US savings bonds to go paperless

It's your last opportunity to slip a paper savings bond into a child's Christmas stocking.

By Giselle SmithonWed, Dec 21, 2011 9:59 PM

Article from Finances.msn.com

Since 1935, grandparents have been giving their children's children U.S. savings bonds for birthdays, holidays and graduations. An investment that also provides valuable lessons about saving money, a paper savings bond can be placed in a box with a bow, or at least tucked inside an envelope.

As of Jan. 1, this gift-giving tradition won't be the same because, like so many other things in our financial lives, U.S. savings bonds are going paperless.

Children didn't necessarily appreciate the bonds when they opened them -- "It was one of those things, like getting underwear," my friend Lorie recalls -- but they usually did later.

As Pocket Changed blogger Caleb Wojcik wrote:

Every Christmas my grandparents gave me savings bonds. "Can I spend it?" I would ask. "Not yet," my mom would say, "but someday." At the time I was confused, but now I realize how thoughtful a gift it was.

In 2012, the bonds will no longer be available for purchase at banks and other financial institutions and can be bought in electronic form only at TreasuryDirect.gov.

Value of savings bonds

Savings bonds are debt securities issued by the U.S. Treasury Department. About 7 billion paper bonds have been sold and circulated, Joyce Harris, a Treasury Department spokeswoman, told CNNMoney.

"U.S. savings bonds are considered one of the safest investments because they are backed by the full faith and credit of the U.S. government," says the U.S. Securities and Exchange Commission website.

One reason for their popularity as gifts is that minors are allowed to hold U.S. savings bonds in their own names. With electronic savings bonds, parents will have to set up accounts for anyone under 18, but minors can own savings bonds via linked accounts.

Going paperless will save money

Part of an "all-electronic initiative," the switch to paperless savings bonds is projected to save the department as much as $120 million over five years by eliminating printing, mailing, storage and fees paid to financial institutions for processing applications.

If you want to convert your Series E, EE or I paper bonds to electronic securities, you can do so via the SmartExchange program, which walks you through the process and spells out the advantages of going digital. As you do with other financial accounts, you'll have 24-hour access to your savings bonds.

Another advantage of electronic savings bonds: You can purchase them in any value, from $25 to $5,000, in penny increments. Paper bonds were available only in specific denominations. So you can purchase a $50.11 bond for your grandson's 11th birthday, for example.

Will paper savings bonds be missed? The move to digital penalizes people who aren't computer-savvy, Allen Schwartz told the St. Petersburg Times, such as his 88-year-old mother-in-law. "She's disabled, legally blind, has no computer and can't do things online," he said.

MainStreet's Matt Brownell argued that children can get a better rate of return -- and learn more about investing -- if you give them an old-fashioned stock certificate.

Series I bonds purchased with tax refunds will still be available in paper form in 2012, according to the Treasury Department, but that may change in the future as well, UPI.com reported.

If you received paper savings bonds as a child, and would like to share that experience with your children or grandchildren, it's not too late to buy them for one last generation's Christmas stockings. 

Who knows, years from now your gift may have added value in being one of the last paper savings bonds issued.

Article from Finances.msn.com

Investment Advice For 2012: Buy Equities, Sell US Treasurys

12/16/2011 @ 11:36AM 

Article from Forbes

I came across this interesting 23 page client report from HSBC Global Asset Management in London that had me thinking of my own portfolio and my fear of buying more as a teeter on facing a maintenance call in my margin account if things get even a little bit worse.  The report says a lot of the obvious — institutional investors are focused on the short term of under a year, which of course makes it hard for long term buy and hold investors to see any capital gains.  Too much selling pressure.  There’s the case made for dividend yielding equities, especially in emerging markets.  As an aside, take Brazilian telecom company Vivo (VIV) — now known as Telefonica Brasil.  It pays about an 11% dividend yield.

The growth outlook for developed markets has deteriorated, with much of the blame being put on Europe. As a result, developing economies will also see their economies slowing down even though they have more fiscal and monetary policy tools at the ready to avoid severe slowdowns.

One of Warren Buffet’s many famous quotes about investing is ‘be fearful when others are greedy and greedy when others are fearful’.

So for individual investors with money on the sidelines to put to good use, here are some takeaways on next year’s trends from HSBC’s report released this week. In short — go long dividend paying high volume equities, including those in the emerging markets, and get rid of those government bonds, especially if they’re European.

The Case For Equities

U.S. equity dividends are yielding just over 2%. Emerging markets, about 3%.

If you can look through the short-term fog, equities offer some excellent opportunities for building wealth in the longer term, as part of a balanced portfolio. Companies, in contrast to governments and the consumer, have been managing themselves extremely prudently. While the former were building debt to unsustainable levels, companies were paying down borrowing and building cash balances. Equity dividend yields currently stand at attractive levels – as the chart below shows – compared with government bonds, while company balance sheets are enabling them to grow dividends – a very attractive combination in a low interest rate environment. Valuations are also extremely low by past standards, as illustrated by the chart below. To some degree, this is justified with growth in developed economies likely to be somewhat lower than it was historically. But focusing on lower growth rates in developed economies ignores two key features. First, companies in developed markets are increasingly global in their outlook. They are not just a play on the economic growth of the country of their domicile, but instead can benefit from higher global growth.”

The Case Against Government Bonds

Bonds have been the beneficiary of an almost perfect storm – a long-term downward shift in yields, accelerated by investors’ pursuing safety in the short term. However, surely just as the bond evangelists’ calls for structurally lower yields become more vocal, investors with a long-term outlook should be avoiding this category given the prospect of negative real long-term returns.While inflationary pressures look muted in the near-term as austerity packages in the West kick-in, we see the structural downtrend in inflation coming to an end. Wages in many emerging markets are now rising rapidly as these economies grow richer and their workers demand higher wages. Also, as the global economy rebalances over the long term, the flows into western government bonds of recent years are unlikely to be repeated.”

Positive Outlook For U.S. Equity (6-12 months)

The outlook for the U.S. economy remains tough, particularly as unemployment is stubbornly high at about 9%, with consumer spending a key driver of growth. However, the U.S. does appear to be seeing stronger growth than other developed economies. This may provide some support to 2012 corporate earnings, at least compared with other developed markets, especially if economic stimulus measures are extended into 2012. Although valuations are somewhat higher than for other developed markets, with a 2012 forecast price/earnings ratio of 10.9 times, we consider this a fair premium given the stronger economic momentum. Political deadlock has been a severe impediment to the US dealing with its budgetary problems, with the country standing alone among major economies in not enacting fiscal austerity. 2012 sees presidential and congressional elections and we would hope that post the primary stages of the contest, which are likely to see candidates appeal to their narrow party bases, they seek common ground and realistic ways of resolving the long-term budget pressures.”

Positive Outlook For EM Equity (6-12 months)

HSBC likes oil and gas rich Russia despite political risks in an election year, sees a soft rather than hard landing in China, and notes that Latin American governments — particularly Brazil — have good balance sheets and plenty of tools remaining to fix the economy. 

Powerful longer-term phenomena such as industrialisation and urbanisation, as well as more robust fiscal positions, underpin our positive view on emerging market equities. We continue to see stronger growth from emerging economies compared with developed economies in 2012, albeit at slower rates than previously. Emerging market equities have underperformed developed market equities in 2011. There is some risk that further downward revisions in global growth could lead to them continuing to trade as higher-risk plays rather than reflecting the superior structural features of their economies. However, valuations are attractive with aggregate emerging market equities trading on about 9 times next year’s earnings, against a 10-year average of about 11 times. We favour Chinese equities where valuations are low in our view, with the market trading on about 8.2 times 2012 earnings, significantly below the market’s 10-year average of about 12.5 times. There are risks in that the rapid rises in residential real estate prices could reverse and become destabilizing to parts of the economy, but overall, we forecast a soft rather than a hard landing for the economy and forecast 2102 economic growth of about 8%.”

Negative Outlook On U.S. Treasurys

U.S. government bond yields remain extremely low despite investors losing confidence in the role of political institutions to tackle fundamental budgetary problems. The U.S. Congressional Budget Super Committee failed to reach a bipartisan deficit reduction agreement after three months of intense negotiations, despite a similar political deadlock over the summer leading to the U.S. credit rating being downgraded by one notch by Standard & Poor’s. More positively for treasuries, the Federal Reserve decided to lengthen the average maturity of its treasury holdings by selling $400 billion of short-dated securities and purchasing longer-term bonds. They also committed to keep Fed fund rates low for a longer period of time. Notwithstanding Federal Reserve actions that are currently supporting prices, we remain cautiously negative on US treasuries as an asset class. We believe the positive surprise seen in economic data can continue and should the Eurozone reach agreement on a lasting solution to its sovereign debt crisis, the safe haven premium embedded in U.S. Treasury prices may start to evaporate. This would force yields to rise to levels more reflective of the current economic and fiscal backdrop.”

Article from Forbes

Beat the Stock Market with Bonds

Bond Investing

By Andrew Mickey

Friday, December 9th, 2011

Article from The Wealth Daily

The U.S. Census Bureau’s American Community Survey found the national median income is down 5.1% over the last decade.

It also found the number of Americans developing and collecting passive income has fallen to levels not seen in decades. Only 24.2% of American households collect income from rent interest or dividends. That’s down from more than one-third of the country a decade ago.

At the same time, more households than ever are becoming dependent on passive income to maintain their quality of life. Tens of millions of baby boomers crossing into retirement will have to earn more income from their investments just to maintain their standards of living.

And many have already started: Massive amounts of money have been pulled out of stocks since the downturn in 2008. Investors have put more than $670 billion in new capital to work in bond funds in the last three years — a massive amount compared to the normal range of $30 to $50 billion per year over the last decade.

The search for yield is going to keep the bond market booming for years to come...

And it’s going to pay off handsomely for investors looking at “boring” bonds now.

Interest Rates: How Low Can You Go?

The primary reason we expect the bond bull to continue is that the dominant market trend for the next decade is financial repression.

Remember, financial repression brings with it negative real interest rates, increased government involvement in the economy, reduced access to capital for businesses and consumers, slow GDP growth or worse, and a global economy that jumps from panic to panic for years — if not decades — to come.

You’re feeling it already. Low interest rates, minimal yields, and heightened stock market volatility are all part of it. After all, why can’t you get any yield in CDs, government bonds, or anywhere else?

Interest rates are being held artificially low to “help” the economy.

This didn’t work in Japan for nearly 20 years. It helped drag down economic growth throughout the Great Depression. And it hasn’t helped much in the past three years.

But if the recent actions by central banks are any indicator, rates are going to be held as low as possible for years to come. And it’s going to keep the bond boom going strong.


Not “Junk” Anymore

Corporate bonds have done extremely well —  and are poised to do much better than the overall markets.
I know what you’re thinking...

Bonds are boring. Most don’t pay much interest. And if interest rates rise (which they will eventually), the value of bonds will be destroyed very quickly. (If interest rates double, bond prices are cut in half.)

But there’s the thing: High-yield bonds are performing exceptionally well.

Now, I realize high-yield bonds usually yield a high rate of interest because they’re risky. The perceived risk of default is normally far greater than government bonds and investment-grade corporate bonds issued by cash cows like IBM and Wal-Mart.

They are called “junk bonds” and have an equally terrible reputation.

During certain time periods, however, they perform exceptionally well.

A period of low interest rates — like the one we’re in now — is one of those times.

For example, the SPDR Barclays Capital High Yield Bond (NYSE: JNK), an ETF which follows the junk bond market, currently yields 7.43%.

That’s nearly three and a half times more yield than the 10-Year U.S. Treasury Bond.

And despite the implied risks of higher interest rates, junk bonds have been doing extremely well. Since the stock market topped in October 2007, the S&P 500 is down almost 20%. Junk bonds, as a whole, have returned more than 34% over the same time period.

And this will continue because despite their performance, high-yield and junk bonds are particularly cheap right now.

Anatomy of a Bond Price

The key to determining the value of a high-yield or junk bond and the interest rate you should expect in return is the default risk.

After all, if you’re lending to Greece, you’re going to want a 30% (or more!) interest rate to cover the high risks of default.

Corporate bonds, however, are much more reliable than debt-engulfed sovereign debts...

The National Bureau of Economic Research recently published a study which found corporate bond default rates are surprisingly low. It found the average default rate is about 1.5 percent between 1866 and 2008.

If you take out a few major panics like the Great Depression and 1870s railroad crisis, when total default rates soared to above 30%, default rates are even lower.  History tells us that bonds are remarkably consistent and safe.

Even during the current economic malaise, bonds are set to continue their extremely reliable run.

Moody’s just announced it expects an increase in global corporate bond defaults to 2.4% next year. For high-yield and junk bonds, the numbers are even better. The default rate on junk bonds is on pace to post a near-record low of about 2% in 2011. That’s below its long-run average of 5%.

Remember, central banks are doing everything they can to keep the gears of credit lubed as efficiently as possible. Defaults are the sand in the gears — and what they're doing everything in their power to prevent.

The net result is the continuation of a trend most investors who only focus on stocks will never realize: During tough times, bonds can deliver far better returns with much less risk.
This trend will only continue to improve.

Revealed: The 128% Bond

Back in August, right when post-QE2 volatility began to surge, we first started talking about alternative investments where you can get extra return safely.

One of those areas was to combine bonds and Closed-End Funds (CEFs) to get into a diversified portfolio of bonds at a discounted price.

In "If You’re Buying Stocks, You’re Making a Big Mistake," we found:

This often overlooked corner of the market is currently safer than stocks. It offers significantly more upside than stocks. And when it has fallen to current levels in the past, investors were handsomely rewarded.

At the time, the euro-induced selling fever had pushed the discounts on CEFs to relatively extreme highs not seen since the 2008 credit crunch. And the CEFs, which invest primarily in diversified portfolios of corporate bonds (which makes them inherently less risky than stocks), were trading at even greater discounts than many.

The fund we focused on was a bond fund that buys convertible bonds — bonds that can be “converted” to stocks if the underlying company’s stock price goes up. We like this fund because it has been a consistent performer, even in the toughest markets.

Since your editor initially bought it, the Calamos Convertible and High Yield Fund (NYSE: CHY) has returned more than 100% in capital gains and more than 15% in dividends income.

The total return over the three-year period: 128% — that’s right,  more than double your money from bonds.

Bonds are great, but they aren’t perfect... No investment is.

The Worst-Case Scenario

Now, I realize bonds are at extreme highs and their yields are at extreme lows.

As we looked at last week, Treasury Inflation Protected Securities (TIPS) have negative yields.

It would appear there is only one way for interest rates to go: up.

And when interest rates rise, bond values can fall very quickly.

Of course, interest rates are at historic lows and can stay at them far longer than most investors expect. At this point, it looks like they will.

That’s why high-yield bonds are appearing better than stocks, even if interest rates rise.

A study by Fidelity Investments found that during the last period of rising interest rates (1941 to 1981), bonds only fell four out of those 40 years. And each year bonds fell, the worst was a loss of 5%.

As I said before, bonds aren’t perfect; but they will be about as close as you can get to "perfect" for the current market environment.

Join the Yield-Chasers Now

In the end, investing and speculating is nothing more than predicting which assets will be in demand in the future — and buying them now.

There are all sorts of assets that will be in demand going forward. For example, gold, silver, and commodities like oil are going to become increasingly popular as inflation pushes real asset prices up (another impact of near-zero interest rates).

Finally, high-yield and junk bonds will continue to increase in demand as the population gets older. Retirees’ disposable income is declining, and they’re going to be induced by central bank policies to search out maximum yield to maintain their standards of living.

There are still opportunities in this market. The yield-chasing trend is still in its early stages. If you are looking for safe and consistent gains, the time to buy is now.
Good investing,

Article from the Wealth Daily