered to be among the safest of investments, as they are backed by the U.S. government.

Investors Run For Cover In Low-Yield Investments

Monday, June 7th, 2010

What should you do when the stock market gets unpredictable? You can hold on for dear life or you can hide your head in the government sand...

  • There’s been a lot of ruckus in the stock market lately; between recession repercussions and the European debt crisis, investors are avoiding higher-risk, higher-return instruments in the stock market.
  • Instead, people are funneling money into significantly lower-risk instruments that are also lower-yield, like money market funds and Treasury (government) bonds.
  • The stock market is expected to improve in the future, but because of potential problems in Europe and a damaged financial infrastructure here in the U.S., investors are likely to stick to safe investments (like bonds) for now.

Facts & Figures

  • The only mutual funds that outperformed the Treasury mutual funds in May were “bear market funds” – mutual funds that earn money only when the market goes down.
  • Bear market funds returned an average of 8% on investment in May
  • The going rate of return on a 30-year Treasury bond is 3.2%

Best Quote

“It’s still awfully close to zero. The amazing thing is that even at these rates, when you’re getting virtually no return on your money at all, people are still moving cash into money market funds. It’s sobering.” – Peter G. Crane, President of Crane Data

What’s the difference between stocks and bonds?

Wednesday, January 13th, 2010

When you buy stock, you own equity – that is, you are actually buying partial ownership of a company in the form of shares. The percentage of the company’s total shares that you own is how much of the company you own – for example, if the company has 100 shares and you buy 50 of them, you own 50% of the company. This means that you share the company’s ups and downs: if the company does well, your stock becomes worth more than what you paid for it, and you make a profit, but if the company does badly, its stock decreases in value, and you suffer a loss. Equity holders are last in line among creditors if the company’s value goes to zero. This is why the stock market always has a certain amount of risk attached: you can never know for sure what’s going to happen to your stock.

With bonds, on the other hand, you virtually always know exactly what you’re going to get. Bonds are not shares, so they don’t give you any ownership. Rather, when an institution wants to raise money, it sells bonds, which are like IOUs; they’re basically promises to pay your money back later, with interest in the meantime. The interest rates are usually fixed, so you can calculate your profits. For example, a company could sell you a bond for $1,000, and under the terms of the agreement, you’d get 5% of that $1,000 every year for the next ten years, and then your original $1,000 back at the end of that decade. Of course, this means you’re only going to make a profit of $500 over ten years, but you are guaranteed that money.  If the company goes bankrupt, bond holders are usually first in line to be paid among those owed money. So people who prefer bonds like the security they offer, and people who prefer stocks like their potential to make their owners an incredible profit in the future.

One final note – there are three main types of bond: government, municipal, and corporate. Government bonds are sold by the government, municipal bonds by cities, and corporate bonds by companies. Government bonds are the most secure, followed by municipal, then corporate (because a company is much more likely to go bankrupt than a government is). However, because corporate bonds are the most risky, they also offer the highest rates of interest.

Baseball’s Wealthiest Team Shares Profit With NYC

Wednesday, October 7th, 2009

When you get taken out to the ballgame in New York City, the local economy gets a serious boost…

  • In the first playoff season to visit the new Yankee Stadium in the Bronx, the New York City Economic Development Corporation estimates that each home game played in the 2009 postseason will bring $6.7 million in income to New York businesses.
  • The estimate takes into account money spent by visitors to the city who patronize hotels, restaurants, and transportation services. In addition, employees in and around Yankee Stadium will take home a total of about $900,000 after every game.
  • Does the economic benefit of these games outweigh the enormous costs of building a new stadium and all its related transportation and infrastructure changes? Not everyone is so sure. One Westchester State Assemblyman says the economic and employment benefits are not enough to justify the low-cost financing that was made available to the team for stadium construction.

Facts & Figures

  • The NYC Economic Development Corporation estimate assumes each postseason game will bring in 16,850 NYC residents, 27,500 residents of the NY/NJ/CT metropolitan area, 6,000 visitors from outside this area, 300 media from outside the area, and 200 players and affiliates.
  • Counting $5.2 million in “indirect economic impact” brings the total benefit to New York City to $11.9 million.
  • The new Yankee Stadium cost $1.5 billion and was largely financed by tax-exempt bonds that will eventually be repaid by the team.

Best Quote

“There is a modicum of economic advantage. The visiting teams travel with their press corps and entourage, some people will travel to New York, stay overnight and spend money on hotels and restaurants.’’ – Andrew Zimbalist, Professor of Economics at Smith College

A Z-Bond is…

Wednesday, August 5th, 2009

A z-bond is a bond whose interest is not paid directly to the investor but is automatically reinvested instead. A z-bond doesn’t pay out until all other bond classes have been fully paid and retired.

Duration is…

Wednesday, August 5th, 2009

Duration is a measurement of how sensitive the price of a bond is to changes in interest rate. A bond with a higher duration would change in price more than a bond with lower duration given the same change in interest rate. The higher the duration, the more you can either gain or lose on the market price of the bond – depending on whether the interest rate increases or decreases.

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